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Date: March 31, 2023
When you’re the owner/manager of a corporation, which method is better to pay yourself with— a salary or a dividend? Each method comes with its own advantages and disadvantages, and here at Wales Accounting we would like to talk about them in detail. This way, you can decide which method is best for your specific tax situation.
Paying Yourself a Salary
The Pros
- At the end of the year when a bonus is declared, there is a chance for personal tax deferral.
- If you want to reduce corporate taxable income, declaring a salary can help with that.
- The salary method allows an owner to take advantage of different types of personal tax deductions.
- Since a salary is considered employment income, it will allow you to contribute to CPP and increase RRSP contribution.
The Cons
- When you have to operate a payroll account, it comes with more complications and compliance costs.
- If a bonus isn’t declared immediately, people run into problems down the road if they struggle with cash flow.
- This method comes with a higher cost since you have to consider employer & employee CPP.
- If the company wants to obtain financing, a salary can decrease the company’s results from that financing.
Paying Yourself Dividends
The Pros
- Depending on the year end outlook of the company, declaring a dividend could provide a tax deferral (till the deadline in April).
- When you earn dividend income personally, it comes with a preferential tax rate.
- It’s much easier to pay a dividend than a salary (since no source deductions are required).
- Since dividends can be declared at any time, you can optimize your tax situation accordingly.
The Cons
- Taxpayers can deal with a loss on certain tax deductions if a salary is not earned.
- When one declares a dividend, you do not get a deduction on your corporate income.
- When you earn dividend income, there is no room for RRSP or CPP contributions.
How Our Team Can Help
When you need financial assistance in a number of different sectors, both on a personal and corporate level, Wales Accounting is here to help. For years, our highly experienced professionals have done everything in their power to help those who need the best financial services. To learn more about our accounting in Richmond Hill, be sure to call our team at (905) 508-9262 today!
Categories: Blog
