Should an entrepreneur pay themselves in dividends or salary?

Entrepreneurs have the option to pay themselves a salary or dividends.

This article will help you make the right choice by explaining these two ways of getting paid.

What are the perks of paying yourself a salary?

A salary is what you get paid for work you do under an employment contract. It's counted as an expense on your company's financial statements.

If you choose to pay yourself a salary as an entrepreneur, these payments are first seen as expenses for your company before they become employment income for you. This means you'll get a T4 slip for your tax return. Plus, this expense lowers your company's taxable income, which means less corporate tax to pay at the end of the year.

To pay yourself a salary, your company will need to set up a payroll system registered with the CRA and Revenu Québec. With each payment, deductions (like pension plans, income tax, etc.) will be taken from your salary and sent to the relevant tax authorities.

In the industry, it's generally estimated that it costs an employer about $58 to pay an employee a gross salary of $57, while the employee actually takes home between $35 and $40 after deductions.

Getting a salary gives you a stable and predictable personal income. It also lets you contribute to an RRSP, get deductions for certain services like childcare, and makes it easier to get a mortgage since you have a regular, predictable income.

Finally, income tax is taken directly from each paycheck, so you won't get a big tax bill at the end of the year.

What are the downsides of paying yourself a salary?

The main downside of a salary is the taxes. An owner's income is subject to a high tax rate, reaching 49.97% in Quebec. So, it's really important to manage your tax duties carefully if you go with this option.

What are the perks of paying yourself a dividend?

Dividends are a slice of the net profits shared among a company's shareholders. Unlike a salary, they don't lower your company's taxable income.

There are two kinds of dividends: eligible and non-eligible. Dividends are taxed less for individuals than salaries because they come with a dividend tax credit.

Paying dividends to shareholders is pretty straightforward. They're declared when the money moves from the company to the shareholder's personal account.

What does this mean for the company?

Every year, the company has to prepare and file T5 slips for shareholders who received dividends. Both non-eligible and eligible dividends aren't tax-deductible for the company. This means individual tax rates are usually lower than those for salaries.

Paying dividends lets business owners take money out of their company without having to contribute to the QPP, which cuts down costs for both the company and the shareholder.

As an entrepreneur, when should you choose between a salary or dividends?

Choosing how you get paid is a big decision.

Now that you have this info, you have a better idea of the strategy to use as an entrepreneur.

Because of the impact on your financial health, we recommend getting help from a good accountant.

So don't hesitate to contact us if you want to find an accountant adapted to your reality as an entrepreneur to accompany you in this process. https://www.bankeo.ca/