You have substantial decision-making responsibilities as the sole owner or manager of a limited liability company. You have the power to decide your pay since you are the boss. Salary vs dividends, which would you choose and why? Either approach could be more beneficial for you, depending on the specifics of your circumstance. What information would you need to feel secure in your choice, then?
Salary vs Dividends
Compensation as Salary
Receiving pay from one’s own business is considered income. A salary or wage, which are synonyms for one another, is regarded as employment income and is taxed as such by the company that pays it on Form T4. Your company will pay less in corporation taxes as a result of this cost since its taxable revenue will be lower.
Payroll income is taxed at the taxpayer’s marginal tax rate when it is submitted to the Canada Revenue Agency (CRA) as personal income. Frequently, this rate is higher than the corporation tax rate. A company may deduct pay as an operational expenditure for tax purposes. In this situation, you are eligible to claim your company salary as personal income and get tax breaks for child care and medical costs.
If you wish to be paid by the company, you must open a payroll account with the CRA. By law, all salaried employees must deduct income taxes and submit tax returns to the CRA. You must make CPP payments if you decide to opt for a salary rather than dividends (CPP). However, you are not required to make EI contributions as a shareholder, therefore if you were dismissed, you would not be entitled to benefits.
Your CPP contribution must be double that of an employee if you own a small company and earn more than $3,500 in net income yearly. Remember that your employer’s income also affects the amount you may deduct from your RRSP.
For company owners who need to save money for retirement but have limited resources, this strategy is appropriate.
Compensation as Dividend
In contrast to personal income like salaries, dividends are seen as investment income. Dividends may result in a somewhat lower effective tax rate than what is typically paid on salaries since they are taxed at the same rate as corporations.
Corporations cannot deduct dividends from their taxable income since they are not business expenses. Dividends are a typical kind of remuneration for company owners. By moving money from the corporate account to the shareholder’s account, you may pay dividends to shareholders. You must create and submit individual T5s for each dividend recipient as required by the CRA, in addition to creating dividends for yourself and your shareholders. You would take the same steps as your shareholders if you wanted to distribute dividends to yourself.
The process could be challenging because of the link between dividend payments and stock ownership. This is where things might become tricky since it can be difficult to distribute earnings among several owners of the same share class.
If you are the single owner of your firm, you are excused from submitting payroll with the CRA and remitting source deductions. It’s crucial to keep in mind that dividends do not count against your RRSP contribution cap, even though they offer a fantastic alternative for people who would rather not contribute to the CPP. You’ll need to establish alternate retirement plans if you don’t pay into the Canada Pension Plan (CPP).
Do you run your own business? You are not required to get paid for your efforts. It’s often best to retain the money in the business if you don’t need it for personal uses. This tactic stops people from paying taxes on money they don’t need. Not everyone indeed has to cope with this problem.
Like so many other issues, the choice between salary vs dividends depends on a wide range of variables. Consider your present requirements in both your personal and professional life before making a decision.