Understanding Entrepreneurial Remuneration: Salaries versus Dividends

Introduction:

As an entrepreneur, the question of remuneration is crucial. It influences not only your day-to-day life, but also your company's long-term tax and financial strategy. You find yourself at a crossroads, having to choose between receiving a salary or dividends, two options with their distinct advantages and specific tax implications. In this article, we look at these differences to help you make the decision that's best for you and your business.

The aim is simple: to provide an informed comparison between salary and dividend, two types of income with clear-cut characteristics, so that you can navigate the complex world of compensation with confidence.

I. What is a Dividend?

A dividend is defined as a portion of the profit that a company decides to distribute to its shareholders after meeting all its financial obligations. For an entrepreneur, it's a means of remuneration that directly reflects the health and performance of the business.

Sometimes seen as a form of reward, dividends fall into two categories: eligible dividends and ordinary dividends. The former are derived from profits on which the company already pays higher taxes, while the latter are derived from income qualifying for the Small Business Deduction (SBD) or investment income, implying slightly different taxation for the shareholder.

What makes dividends particularly attractive is their advantageous tax treatment. For the shareholder-entrepreneur, eligible dividends are subject to a lower tax rate thanks to a dividend tax credit mechanism, which avoids double taxation since the company has already paid taxes on these profits.

II. What is a Salary?

In the business world, a salary is a periodic sum paid to an individual in return for his or her work or services as an employee. For an entrepreneur opting for this form of remuneration, the salary is an operating expense for the company, integrated into the income statement and thus reducing its taxable income.

Paying a salary also generates additional obligations, such as social charges, including contributions to various social plans for both employer and employee. These contributions, while representing an additional cost, confer a number of advantages, such as access to pension or insurance plans for the shareholder, while benefiting from the deductibility of salaries for the company.

III. The tax impact of wages

Salaries are subject to direct taxation as soon as they are received, at progressive rates according to the tax scales in force. For the employer-entrepreneur, this means deducting and paying social security charges and contributions on the sums paid out, thereby increasing the real cost of remuneration.

For example, in a hypothetical case where an employer wishes to grant a gross salary of $100 to an employee, the total cost to the employer could be around $115, taking into account employer charges, while the employee could net $55-75 after tax and social security deductions.

That said, paying a salary allows you to benefit from a variety of tax deductions. These include childcare tax credits and retirement savings plans, which are not available when dividends are paid.

IV. The tax impact of dividends

When we look at dividends from a tax angle, the notion of double taxation quickly comes to the fore. A company's profits are initially subject to corporation tax, and dividends are distributed from the remainder. However, thanks to the dividend tax credit mechanism, the tax burden is reduced for the entrepreneur.

A distinction must be made between the tax rates applicable to the two types of dividend. An eligible dividend, generally drawn from profits not eligible for the Small Business Deduction (SBD), benefits from a preferential rate, since the company has already paid a more substantial tax. Conversely, an ordinary dividend, drawn from ECD or investment profits, will be taxed at the entrepreneur's higher rate.

This does not mean, however, that dividends are always the royal road. One of the main drawbacks is that dividends as such are not deductible from company expenses, in contrast to the deductions allowed for salaries.

V. Salary vs Dividend Comparison: Scenarios and Practical Advice

Let's be clear: there is no universal answer to the question of choosing between salary and dividends. It all depends on your company's financial situation, your personal needs and your long-term perspective. An entrepreneur who needs a stable income to ensure sufficient social security cover might opt for a salary, while another, favoring tax optimization and reinvestment in his business, might opt for dividends.

A business accounting tip here would be to carry out an in-depth financial analysis, considering projected tax scenarios over several years to observe the impact of each choice. The support of a tax advisor can be crucial in this process.

VI. Certified accountants at the service of entrepreneurs

Bankeo understands that, behind every entrepreneur, there is a unique individuality, projects and aspirations. That's why our platform aims to match each entrepreneur with the ideal accountant, able to provide personalized recommendations.

Bankeo's services include tax consulting, compensation optimization and assistance with corporate tax returns. The tax and accounting landscape can be very complex, and having a specialist at your side could make all the difference in making strategic decisions about your compensation.

Glossary:

• Shareholder: Individual or entity holding a share of a company's capital.
• Social contributions: Compulsory levies collected from employers and employees to finance social protection.
• Dividend tax credit: tax mechanism to avoid double taxation of profits distributed as dividends.
• Small Business Deduction (SBD): A tax measure enabling SMEs to reduce their tax rate on a portion of their taxable income.
• Corporation tax: Tax levied on a company's profits.

The choice between remuneration by salary or by dividend is inseparable from an overall reflection on your company's strategy and your personal needs. Each option has its own specific features, which need to be fully understood and analyzed.

VII. Conclusion:

We covered a range of key points relating to contractor remuneration, from how dividends work and their tax treatment, to the implications of salaries for the company and the employee, and a detailed comparison of the advantages and disadvantages of each remuneration method.

Making an informed choice between a salary and dividends is not a trivial decision, as each scenario requires precise financial and tax analysis. This choice will need to take into account not only the tax aspects, but also your long-term objectives, and potentially your strategy for personal growth and business expansion.

To benefit fully from advice tailored to your situation, it is advisable to consult a professional accountant or tax consultant. That's exactly what Bankeo is here for: to put you in touch with the accounting expert who can guide you towards the best decisions for your income. Whether it's preparing your company's tax returns or planning tax optimization, accounting expertise is an indispensable asset for all entrepreneurs wishing to make the right financial decisions.

Aimed specifically at entrepreneurs, Bankeo offers tailor-made solutions to help you meet these challenges. With the support of accounting specialists, you can free yourself from uncertainty and lay a solid foundation for lasting financial prosperity.

Finally, use the resources at your disposal to enrich your knowledge. By constantly monitoring and updating our content, Bankeo ensures that you have access to the most recent and relevant information to help you on your way.

All that's left is for you to get in touch with a Bankeo expert for top-of-the-range, fully personalized support. Your entrepreneurial project deserves the best for its growth and financial development. Work now for your success by choosing the remuneration that suits you best.

Have you decided which form of remuneration to choose to maximize your tax benefits while respecting your professional ambitions? For further information or personalized assistance, don't hesitate to contact Bankeo. Our experts are ready to help you make the most of your career path with expert advice tailored to your needs. Take the right course for your financial success today by teaming up with Bankeo - your trusted partner for accounting and tax advice.