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Small Business Tips: How to Pay Yourself

ON August 28, 2018

How do you pay yourself?

To anyone who has never owned their own business, that might seem like an odd question. They probably figure it is a simple matter of giving yourself a salary based on the profits that the business brings in. But as a business owner, you will have come to see that there are two ways to pay yourself, and it is worth taking the time to consider how to pay yourself in a small business.

There are two different ways to pay yourself: by dividend, or by salary, each with certain advantages and disadvantages.

Business Salary Advantages and Disadvantages

A salary is an employment return which is paid out of the corporation’s net income. The main advantage is simply that you have an income, and what that means is:

  • You will be able to make RRSP contributions (depending on your age).
  • You will be contributing to the Canada Pension Plan (CPP). Your retirement pension is based on how much you have contributed, and for how long. It can therefore be an important consideration for your retirement. Note that you will be paying both portions of the CPP, as you are both employer and employee.
  • Your business salary will be a tax deduction for the company.
  • You can do some income-splitting by paying salary to related employees, such as your spouse or children.

The major disadvantage is that you will have a personal income. Unlike dividends, which are taxed at a lower rate, salary is 100% taxable and may result in an increased tax load.

You will also have to do payroll if you choose to pay yourself a business salary, which will also require setting up a payroll account and doing all related paperwork, such as T4 slips. Also, if your business profits vary from one year to the next, you won’t be able to carry back a business loss, which you would be able to do if you pay yourself by dividends.

Dividend Advantages and Disadvantages.

A dividend is defined as an Investment return paid out of the corporation’s retained earnings. This comes with certain advantages, such as:

  • A lower tax rate, which can result in you paying less personal tax
  • Saving money by not paying into the CPP
  • Easier to pay yourself dividends than a salary; simply write yourself a cheque from your corporation. At year-end, update your minute book and prepare a resolution for the paid dividends.

Some disadvantages exist, however. For example, you may want to pay into the CPP because if you don’t, you will be entitled to less when you do retire. You also will not be able to pay into an RRSP, as you do not have an income. Further, claiming dividends may prevent you from claiming certain income tax deductions, such as child care expenses.

It is in your best interest to examine both options thoroughly in order to determine what is right for you, based on your particular needs and situation.

For all your small business accounting needs, contact BCJ Group today!

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