Entrepreneurs can pay themselves a salary or dividends

This article will help you make the right choice by informing you about these two income payment methods.

What are the advantages of paying yourself a salary?

A salary is remuneration paid for work performed under an employment contract. It is considered an expense in the company's financial statements.

If you opt for a salary as a contractor, the payments are first considered as expenses for your company before becoming employment income for you. This means you'll receive a T4 form for your income tax return. What's more, this expense reduces your company's taxable income, resulting in a reduction in the corporate income tax payable at the end of the year.

To pay you a salary, your company will have to set up a payroll system registered with the CRA and Revenu Québec. With each payment, deductions at source (pension plan, income tax, etc.) will have to be made from your salary and remitted to the appropriate tax authorities.

In the industry, it is generally estimated that it costs an employer around $58 to pay a worker a gross salary of $57, while the employee receives between $35 and $40 net after deductions at source.

Paying a salary provides you with a stable, predictable personal income. What's more, it allows you to contribute to an RRSP, benefit from deductions for certain services such as childcare, and make it easier to obtain a mortgage thanks to a regular, predictable income.

Finally, income tax is deducted at source from each paycheck, avoiding a tax bill at the end of the year.

What are the disadvantages of paying yourself a salary?

The major disadvantage of salary is taxation. The shareholder's income is subject to a high tax rate, reaching 49.97% in Quebec. It is therefore important to manage your tax obligations carefully when choosing this option.

What are the advantages of paying yourself a dividend?

Dividends represent a share of net profits distributed to a company's shareholders. Unlike wages, they do not reduce the company's taxable income.

There are two types of dividends: eligible dividends and ordinary dividends. Dividends are taxed less on personal income than salaries, since they benefit from a dividend tax credit.

Payment of dividends to shareholders is relatively straightforward, and is declared when funds are transferred from the company to the shareholder's personal account.

What are the consequences for the company?

Each year, the company must prepare and file T5s for shareholders who have received dividends. Ordinary and eligible dividends are not deductible from corporate income tax. Tax rates for individuals are therefore generally lower than those applicable to salaries.

Paying dividends allows business owners to withdraw funds from their company without having to contribute to the QPP, reducing costs for both the company and the shareholder.

When to opt for a salary or dividend when you're an entrepreneur?

The choice of remuneration is an important decision.

Once you've familiarized yourself with this information, you'll have a better idea of the strategy you need to adopt as an entrepreneur.

Because of the impact on your financial health, we recommend that you call in a quality accountant to help you.

So don't hesitate to contact us if you'd like to find an accountant adapted to your entrepreneurial reality to support you in this process. https://www.bankeo.ca/