If you are a business owner, you can pay yourself in one of two ways: salary or dividends. Learn all about the pros and cons of each payment method.

Have you recently established your business in Canada as a corporation? If you want to pay yourself as a business owner, you have one of a few options from which to choose: business salary, dividends, or a combination of both. Each option has its upsides and downsides, so it’s important to consider each and determine which will work best for you.

Receiving a Salary

If you receive a salary through the corporation, there are certain advantages and disadvantages that come with this form of payment.

Some of the pros of receiving a salary include:

  • Salaries provide you with personal income.
  • Salaries enable business owners to contribute to retirement accounts.
  • Salaries and bonuses count as tax deductions for corporations.

On the other hand, salaries can come with multiple downsides, including:

  • Business owners need to set up payroll accounts and prepare all paperwork.
  • Investing for retirement results in twice as many payments considering business owners pay as employers and employees.
  • Salaries are taxed 100 percent, potentially adding more of a burden to taxes.

Receiving Dividends

If you’re considering dividends as a form of payment from the corporation, certain benefits of this arrangement include:

  • Dividend taxes are lower than salary tax rates, which means you pay less in personal taxes.
  • You can declare dividends at any time, which allows for more flexibility depending on your tax situation.
  • You can save more money without the need to pay into the Canada Pension Plan (CPP).
  • The process of paying via dividends is simple compared to salaries, as it involves writing a check in the name of the corporation, followed by updating the corporation’s minute book and preparing a director’s resolution for all paid dividends at the end of the year.

The cons of receiving dividends include:

  • You won’t have any income left to contribute toward investments such as retirement or other accounts.
  • You won’t be able to claim any other tax deductions for expenses made with personal income.

Choosing to Receive Both

In many cases, business owners receive both a salary and bonus to prevent the corporation from making more than $500,000. If a corporation earns less than that amount, Canadian-controlled private corporations (CCPCs) will pay income tax at a far lower rate than they would if their income exceeds $500,000.

Whether you decide to receive payments in the form of salary or dividends, this decision will be based on your personal financial situation, which accounts for income level, projected annual income, cash flow needs, your age, and the necessity of personal cash reserved for tax deductions and investments.

If you are seeking an experienced accounting partner to help you take your business to the next level, contact us.

E&E Professional Accountants has years of experience in assisting businesses with their accounting needs. We are founded and managed by an experienced corporate auditor and a former CRA tax auditor. Feel free to contact us for assistance with all your accounting and bookkeeping needs.