Salary vs Drawings in a Small Business: What’s the Difference?

One of the most common questions small business owners ask is whether they should take money out of their business as a salary or as drawings. Choosing the right option is important because it affects your tax obligations, cash flow, compliance, and even how your business is perceived.

Understanding the difference can help you avoid costly mistakes and plan more effectively.

What Are Drawings?

Drawings are amounts taken out of a business by the owner for personal use. This structure is typically used by:

• Sole traders

• Partnerships

• Some look-through companies (LTCs)

Drawings are not an expense to the business and do not reduce business profit. Instead, the business’s profit is taxed in the owner’s personal tax return, regardless of how much money is actually withdrawn.

Because drawings are not subject to PAYE, there is no tax deducted at the time of payment. However, this often means the owner needs to plan ahead for provisional tax and ACC levies.

What Is a Salary?

A salary is a regular payment made to a shareholder-employee of a company. It applies when the business is structured as a company and the owner is paid through payroll.

Salary payments:

• Are treated as a business expense

• Reduce the company’s taxable profit

• Are subject to PAYE, KiwiSaver, student loan deductions, and ACC

Shareholder salaries are usually declared at the end of the financial year rather than processed weekly through payroll, although PAYE obligations still apply.

Key Differences at a Glance

The main differences between salary and drawings come down to tax timing and compliance. Drawings are simple and flexible but require discipline to ensure tax is paid later. Salaries are more structured and compliant but involve more administration.

Drawings suit businesses with fluctuating income, while salaries provide regular income and clearer budgeting.

Cash Flow and Tax Planning

One of the biggest risks with drawings is underestimating tax. Because no tax is deducted upfront, business owners can be caught short when tax payments fall due.

With salaries, tax is paid as you go, which can make cash flow more predictable. However, overpaying salary can create pressure on the business if cash flow tightens.

Common Mistakes to Avoid

Small business owners often:

• Mix salary and drawings without understanding the tax impact

• Withdraw funds without checking cash flow

• Forget provisional tax obligations

• Assume drawings are “tax-free” income

These mistakes can trigger IRD issues and unnecessary stress.

Which Option Is Right for You?

There is no one-size-fits-all answer. The right approach depends on:

• Your business structure

• Profit levels

• Cash flow stability

• Personal income needs

Getting this decision right can improve cash flow, reduce tax surprises, and support long-term growth.

Final Thoughts

Salary and drawings serve different purposes, and choosing the right method is essential for running a financially healthy small business. With the right advice, you can structure your income in a way that works for both you and your business.

Professional guidance can help ensure compliance while maximising efficiency and peace of mind.