How to Pay Yourself as a Small Business Owner
One of the biggest questions every small business owner faces is a self-indulgent one: How much should I pay myself? And while most entrepreneurs recognize that running a small business isn’t all about the profit, we all have bills to pay and that requires an adequate income.
The beauty of being an entrepreneur is having the flexibility to establish your own income. But ultimately how much you earn is dependent on the performance of your business.
This is the time of year you should be sitting down with your accountant to evaluate how your business has fared over the year and figure out what your income needs to be.
Step 1: Weigh Your Business’s Financial Performance Against Your Lifestyle Needs
With the help of your accountant, the first step in determining your salary is to understand the trend of your business’s cash flow—there’s no sense in taking income that isn’t there. You’ll then want to project where your safe income (otherwise known as tax paid retained earnings) is.
But it isn’t just your business’s financial needs you have to consider—after all, without you there is no business. Knowing how much cash your life requires is a big part of knowing what to take home as a small business owner. Factor in things like your mortgage, car payments, and monthly expenses.
Step 2: Consider Salary vs. Dividends
If you pay yourself a salary the big advantage is that you will have a regular personal income—one that would be considered a tax deduction for your business. However, you will have to pay monthly income tax and pay into things like CPP.
Alternatively, you can pay yourself at the end of the year and convert your salary into a “management bonus,” but that will cost you in taxes.
If you pay yourself in dividends, you'll be taxed at a lower rate and save on CPP. Dividends give you greater flexibility when it comes to your income, which is a selling point for some business owners, but you have to stay on top of your books in order to make it work.
Keep in mind that if you are the sole proprietor of your business everything you make is taxable.
Step 3: Work with an Accountant
What works for one small business owner may not work for another. There is no “one size fits all” approach to determining your income, but with the help of a trusted accountant you can make the best decision for your business.
We can help you come up with a tax efficient way to determine your income and help you process that income through your company before the end of the year.
Give us a call, we’d love to chat about your small business: 289-466-5210