One of the most common questions that’s entrepreneurs ask their accountant is should they take payments from their company as salary or dividends says Edmonton bookkeeping. This is a very difficult question to answer without thoroughly researching both the finances for the business. And the personal finances of each shareholder of the corporation.
Ultimately, the reason why it is beneficial to become an entrepreneur and Canada. Is because the average Canadian taxpayer pays 43% of their wages in taxes, including income tax, CPP and EI. The highest tax rate in Alberta is 48%.
However, by comparison, corporations only have to pay 11% in taxes throughout Canada says Edmonton bookkeeping. Because of this up to a 37% tax savings. Is why it’s beneficial to be a business owner.
However, how they take their shareholder draws out of the corporation. Is what will give them the tax savings or not. Edmonton bookkeeping says that entrepreneurs tend to use the savings from taxes to fund their business, give themselves a pay raise. As well as increase their wealth for their future.
However, to implement this, entrepreneurs need to have a great accountant. That they can be very upfront with. Who can help them save as much taxes as possible.
Because of this, it is typically going to be a mix of salary as well as dividends, depending on the current Financial circumstances of the business. And the current personal circumstances of each shareholder.
The first thing that business owners need to keep in mind, is when an entrepreneur takes money out of their corporation as salary. They will pay the full taxable rate. If they take dividends, there’s no Source deductions applied to it. But taxes will be applied to it as soon as it is taken out of the corporation.
Because of this, it’s often in an entrepreneur is best interest to leave their dividends in the corporation for as long as possible says Edmonton but keeping. But this is not always possible when shareholders need to earn an income off of their business.
Whether a shareholder needs to earn an income from their business, or if they don’t. The strategies that their accountants comes up with says Edmonton bookkeeping. Is going to be different based on those elements.
If an entrepreneur needs to take a shareholders draw from their corporation. Whether they take it by a check or an e-transfer. They need to ensure that they take a whole and round number and tickets out only once a month.
Edmonton bookkeeping says that if entrepreneurs are readying themselves a check. One of the first things they need to avoid ever doing. Is writing salary on the memo line. This will force an accountant to classify that as salary only. Which may not be in the entrepreneurs best interest.
Therefore, they right shareholder draw on the check instead, and the accountants can figure out at the year-end finances. What percentage should be accounted as dividends and what should be counted as salary.
Edmonton Bookkeeping | Should Shareholders Take Salary or Dividends
Many entrepreneurs wants to know how soon they’ll be able to take shareholder draws out of their corporation says Edmonton bookkeeping. And while this is a complex question, requiring and accountants to do a lot of research into the finances of the business.
It also requires an accountant to understand the personal circumstances of each of the shareholders as well. This way, the accountant will know how much money they absolutely needs to get paid on a monthly basis. And how much revenue the business needs to be generating in order to pay the entrepreneur that amount.
some shareholders needs to receive all of their income right away from the business says Edmonton bookkeeping. Some shareholders need a bit of income, while some shareholders are perfectly fine either living off their savings. Or not taking a shareholder draw at all for quite a while.
This is why it’s very important that the accountant understands its shareholders personal circumstances. So that they can make the best decision about how early they can take money out of their corporation. And if it should be taken out in dividends, or salary.
The first thing that an accountant is going to ask each shareholder to fill out, is a personal balance sheet. The balance sheet is going to help an accountant understands what resources they have at hand. And if the needs too, can they take resources out of their personal life to put into their business?
Edmonton but keeping says that’s the personal balance sheet is going to have their personal assets at the top, which will be anything worth value that they own. This can include Vehicles, their house, vacation property, and even things such as rrsps, stocks and bonds or even tax free saving accounts.
The second part of the personal balance sheet, are the liabilities that each shareholder has. This can include the mortgage that they have for the house that they own. Any car payments they are making, credit card debts, outstanding balances on their line of credit. Even the taxes that they owe and money that they owe to family members. All can be considered part of their liabilities.
The next thing that an accountant will ask the shareholders to do, is fill out a personal income statement. Edmonton but peeping says this is going to show an entrepreneur once there requirement is for payments, so that’s the accountant can figure out absolutely how much money and entrepreneur needs each month.
The top of the personal income statement will show all of the fixed expenses that the shareholders have. This can be things such as rent or mortgage, car payments and utilities because these are static, and needs to be paid on a monthly basis.
Below the fixed expenses are the variable expenses. And these are the expenses that might not be able to be skipped each month. But are not a events such as groceries. Shareholders can also put things here such as their gym membership, their entertainment budget, and meals and gifts.
When the accountant understands all of the personal circumstances of the shareholders. As well as what’s going on financially in the business. They will be able to make a much better decision on how much the shareholders can draw out of the corporation. And when they can start taking that money for themselves.