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How to pay yourself as a corporation

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“Siri, how do I pay myself if I’m incorporated?” | Photo by Viktor Hanacek via Pic Jumbo

So you have gone through the process of incorporating and have finally reached the super fun part: PAYING YOURSELF WOOOOOO.

When it comes to paying yourself as a corporation, you have two options: You can either pay yourself a salary or you can pay yourself dividends.

Which option makes the most sense for you is influenced by your level of income, your corporate structure and of course your accountant’s advice.

Here is an overview of what each option has to offer.

Salary

This option is usually the more expensive of the two from a company perspective.

To set this up you will have to add yourself to the company payroll and ensure the company pays all the applicable taxes on your behalf and issues you a T4 annually.

CON

The company will have to pay payroll taxes on your behalf

PRO

You accumulate more room in your RRSPs to save on personal taxes

Dividends

This one requires less work to set up but can get out of hand if you don’t keep track of your spending.

To make this one work you have to:

  1. Get a bookkeeper to figure out how much money you took from the business
  2. Your accountant will declare the money you have taken from the company as a dividend & issue you a T5 from the corporation

CON

You need to keep better track of your withdrawals and can pull out more income than intended increasing your tax rate.

PRO

You avoid paying payroll taxes.

WARNING:

  1. You cannot be a contractor to your own corporation because doing so creates a loophole that causes the Canada Revenue Agency (CRA) to miss out on taxes. Naturally, they have discovered this loophole and shut this option down!!!

As always, when in doubt or unsure of which option makes the most sense for you talk to a professional. A small investment on advice can provide big savings down the line.

Incorporation Series: How do I pay myself if I’m incorporated?

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Balling! When your wallet fat from all that cheddar…..

 

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.

1. Salary

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.

2. Dividends

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.

Important Note

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.