Reimbursing Yourself From Your Business: Owner Draws, Reimbursements and Payroll

The difference between a reimbursement, a draw and payroll

A lot of owners mix these up, and it is easy to see why. All three move money from the business to the owner. But the books treat them differently, and your CPA cares which one is which.

A reimbursement is a payback. You bought something for the business with your own card or your own cash. The business owes you for that cost. When the business pays you back, it is not income to you. It is the business covering its own cost through you.

An owner draw is a distribution. You earned the profit in an earlier month. Now you are taking some of that profit out for your own use. It is not a cost of running the business. It is a distribution of what was already earned.

Payroll is wages. You work in the business and you earn a wage for the work. The pay runs through the payroll and shows up in the wage line. It is a cost of running the business.

Each one has its own home in the books. When they get mixed up, the profit and loss report tells the wrong story and the balance sheet gets messy.

How to record a reimbursement

A reimbursement starts when you pay for a business cost with your own money. You buy office supplies on your personal card. You pay for a tool with your own cash. The cost belongs to the business, not to you.

The clean way is to record the cost as a business expense the day it happened. Then the business pays you back. The payback is not income to you. It is the business settling up what it owed you.

Here is what the books should show.

• **The cost in the right line.** The supply, the tool or the fee recorded as a business expense on the date you bought it.
• - **A reimbursement or owner contribution.** The other side of the entry shows the business owes you, or that you put the money in.
• - **The payback.** When the business pays you back, the cash goes out and the amount you are owed goes down.
• - **No income to you.** The payback is not a sale and it is not a wage. It is a settle up.

The mistake most owners make is to skip the cost and just move cash. If you buy supplies on your personal card and the business pays you back, but no one records the cost, the expense line is too low and the profit looks too high. The fix is to record the cost first, then pay it back.

Another mistake is to book the payback as a wage. If the business owes you for a cost you covered, the payback is not payroll. It is a reimbursement. When it goes through the wage line by mistake, the wage line is too high and the payroll records do not match the work.

How to record an owner draw

An owner draw is money you take out of the business for your own use. You earned the profit already. Now you are moving some of that profit to yourself. It is not a cost. It is a distribution.

A draw goes to an owner draw account, which is part of equity. When you move cash out, your bank balance goes down and your equity goes down by the same amount. Your income and your costs do not change.

Here is what should be true after a draw.

• **Your cash goes down.** The money left the bank account.
• - **Your equity goes down.** The owner draw account grows by the same amount.
• - **Your income does not change.** A draw is not a cost.
• - **Your profit for the month does not change.** A draw is a distribution of old profit.

A draw can take many forms. Cash pulled from the bank. A personal bill paid from the business account. A personal item bought on the business card. Each one is a draw if it is for your own use and not for the business.

The mistake is to book a personal cost as a business cost. If you pay your home electric bill from the business account and call it utilities, your costs look too high and your profit looks too low. The right way is to record it as an owner draw. The cash leaves the business the same way, but your profit and loss report stays clean.

How payroll is different from both

Payroll is the third way money moves to you, and it is the most different. A reimbursement pays you back for a cost. A draw distributes old profit. Payroll is wages you earn for working in the business.

When you are on the payroll, your pay runs through the payroll the same way any team member's pay does. The wage goes in the payroll line. What comes out goes where it belongs. The pay record gets tied to the run. When the month closes, the payroll lines match the pay records and the bank.

Payroll is a cost of running the business. A draw is not. A reimbursement is not either, because the cost itself is the expense and the payback just settles it. Payroll shows up in your profit and loss as a wage. A draw shows up on your balance sheet as a reduction of equity.

Here is the difference in plain terms.

When each one goes to the right place, the profit and loss report tells the true story of the business. The balance sheet tells the true story of what you own, what you owe, and what you have put in or taken out.

Keeping the three apart

The three moves look the same on the bank statement. Cash leaves the business and lands with you. But the books care which one it is, because each one changes a different line.

A reimbursement keeps the cost in the right expense line and keeps the payback out of your income. A draw keeps the profit and loss clean because the draw lives in equity, not in costs. Payroll keeps the wage in the cost line and the pay record on file.

When they get mixed up, the reports stop telling the truth. The profit looks too high because a cost was skipped. The profit looks too low because a personal bill went through the costs. The wage line does not match the work because a reimbursement went through payroll.

The clean way is to ask one question before each move. Was this a cost I covered for the business? Then it is a reimbursement. Was this money for my own use? Then it is a draw. Was this wages for work I did? Then it is payroll. We sort each one the right way so the books stay clean.

A situation we clean up

The payback that went through three wrong lines

A business owner buys supplies on a personal card, takes cash out for a personal bill, and draws a paycheck now and then, all from the same business account. The books have the cost skipped, the personal bill in the utilities line, and the draw in the wage line. At year end, the wage line is too high, the profit is too low, and the supplies cost is missing.

Here is how we handle it. We pull the bank and the card statements for each month. We find the supply cost and record it in the right line with a reimbursement to settle it. We move the personal bill out of the costs and into an owner draw. We pull the draw out of the wage line and into equity. We catch up the open months one at a time, from the oldest forward. Then the routine runs every month, so the next year end starts with each move in the right line.

Common questions

What is the difference between a reimbursement and a draw? A reimbursement pays you back for a business cost you paid with your own money. The cost goes in the expense line and the payback settles it. A draw is money you take out for your own use. It goes to equity, not to costs. Your profit does not change with either one, but the lines they touch are different.

Is an owner draw a cost? No. A draw is a distribution of profit you already earned. It goes to an owner draw account in equity. Your cash goes down and your equity goes down. Your income and your costs do not change.

Should a reimbursement go through payroll? No. A reimbursement is not a wage. It is the business paying you back for a cost you covered. When it goes through the wage line, the wage line is too high and the payroll records do not match the work. We keep it in the expense line with a payback to settle it.

Do you prepare taxes? No. We do not prepare taxes. We keep the reimbursements, the draws and the payroll in the right lines of the books, and your CPA makes the calls. You can reach us on our contact page if you want a team that keeps each move clean.