As a business owner, you have the option of taking a salary or dividends from your company. Both have benefits and drawbacks that you should consider before making a decision.
Here’s a breakdown of each option to help you decide which is best for you.
The Difference Between a Salary and Dividends
A salary is simply defined as wages earned for work performed. You are an employee of your company and, as such, are paid for your time and expertise. A dividend, on the other hand, is a portion of your company’s profits that are distributed to shareholders. If you are the sole shareholder of your company, then you would receive all of the dividends.
The Advantages and Disadvantages of Taking a Salary
Taking a salary has several advantages. First, it’s a regular source of income that you can count on every month. This predictability can be helpful in budgeting and cash flow planning. Second, salaries are eligible for payroll deductions like employment insurance (EI) and Canada Pension Plan (CPP) contributions. This can result in savings come tax time.
There are some disadvantages to taking a salary, though. The biggest disadvantage is that salaries are subject to personal income tax at your marginal tax rate. This means that, depending on how much you earn, you could end up paying a significant amount of money in taxes. Another downside to salaries is that they aren’t flexible – if your company is not doing well, you may not be able to reduce your salary accordingly.
The Advantages and Disadvantages of Taking Dividends
Taking dividends also has its advantages. One major advantage is the simplicity of paying dividends as a way for business owners to withdraw money from their corporation and removing the need to contribute to CPP, which is capable of reducing corporate and personal costs. This can result in tax savings, and provides significantly more flexibility than taking a salary. If business is slow, you can choose to take less dividends or no dividends at all until things pick up again.
There are some disadvantages to taking dividends, as well. One disadvantage is that they are not eligible for EI or CPP contributions like salaries are. This means that you will not receive these government benefits if you take dividends instead of a salary. Additionally, because dividends come out of after-tax profits, they may fluctuate from year to year. This can make budgeting and cash flow planning more difficult since you will not have a predictable source of income each month.
There is no right or wrong answer when it comes to deciding whether to take a salary or dividends as a business owner – it all depends on your personal situation and what makes sense for your company. Weighing the advantages and disadvantages of each option carefully with the expert eyes at Keenans Accounting is your path to financial success. Contact us today to get the advice best tailored to you and your business at 705-526-7628.