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Entrepreneurs should be aware of the differences between salary and dividends says part-time CFO. The reason for this, is because the biggest difference between salary and dividends is the taxes that business owners pay on the amount of each as they take it out of their business. Salary is deductible from the income of the business, and it shows up on the income statements of the business. Business owners who take salary, will end up paying personal taxes on this amount. Since personal tax rate in Alberta tops out at 48%, this can be a significant amount of money. Dividends on the other hand are not deductible from the income of the business, because it is a direct withdrawal of the prophets. It wonít show up on the income statements of the business, and business owners that take dividends to pay the small business corporate tax rate at 11%.
Many entrepreneurs believe that since dividends are taxed lower, they should take all of the money out of their business and dividends. This seems like a good strategy says part-time CFO, is not necessarily sound for many reasons. Business owners pay zero dollars and salary throughout the year, the end of having to pay far more in owed taxes to Canada revenue agency. If they pay too much however, and up to helping out at the 48%. Balances having to pay more salary, in order to avoid having to pay back taxes at the end of the year, but not paying too much they max out there personal tax rate. Also, if business owners need to claim child care expenses are moving expenses, they need to have some salary in order to do this. Itís important that business owners also take into consideration any income that they have coming in that is unrelated their business, and how theyíre receiving that money whether itís a salary or dividends as well. If they have a spouse, and spouse has any income coming into the household, so they receive it, is it salary or dividends? If the spouse takes many from the same corporation, how do they exempted. All of these factors will together to start part time CFO understanding how a business owner can use this as a tax strategy to pay minimal taxes in their business.
Other factors that part-time CFO must take into consideration when they are developing their tax strategy for the entrepreneurs, is are they going through divorce, or going through a separation agreement? Do their family members have other corporations, are all of the family members corporations associated with each other? Is the business moving in the next year, has the business lost money last year our stands to lose money this year question does the corporation have employees, order to they hire independent contractors? All of these factors are just part of the picture that needs to be considered when accountants are creating their tax strategy for entrepreneurs.
When the more important questions that entrepreneurs can the answer to is what is the difference between salary and dividends says part-time CFO. The reason why this is so important, is because the biggest difference between the two is the amount of taxes that are applied to them after the business owner takes them out of their business. It ultimately boils down to being a tax strategy for entrepreneurs. The answer to this question is rarely taking 100% salary or hundred percent dividends, because many factors have to be considered when making the determination.
When choosing the part-time CFO that they want to hire to help them with this, business owners should take several things into account, namely not hiring an accountant based solely on cost. No entrepreneurs believe that they are saving lots of money on accounting services, but they end up paying in an efficient tax strategy is thousands of tax dollars a year. Business owners can save significant amounts of taxes, they simply hire an efficient accountant to work with them.
Some warning signs that the part time cfo that there filing is not the right one for them include if they try to give an answer without first understanding the business owner or their business, also, if they try and give a simplistic answer based on a formula such as some people believe that salary, dividend and corporate tax rates are integrated. Part-time CFO says will this is a theory that can work, once attempted in practice, it falls apart. The premise behind this is since dividends are nondeductible, an entrepreneur pays both corporate and personal tax, if they add those to tax rates together, it should equal the amount on a salary. Again, this is a theory that works on paper, but when applied to real situations, there so many variables that it doesnít end up working. Another warning sign that they might have the wrong accountant is if they have been told that they only have to pay hundred percent and dividends or hundred percent in salary. The most efficient tax strategies going to work out to the business owner having a combination of dividends as well as salary.
When entrepreneurs are talking to their part time CFO about what strategy works best for them, theyíre going to have to go through a lot of information both about their corporation and personally. The accountants at Spurrell and Associates have been creating business plans for their customers for several years, and have developed a formalized process. This formalized process is going to allow them to glean as much information from the client as possible, and ensure that itís great information. The also be able to process that information well, in order to come up with the tax strategy efficiently and a less cost than it would take an accountant to come up with from scratch.
By working with the right professionals, part-time CFO says that entrepreneurs can get the right tax strategy for their business, and significantly impact their business by saving so much in taxes.
