Is It Better To Pay Yourself A Salary Or Dividends?
As the business owner, you're required to decide how you'll be compensated. Should you choose a salary or dividends after you incorporate your business? Each method has its advantages, depending on your situation.
Pros and Cons of Salary
Regular Income: A salary provides a stable and predictable income stream, which can be beneficial for personal financial planning and budgeting.
Contributions to CPP/QPP: Salaries are subject to contributions to the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), which can help build retirement benefits.
Tax Deductibility: Salaries are deductible expenses for the corporation, reducing the corporation's taxable income.
Personal Taxation: You pay personal income tax on your salary. The tax rates and brackets for salary income are progressive, meaning the more you earn, the higher the tax rate.
Pros and Cons of Dividend
Flexibility: Dividends provide flexibility in timing and amount. They can be paid out when the corporation has profits available, and the amount can vary based on business performance.
Avoid the hassle of a CRA payroll account: Paying through dividends allows you to avoid the hassle of setting up a CRA payroll account and having to meet the obligations of that, which include timely remittance of deductions and penalties for late payments.
No CPP/QPP Contributions: Dividends do not contribute to CPP/QPP, so they do not build retirement benefits under these programs.
Corporate Tax Implications: Dividends are after-tax payments (not expenses) that don’t reduce your corporate tax payable.
Considerations for Choosing Between Salary and Dividend
Personal Financial Needs: Consider your immediate financial needs, lifestyle, and personal budgeting preferences.
Tax Planning: Consult with a tax advisor to determine the most tax-efficient strategy based on your overall income, other sources of income, and tax bracket.
Retirement Planning: Factor in your long-term retirement goals and how CPP/QPP contributions or lack thereof may impact your retirement income.
Legal and Regulatory Compliance: Ensure compliance with tax laws, employment standards, and corporate governance requirements when making decisions on compensation.
In summary, the optimal choice between salary and dividend varies based on individual circumstances, tax efficiency goals, and personal financial planning needs.
Contact ATZ Accounting today to seek professional tax advice and personalized guidance based on your specific situation and objectives.