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E-Myth – “Why most small businesses don’t work & what to do about it”

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Part-time CFO | Is Salary The Most Efficient Tax Strategy

One of the most important decisions a business owner may make in their business is how they should take money out of their corporation says part-time CFO. A business owner can only take money out of their corporation in one of two ways, salary or dividends or a mix of the two. Although it seems like this is an issue about getting paid, this actually is a tax strategy issue. Since a business owner has to take money out of their business somehow, how they do it ends up being a tax strategy, because whether they take a salary, dividends or a mix of both, each one has its own tax implications, so deciding how to take money out of business is extremely important.

Business owners that donít use the most efficient strategy to take money out of their business can often end up paying far more in taxes than they expect. Business owners often think that they can save significant amounts of money on their accounting, by hiring an inexpensive part time CFO, and that leads to hiring a professional that has less knowledge about taxes, and an inefficient tax strategy. Since 29% of all entrepreneurs that fail in business failed because they ran out of money, efficient tax strategies can go an extremely long way to helping business owners avoid that fate.

The decision whether business owners should get paid in salary, dividends or a mix is an extremely complex one that has several variables. Some business owners claim that the salary, dividend and corporate tax rates are integrated, and while part-time CFO says that that is in theory accurate, there are so many variables that it doesnít actually work out that way. What they are referring to is since the dividends that a business owner draws out of their corporation are nondeductible, a business owner pays corporate and personal tax on it. If you add the personal corporate tax rates up together, it should equal the amount on the salary. However this simplistic formula doesnít actually take into consideration all of the variables that factor into help business owners should pay themselves.

Some of the variables that need to be considered when part time CFO is helping their entrepreneurs make the decision, is if the business owner has a spouse, if the spouse has their income, if the business owner themselves has their income unrelated to their business, if they have childcare expenses, if theyíre going through divorce, even what future losses may be and what type of contracts the business owner has in their business. This is an extremely complex and multifaceted issue.

Business owners should ensure that they are trusting a great part-time CFO who has a lot of experience to make this decision with them, so that they donít end up costing themselves far more in taxes than necessary. By working with a great professional, business owners can be assured that the decision that they make will help them save money now and into the future.

One of the most commonly asked questions that part-time CFO sees in their business, is how business owners should pay themselves in their business. When entrepreneurs are taking money out of their business, the two options that they have to choose from is salary or dividends. The decision is less a question about which one or the other to they choose, but what makes a business owner needs to take out. The reason this is so important, is because how a business owner takes money out of their business and that being tax strategy not only for the business owner for the business owners corporation as well. A great tax strategy can help a business owner save money and personal and corporate taxes, where a poor strategy ends up costing them thousands of dollars every year.

This is an extremely complex issue, and there is no one formula or answer that works because each business owner and their own circumstances need to be taken into consideration along with their corporation and the corporation circumstances. One of the first things that part-time CFO will take into consideration when helping the business owner make this determination, is if the business owner has any income coming in that is unrelated to the corporation. They have a spouse, and is the spouse have any other income unrelated to the business as well? The business owner may want to consider income splitting opportunities, and if their spouse has other income, how that income is coming in if it salary or dividends will factor into how an entrepreneur will want to split income with their spouse.

Another issue that can affect help a business owner takes many of their corporation, is if the business is going to be moving in the next year. If the business is, an entrepreneur may want to get paid in salary in order to be able to deduct moving expenses from their income. The reason for this, is because moving expenses are only deductible off of earned income. Part time CFO says that if business owners are moving, and want to claim that they should let their professional know so that they can change their income makes to reflect that.

Another factor in how business owner is going to get paid from their corporation is how can future losses affect how they get paid? If an entrepreneur is facing a loss in their business in the upcoming year, they can utilize this information and changed the mix and how they get paid so that they can avoid paying corporate taxes and just pay personal tax in that year.

By working with an extremely knowledgeable part-time CFO, entrepreneurs can ensure that the decision on how they take many of their corporation is considered very carefully in order to avoid paying more in taxes than is absolutely necessary. This is one of the most important decisions that a business owner can make in their business, to help them accumulate their wealth for the future.