Choosing a Salary vs. Dividends: Here’s What You Should Know

Choosing a Salary vs. Dividends: Here’s What You Should Know-3
As a small business owner, you’ve probably wondered whether it’s more beneficial to pay yourself a salary vs. dividends. But the answer isn’t quite so simple, and depends on a variety of factors. We will dive into the benefits and drawbacks of both, including other considerations like retirement, taxes, and more, so you can make the best decision based on your individual needs.     Choosing a Salary   Business owners most commonly choose to pay themselves a salary, and there’s solid reasoning behind it. After all, your salary gets deducted from the company’s revenues; since individuals pay lower taxes than companies do, you and your company will end up paying less tax that way.   Paying yourself a salary also means you can contribute to your RRSP, lowering your personal taxable income. You’ll need to contribute to the government pension plan, but you’ll eventually see this money back in retirement income.   Keep in mind that you’ll need to set up payroll (if you haven’t already) in order to properly pay yourself a salary. You should also note that if you own a small business and your annual income exceeds $3,500, you’ll need to pay double the CPP that a normal employee would.     Choosing Dividends    To put it simply, dividends are the earnings from a company that are distributed to shareholders. A board of directors determines how much will be paid to shareholders, and then shareholders receive dividends according to the number of shares they own.   As a business owner, you can choose to pay yourself fully in dividends. This can be more beneficial to you and your company in certain situations, but it really depends on your financial situation and the type of dividends paid.   Dividends aren’t considered personal income like a salary, but instead is considered investment income. Since it was likely taxed at a higher corporate tax rate before being paid to you, you may end up paying less tax on it personally.   Keep in mind, you’ll need to create and file T5s for every individual that receives dividends at your company. If you choose the route of dividends, you’ll also need to ensure you have a financial plan for retirement, since you won’t be contributing to (and benefiting from) the Canadian Pension Plan (CPP).     Salary vs. Dividends: Which Is Right for Me?   Many people would gravitate towards a salary, but there’s no right answer for everyone. It can really depend on where you’re at and what you need. For example, if you’re at a stage where you’re looking to buy a home and are qualifying for a mortgage, you’re going to want a predictable income like a salary instead of dividends.   However, if you’re approaching retirement and don’t need to contribute to an RRSP or CPP, dividends can be a more flexible option. You could end up with more cash and increase your savings. It also benefits you as a business owner, as you may not need to set up payroll if you don’t have any employees.   Do neither of these options sound right for you? Keep in mind, you don’t have to pay yourself anything. If you’re able to support yourself outside of this business, it might be wiser to re-invest all revenue back into the business to help it grow.   At the end of the day, you’ll want to do what makes sense for you and your business. At Arvind Betala, we can help you make the right choice between salary vs. dividend to help keep you and your business thriving. Contact us today for more information.