Explore Accounting Owner Withdrawals vs. Salary Expense Go to Pg 53 When the owner of a business withdraws cash for personal use, that withdrawal decreases owner's equity. However, it is not considered an expense of the business. On the other hand, when wages or salaries are paid to employees, those wages or salaries are considered an expense of the business. These are called Wages Expense or Salary Expense. The income of a business is calculated by subtracting total expenses from total revenue. Since employee wages and salaries are an expense of the business, they reduce the net income of the company. Since owner withdrawals are not considered an expense of the business, they do not reduce the net income of the company. A business owned by one person is called a proprietorship. The Internal Revenue Service does not require the proprietorship, itself, to pay taxes. However, the owner of the proprietorship must include the net income of the proprietorship in his or her own taxable income. The income of a proprietorship is affected by employee wages and salaries. Therefore, the income tax paid by the owner is affected by the amount of wages or salaries expense. The more wages or salaries expense the company has, the lower the net income will be. The lower the net income of a business, the lower the amount of Criminal Justice Q Go to Pg. 53 ule uwier is anrected by the amount of wages or salaries expense. The more wages or salaries expense me company has the lower the net income will be. The lower the net income of a business, the lower the amount of income tax that will be paid on the net income. Because the income of a proprietorship is not affected by owner withdrawals, the income tax paid by the owner is not affected by how much cash the owner withdraws from the business. If Bergum Consulting Company has revenues of $35,000.00 and expenses of $17,000.00, its income is $18,000.00 ($35,000.00 - $ 17,000.00). Bergum Consulting Company will have income of $18,000.00 whether the owner withdraws $300.00 or $3,000.00 from the business during that period. Instructions 1. Amar Gupta owns St. Croix photography. He is considering withdrawing $4,000.00 from St. Croix Photography for his personal use. What effect would this withdrawal have on the income tax Mr. Gupta must pay this year? 2. Mr. Gupta is also considering giving his employees a raise that would increase total salaries by $35,000.00 per year. What effect would this raise have on Mr. Gupta's income tax