One of the most common questions that most business owners in Toronto ask us is if they should pay themselves and their employees a dividend or salary. It’s a good question and one that doesn’t have a simple answer. It all depends on your circumstances and a few financial factors.
In this blog, our financial business advisors will explore the pros and cons of salary and dividends so that you can make the best decision for your business.
- Paying yourself a salary is tax deductible. That means you can deduct the amount you pay yourself from your company’s profits before taxes are calculated. This can help lower your overall tax bill.
- Salary helps build Canada Pension Plan (CPP) This plan is a government-run pension plan that provides income to retired Canadians. The more CPP credits you have, the higher your pension will be when you retire. So, if you’re planning for retirement, paying yourself a salary can be a good way to boost your CPP benefits down the road.
- One downside of salary is that it’s subject to payroll taxes, which include Canada Pension Plan (CPP) deductions for Employment Insurance (EI).These payroll deductions can eat into your take-home pay, leaving you with less monthly money.
- Another potential disadvantage of salary is that it may put you in a higher tax bracket. This could mean you pay more taxes overall, although this will depend on how much your company makes and the province you live in.
- One of the biggest advantages of dividends is that they’re not subject to payroll taxes. This means more money in your pocket each month.
- Dividends can help keep you in a lower tax bracket than if you paid yourself a salary – which could save you money on taxes overall.
- If your company’s profits don’t cover the dividends you take out, there’s a chance that this could be represented as you taking out a loan. And you’ll need to quickly pay it back.
- If you ever get in an unfortunate situation, such as being involved in a divorce, your family court will view the dividend as a matrimonial resource.
So, which is better for your business: salary or dividends? There’s no easy answer, as it really depends on many factors, including your long-term goals and your company’s revenue. However, we hope this blog has given you some food for thought. As always, we recommend speaking with a tax accountant or financial business advisor to get expert advice tailored to your circumstances.
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Whether you’re looking for a corporate or a personal tax accountant in Canada, we cater to all your needs at Accounting Plus. We offer exceptional personal tax, corporate tax, and accounting and bookkeeping services to all our clients in Toronto, Richmond Hill, Markham, and nearby areas. Our team of accountants uses top-notch software Xero for cloud-based accounting services.
We can also help you complete your loan application and develop a business plan from scratch with our business advisory services.
So hurry up and contact our team for tax services before this year ends.