Should I pay myself a salary or dividends from my corporation? A very recurring question that is encountered by accountants in Toronto and all over Canada. The method you choose to pay yourself from a corporation has an impact on many different things – and not just your personal income tax.
Being an owner of a Canadian small business corporation, one of your first actions is to determine whether you should pay yourself a salary income or dividends – or both. However, this choice will vary depending on how your business is structured. It requires you to have an objective understanding of the pros and cons of each payment method.
Now that you know the pros and cons of dividends and salary you should consult with your accountant in Mississauga to determine which one fits your circumstances. There’s no right or wrong answer to this question. For instance, if you are applying for a loan maybe you want to go with salary if you are concerned with paying the least amount of tax and don’t want to contribute to the Canada Pension Plan that dividends may be the way to go for you Ultimately when it comes to making this decision, the choice is yours and should be based on your specific circumstances, your company structure, and your goals. However, it is common that business owners will pay themselves a mix of a reasonable salary, with dividend options to get the best of both worlds. In the end, you must keep your documents to a bookkeeper to be in safe hands.
You must understand that in some situations salary would be the better option in comparison to dividends or vice versa, so there is no one size fits all solution. Hence engaging a professional chartered accountant will ensure that you make the right decision resulting in saving your valuable time and more importantly paying fewer taxes.
If you have any further questions related to the above topic feel free to contact us through our website filingtaxes.ca or reach out at 416-479-8532. Schedule your tax preparation appointment with us and take the first step towards proper management of your finances. Our professional personal tax accountants will make sure to get you the maximum tax refund on your personal tax return.
Dividends provide an opportunity to extract profits in a tax-efficient manner. Dividends are subject to the corporate tax rate hence may yield a marginally lower tax rate than what is usually paid on a salary. Whereas with a salary or a wage, the payments become an expense of the corporation. Classification as a business expense, salary reduces your company’s overall taxable income, which in turn reduces the corporate taxes owing. However, you are subject to the personal income tax rate on your salary which tends to be higher than the corporate tax rate. Given the different opportunities and benefits, each affords, determining to pay yourself a salary vs. dividends from your corporation truly depends on your individual business and personal situations.
For small business owners cash breaths life into their business. The way your business is structured has a huge impact on how you pay yourself. The type of business structure you have influences how you receive your wages, pay taxes, and file taxes. Business owners can pay themselves through dividends, a salary, or a combination of both. Sometimes deciding your business’s budget and figuring out how much to pay yourself is tricky. If you are unsure, it’s better to be safe than sorry. Get an expert opinion from a professional, like an accountant.
Though personal circumstances are different for each small business owner, most find paying themselves a combination of dividends and salary as the most tax-efficient structure of working. This involves the small business owners paying themselves a salary up to the tax-free allowance and subsidizing the rest of their profit via dividends.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.