You got 99 problems and your incorporated small business ain’t one? Great. Now it is time to pay yourself. Because you can. Unlike sole proprietors, owners of a corporation no longer have to claim all of the income from the business as personal income.
“How do I pay myself if I’m incorporated”
You can pay yourself in a variety of ways.
You can add yourself to the company payroll and receive a T4.
This is a more expensive option as the company will have to pay all required payroll taxes on your behalf. Owners are exempt from EI but must pay CPP like other employees.
However, choosing this option will allow you to accumulate more room in your RRSP’s which you can utilize to save on personal taxes once you are making the big bucks.
Additionally if you are the lower income earner and need to deduct child care expenses from your taxable income you will need to be pay yourself with a salary.
You can declare the money you have taken from the company as a dividend.
To do this you will need to get your bookkeeper or accountant to figure out how much money you took from the business throughout the financial year and issue you with a T5 from the corporation.
Your personal tax rate will be lower than if you take a salary.
As tempting as it may be to pay yourself as a contractor WE DO NOT RECOMMEND THIS OPTION.
Anytime the CRA feels they are missing out on receiving taxes they feel they are entitled to ( which in this case would be payroll taxes) they will, put quite simply, come after you!
For more information about the penalties for incorrect employee classification check out our blog post Employee VS Contractor – CRA Penalties for incorrect worker classification
In the end we recommend that you talk to your bookkeeper or accountant before you decide how you are going to pay yourself so that you can choose an option that is the most tax effective based on your income requirements.
If you are considering becoming incorporated and would like to discuss your options face-to-face with Teya our business consultant and tax expert you can make an appointment by calling us directly on 604-739-9536 or by requesting an appointment through our contact us page.