Paying Yourself A Salary Out Of Your Business Allows You To Enjoy Many Benefits. They Are As Follows:
- The Canadian Pension Plan considers contributions to your retirement funds through employment income, and it is determined by how much and how long you contributed.
- You’re entitled to join the TFSA (depending on your age) which is the greatest technique to defer income tax and it allows you to pay less tax in future when your taxable income is lower.
- The taxable income of the organization would decrease because it is a tax deduction, and paying salaries would reduce its taxable income.
- You can also pay your spouse or children a regular wage in another tax technique known as income splitting, but you must adhere to CRA’s established standards. Please see Tax Planning Strategies for additional information.
The most obvious disadvantage stated by tax accountant Toronto team about paying yourself a salary from your firm is that since your business income is 100% taxable if your taxable income rises into a higher tax bracket, your tax bill will go up.
As both the employer and employee, you’ll be responsible for CPP contributions.
Treating yourself as an employee entails keeping track of your payroll records and creating a Payroll account with the CRA. T4 slips must be issued after the end of the year.
Paying Dividends Out Of Your Own Business Have Following Advantages:
- Dividends are taxed at a lower rate than your regular income, so you will pay less personal tax.
- You aren’t required to make payments into CPP.
- It’s easy to generate revenue from your firm by distributing dividends. Simply write a cheque to yourself at the end of the year, update the company minutes’ book, and prepare the director’s resolution for dividends paid.
Tax accountant Toronto team state that not contributing to CPP would lower your CPP benefit when you retire. You can’t contribute to an RRSP if you don’t have employment income.
You will lose some personal income tax deductions, such as child-care expenses, if you receive dividends instead of a salary.
So, Which One Is The Better Option?
Choosing among these alternatives entails weighing the advantages and disadvantages of each. As a result, tax accountant Toronto speculate that picking one of these methods is based on the following criteria:
- The financial status of the company owner, for example, if business owner’s taxable income is in a higher tax bracket when dividends are paid.
- The monthly cash flow demands of the company’s owner. This will assist in determining which tax deferrals are available with each alternative.
- The corporation’s anticipated income for the year, according to its financial projections. Whether it is a consistent revenue stream or one that has ups and downs.
- The impact of personal tax deductions on the business owner.
- What is the age of the business owner?
It’s tough to figure out the influence of these variables on each alternative, so it’s best to get expert guidance from a professional accountant or tax specialist.