How to Create a QuickBooks Owner Draw Account
Deciding how to pay yourself as a small business owner can be a complicated decision, but it doesn’t have to be. Did you know that you can draw funds from your business to pay yourself through QuickBooks?
This feature can be a bit complicated, so this article will serve as a guide to owner’s draws and how they can be set up and paid out through the popular accounting software QuickBooks.
Let’s get into it and go over how to create an owner’s draw account in QuickBooks online. The process is a common alternative to taking a salary from your business, but it can be a little tricky to navigate if you have never done it before.
What is QuickBooks?
You are probably already familiar with QuickBooks, but to clarify, it’s an accounting software that is owned by Intuit and is geared toward small to medium-sized businesses.
There is both a desktop and online version of the program, and many people credit it for giving them the tools to save money on their accounting and taxes.
However, the software can have a bit of a learning curve to it, especially if your background isn’t in numbers. With some research and guidance, you can use it to easily conquer your accounting and tax services needs.
Should You Use an Owner’s Draw Instead of a Salary?
It depends! If your net income is less than $60,000 a year, you can and should use owner’s draws to pay yourself. Using an owner’s draw to pay yourself through your business is a way to help your business along if you can be flexible with your income, rather than having a set dollar amount like your other employees may have.
If your net income is greater than $60,000 a year, paying yourself via salary is something to consider, but be sure to consult your CPA first to see if and when you should start paying yourself… and how much! The tax savings can be as much as $16,000 depending on how you pay yourself.
What is an Owner’s Draw Account?
An owner’s draw is the process in which a business owner takes funds out of their account for their personal use. In the context of QuickBooks, you will need to create an account in order to do this.
This is also known as an owner’s equity account. These types of accounts can have funds in them that are your own money that you’ve invested or they could be profits from your business.
When you set up your owner’s draw account through QuickBooks, the service will track your withdrawals of company funds to the owner through QuickBooks Desktop. This will allow you to easily see just how much you’ve paid yourself throughout the year.
When Can You Take An Owner’s Draw?
Owner’s draw accounts are only available to those who own their businesses. If you own a sole proprietorship, an LLC, or an LLP, you can take owner’s draws because you have ownership in your business (Source).
However, corporations (not all corporations, but many of them) can’t take owners’ draws due to the structure of these types of businesses. Again, contact your CPA for guidance.
Do not worry! If you are running a small to medium-sized business and using QuickBooks, you should be able to take an owner’s draw.
How to Create an Owner’s Draw Account in QuickBooks Online
Now that you know more specifics about what an owner’s draw account is, let’s get into the specific steps of how you can create your owner’s draw account in QuickBooks to withdraw your funds from your business.
Step One: Select Lists and then select Chart of Accounts in QuickBooks.
Alternatively, you can press CTRL + A in the Desktop version of QuickBooks as a quick shortcut! This will allow you to access all of the accounts that you currently have in QuickBooks.
Step Two: In the bottom left corner, select Account, then select New.
Using this function will allow you to start setting up your brand-new owner’s draw account in QuickBooks.
Step Three: Select Equity, then select Continue.
This selection delineates your owner’s draw account as an equity account. As we mentioned before, this specification is important as your ownership of your business entitles you to equity in the business.
Step Four: Then you must enter the name of your new account.
QuickBooks recommends that you simply name this account ‘Owner’s Draw’ to avoid any confusion in the future. Adhering to this naming convention will allow you to keep all of your accounts straight.
Step Five: Save and exit!
You’ve successfully completed the creation of your brand-new owner’s draw account.
How Do I Pay Myself Through My New Owner’s Draw Account?
Now that you have made your new owner’s draw account, you will then need to write yourself checks through QuickBooks to generate funds from your new account.
To do this, you’ll simply write a check in QuickBooks rather than using any of the payroll options. You’ll first go to Banking in QuickBooks and then select Write Checks.
From here, you will select the owner from the section titled Pay to the order of. This will specify that you want to pay the owner.
Next, enter the amount you want to pay to the owner and assign the check to the owner’s draw account that you had created for this purpose. Don’t forget to save and close out of this window!
FAQs
Are owner’s draw transactions automatically categorized in QuickBooks Online?
No, owner’s draw transactions are not automatically categorized in QuickBooks Online. You need to manually categorize these transactions to ensure they are recorded correctly. To do this, you can create an owner’s equity account and categorize the draws under this account. This helps in accurately reflecting the owner’s withdrawals from the business for personal use.
Is a negative balance okay for the draw account?
A negative balance in the owner’s draw account can be normal and is not necessarily a cause for concern. This typically happens if the owner withdraws more money than what has been contributed to the business. However, consistently maintaining a negative balance may indicate that the business’s financial health needs to be reviewed, as it could impact the company’s cash flow and capital reserves.
How do I record owner draws in QuickBooks?
To record owner draws in QuickBooks Online, follow these steps:
- Create an Owner’s Equity Account:
- Go to the Chart of Accounts.
- Click on New.
- Select Equity as the Account Type and Owner’s Equity as the Detail Type.
- Name the account (e.g., Owner’s Draw).
- Record a Withdrawal:
- Go to the + New button.
- Select Check or Expense.
- Choose the bank account used for the withdrawal.
- In the Payee field, enter the owner’s name.
- In the Category column, select the Owner’s Draw account you created.
- Enter the amount withdrawn.
- Save the transaction.
What type of expense is the owner’s draw?
An owner’s draw is not considered an expense in accounting terms. Instead, it is a distribution of profits to the owner and is recorded under equity accounts. In QuickBooks Online, owner’s draws should be categorized under an equity account, specifically under an Owner’s Equity account, rather than an expense account. This is because the owner’s draws represent withdrawals of the owner’s invested capital or profits and are not operating expenses of the business.
Conclusion
We hope that we were able to help you navigate this function of QuickBooks in order to pay your owner from the business funds. Paying yourself and recording the payments through QuickBooks is very useful. It also helps with your accounting.
If you are still struggling with QuickBooks or need some additional help with managing the accounting of your business, feel free to reach out to us!
At Luca Financial, we strive to help small and medium-sized businesses with their taxes, accounting, and consulting needs. To explore our options, check out our services.
