Free consult & free copy of book

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

Contact Us


Most 5 star CPA Google reviews in Canada

Read Reviews

Chartered Professional Accountants E Myth

1 Fixed Monthly Fee - Planning | Accounting | Taxes | Consulting

Helping Canadian businesses beat the odds!

Part-time CFO | Should Business Owners Pay Themselves Salary

The reason why itís important for business owners to decide how theyíre taking money out of their corporation is because it is essentially a tax decision says part-time CFO. If business owners are taking any money out of their business, it needs to be done either through salary or dividends, or a mix of the two. Since salary is deductible from the income of the corporation, and to dividends or not, both are extremely different when it comes to paying taxes on them, and must be considered very carefully.

Because this is a complex issue, if business owners part time CFO has said itís an extremely simple question, or they havenít taken into consideration several factors about the business ownerís life, they may not have as efficient tax strategy is possible. Business owners should understand that they should not try to save money in their business by hiring the least expensive accountant, simply because what they can save and accounting fees pales in comparison to what they can save in taxes with the most efficient tax strategy possible.

One of the decisions that business owners part-time CFO should take into consideration when they are deciding how to take money out of their business, is how future losses in their corporation can affect that decision. Because if there is a loss in the business, business owners can end up paying just the personal tax and avoid paying corporate taxes, which may be the best strategy for them. By figuring out any future losses, can help business owners make the best tax decision. The decision on how they should pay themselves whether itís salary, dividends or mix of the two, may change as a business owner and their businesses circumstances change.

Another determining factor to this decision, is suppliers and customers contracts with they business can also affect the part time CFO decision to pay themselves in salary or dividends. An example of this, is that business owners have deemed have corporate employees instead of contractors may be subjected to a punitive tax. If the business owner falls under the personal business service risk, is to understand that this is either a low-risk or high-risk and nothing in between, they may start preferring salary income if they get assessed at the higher corporate rate.

Essentially, this decision is extremely complex, and chartered professional accountants whoíve been going to school for four years, with several more years of experience are about the only people they are qualified to truly answer this question. If anyone does answer this question quickly or simply, they may not have a complete understanding of the circumstances. Any entrepreneur whoís getting paid either 100% in dividends or hundred percent in salary is probably not utilizing the most efficient tax strategy for them and their business. It may be important for business owners to get a second opinion from a different part-time CFO who can ask the right questions and let them know what a great strategy for them be.

When entrepreneurs have made enough money in their business that they can start deciding how to take money out of their corporation, it needs to be done one of two ways says part-time CFO. Business owners can either take money out of their business or salary or through dividends. The difference between the two, is that salary is deductible from a business owners income, and dividends are not because they are a direct withdrawal of the profits from the corporation and will show up on the income statements at all. This boils down to a question of taxes. How can a business owner take out money from their corporation and avoid paying as much personal taxes they can, and how can I avoid paying as much corporate tax as possible. Since each of these payment strategies carries different tax rates with it, the answer to this question can help a business owner save personal taxes as well as corporate taxes and the answer is usually a mixture of the two.

The decision on how a business owner should take money out of their corporation is a complex one as well says part time CFO. Several factors must be taken into consideration including does the business owner have any other income thatís unrelated to their business, are they getting paid from that income, do they have a spouse and does the spouse have another income? Does the business owner wants to utilize income splitting with their spouse or children? If the spouse or the business owner have child care expenses, are anticipating moving expenses can factor into this decision as well. Divorces and future losses can also factor in. Because of this complexity of the issue, entrepreneurs who have been given an extremely simple answer on how they should pay themselves in business, probably was given answer from someone who doesnít completely understand the situation.

Many business owners have been told by part-time CFO that salary, dividends and corporate tax rates are integrated and believe this to be true. While this is something that works in theory, the number of variables that are actually taken into the decision mean that this theory doesnít really work in reality. However the theory is since dividends are non deductible from the income of the business, a business owner ends up paying corporate and personal tax on it, if you add the amounts together, it should equal the amount on the salary. This may be a starting point, but essentially all of the variables needs to be factored in to this decision.

When business owners are considering what part-time CFO to use, they should understand that paying for a great professional to help them in their business, can end up saving them significant amounts of money in the long run from tax savings both personally and in their business. Business owners should work with a professional who understands the complexity of it, so that they can end up with the strategy thatís most efficient for them.