Drawings vs Salary
How Should You Actually Pay Yourself?
If you've ever stared at your business bank account, transferred some money to your personal account, and then wondered "wait, was that even allowed?" - you're not alone.
It's one of the questions we get asked the most, and the honest answer is: it depends on your structure, and there's no single right way to do it.
Let's break it down properly.
First, what's the difference?
Drawings are simply you taking money out of the business for yourself. No PAYE, no payslip, no tax deducted at the time. You just transfer the cash and deal with the tax later when the year's accounts are done.
Salary (or wages) is a formal payment, run through payroll, with PAYE, KiwiSaver and ACC earner's levy deducted before it hits your account, same as any employee.
The catch is that which one you can actually use comes down to your business structure.
If you're a sole trader or in a partnership
You can only take drawings. There's no such thing as paying yourself a "salary" as a sole trader, legally, you and the business are the same entity, so you can't employ yourself.
Every dollar of profit the business makes is taxed as your personal income, whether you draw it out or leave it sitting in the business account. Drawings themselves aren't taxed again, the tax already happened on the profit. This is why so many sole traders get caught out: they draw out what feels like "their share," profit's actually higher than what they've drawn, and a tax bill turns up that doesn't match what's in the bank.
The upside: it's simple. No payroll, no extra admin, no PAYE compliance.
The downside: no automatic tax withheld means you need real discipline to set aside for provisional tax and ACC levies yourself, usually 20-30% of what you draw, depending on your income level. A lot of sole traders keep a separate "tax" savings account and shift a percentage across every time they draw. It sounds basic but it works.
If you run a limited company
Now you've got options, because the company is a separate legal person from you.
Shareholder salary - you formally pay yourself as an employee (or as a shareholder-employee, which has its own ACC rules), PAYE gets deducted, and the salary is a tax-deductible expense to the company. This reduces the company's profit and therefore its tax bill.
Drawings from the shareholder current account - you draw money during the year without PAYE deducted, and at year-end your accountant allocates some or all of it as a shareholder salary (or dividend) once the numbers are final. It's more flexible day-to-day, but it comes with a real trap: if you draw out more than the business can actually afford to pay you, the IRD treats the overdrawn balance as a loan from the company to you, and expects interest to be charged at IRD's prescribed rate, or FBT applies. This is one of the most common things that trips company owners up, so it's worth keeping an eye on your current account balance through the year rather than finding out at year-end.
Dividends are a third option - paid out of after-tax profit, with their own tax treatment (imputation credits and all that). Most companies use some combination of salary and dividends rather than picking just one.
What about ACC?
Worth flagging separately because it catches people out. If you're PAYE-paid, ACC cover comes automatically through your levies (Workplace Cover). If you're not on PAYE, sole trader, or a company owner taking drawings rather than salary, you're on standard CoverPlus by default, which pays out based on your declared earnings and can leave you under-covered if your income is irregular or the business is new. CoverPlus Extra lets you agree a fixed cover level with ACC up front, which is often the better fit for business owners with variable income. Worth a conversation with your accountant or an insurance adviser rather than assuming the default suits you.
So which is right for you?
There's no universal answer, but here's a rough idea:
If you're a sole trader, you don't really get a choice, it's drawings, so the main game is just making sure you're setting aside enough for tax and ACC as you go, and not spending money that's actually the taxman's.
If you run a company and want simplicity and certainty, a regular shareholder salary with PAYE deducted each pay cycle means the tax is dealt with as you go, and you know exactly what's yours to spend. Good if you don't want any surprises.
If you run a company and want flexibility, say your income is lumpy, or you want to leave more profit in the business some months, drawings against the shareholder current account, tidied up at year-end, can work well. Just keep a close eye on that current account balance so it doesn't creep into "informal loan" territory.
Plenty of business owners land somewhere in the middle: a regular salary to cover the bills, topped up with drawings or dividends when the business has had a good run.
The real answer
Honestly, the "right" approach depends on your income, how disciplined you are with saving for tax, and what your accountant is already doing with your structure. If you're not sure which camp you're in, that's exactly the kind of five-minute conversation worth having before year-end rather than after.
If you'd like a hand making sense of drawings vs. salary for your circumstances, we'd love to chat.
Note: This article is general information, not personalised tax or financial advice. Every business is different, talk to us about what fits yours. We’d love to chat.
