This article will help you make the right choice by informing you about these two methods of paying income.
A salary represents remuneration paid in exchange 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 expenses for your company before becoming employment income for you. This means that you will receive a T4 form for your tax return. In addition, this expense reduces your company's taxable income, resulting in a reduction in corporate tax payable at the end of the year.
To pay you a salary, your company will need to set up a payroll system registered with the CRA and Revenu Québec. With each payment, withholding taxes (pension plan, income tax, etc.) will have to be made from your salary and remitted to the competent tax authorities.
In the industry, it is generally estimated that it costs an employer about $58 to pay a worker a gross salary of $57, while the employee receives between $35 and $40 net after payroll deductions.
Paying a salary ensures a stable and predictable personal income. In addition, 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 with a regular and predictable income.
Finally, income tax is deducted at source from each paycheck, avoiding a tax bill at the end of the year.
The major disadvantage of the salary lies in the taxation. In fact, 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 well by choosing this option.
Dividends represent a share of the net profits distributed among the shareholders of a company. Unlike salary, they do not reduce the taxable income of the company.
There are two types of dividends: eligible dividends and ordinary dividends. Dividends are taxed less on personal income than salaries, as they benefit from a dividend tax credit.
The payment of dividends to shareholders is relatively straightforward and they are declared when the company's funds are transferred to the shareholder's personal account.
Each year, the company must prepare and file T5s for shareholders who received dividends. Ordinary and eligible dividends are not deductible from corporate tax. As a result, personal tax rates are generally lower than those applicable to salaries.
Paying dividends allows business owners to withdraw funds from their corporation without having to contribute to the QPP, reducing costs for the business and the shareholder.
The choice of remuneration is an important decision.
After reading this information, you now have a better idea of the strategy to adopt as an entrepreneur.
Due to the impact on your financial health, we recommend that you hire a quality accountant to help you.
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/
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