Salaries or Dividends - Which Option is Right for Your Small Business in Surrey BC
What is the Difference Between Salaries and Dividends for Your Small Business as a Business Owner?
A corporation is a separate legal entity. If your Small Business is set up as a corporation, you have the choice as to how you can pay yourself. You can do this by paying yourself a salary, receiving monies as dividends, or a mix of both. In addition, if you have loaned money to your company, you can arrange to receive interest on the loan. We will discuss the advantages and disadvantages for business owners drawing a salary versus receiving dividends.
The type of remuneration that a small business owner decides to draw from their business, whether it be salary or dividends, will have an impact on both the business owner/manager and their corporation. We will also discuss the tax implications of receiving a salary versus dividends as well as some nontax considerations that are of importance when deciding which form of remuneration, you, as a small business owner-manager, should take.
Salaries - T4
- Salaries are the primary method to provide a base wage to a small business owner on a regular basis
- Salaries/wages provide you with a T4 slip showing employment income
- Financial institutions are more comfortable lending money to an “employee” rather than a self-employed person
- There is an element of consistency and expectation with employment income.
- If receiving a salary, you are required to contribute to CPP
- This is not a bad thing since CPP does provide for some retirement income. But you will be paying both portions of CPP as you will be both the employer and the employee.
- Management fees & year-end bonuses are considered salary by CRA and are reportable on a T4 slip
- A year-end bonus is also widely used to help eliminate shareholders drawings that are in a debit balance.
- The business salary or bonus paid out will be a tax deduction for the corporation
- If paying yourself a salary, you will have to organize payroll
Dividends - T5
- Dividends are investment income – a return on your shares
- As such, they are not generally subject to normal payroll deductions and charges such as CPP and EI premiums, provincial payroll/health taxes, workers’ compensation premiums, etc.
- Dividends, just like bonuses, can be used to help eliminate shareholders’ loans that are in a debit position
- This can be a very tax efficient way of disbursing funds on paper to a shareholder.
- Paying yourself with dividends is comparatively simple
- The shareholder draws from the corporate bank account to their personal bank account in one or many transactions throughout the year.
- Each year dividends are declared totaling all of the draws and the corporation issues a T5 for any shareholders who receive dividends.
- Another benefit is that dividends are a much more flexible way of income splitting within the family
- Caution that dividends should not be paid to children under the age of 18 to avoid the punitive “kiddie tax”.
- Dividends paid to shareholder are not subject to withholding taxes and as a result, can be used to maximize the cash to be paid to a shareholder
- But be sure that you are well aware of the tax bill that will be due when your personal taxes are filed in April.
Find more insights on Corporate Tax Integration for Shareholders & Business Owners click here...
In summary, the payment of a salary is deductible to your corporation whereas dividends are paid from after-tax corporate profits. Careful analysis is needed to calculate the best mix of salary, interest and/or dividends for your specific circumstances. Green Quarter Consulting can assist in analyzing what the best mix for your small business is.
At Green Quarter Consulting - Accounting and Bookkeeping Services for White Rock, South Surrey, Langley and Surrey BC, we are here to help. We can assist with guiding you through some of the Advantages and Disadvantages of a Salary vs Dividends.
Contact us today at 778-791-2864 or 604-970-0658, let’s talk, or send us an email here and we will be in touch very shortly.