Part-Time CFO | Should Entrepreneurs Pay Themselves Salary Or Dividends
This is probably one of the most common questions that part-time CFO gets from business owners, is if they should pay themselves in salary or dividends. Ultimately, the answer to that question is not simple, and it depends on specific sets of circumstances for each business owner. Anyone who answers that question quickly or simply probably does not understand the subject well enough to be able to make that determination. If business owners take a look at their financial statement or their tax returns, and see that their current accountant is having them being paid either in hundred percent dividends or hundred percent salary, that should be a warning sign that their accountant has not put enough thought into this decision.
There are so many variables that need to be discussed with their part time CFO, in order to understand completely what is in the business ownerís best interest. Since ultimately, the accountant is going to help the business owner figure out how to take money out of their business, in order for the business owner to pay taxes, they need to answer a lot of questions so that they can get a complete picture of the business owners situation as well as their businesses situation.
In order to first understand this topic, business owners need to understand the difference between salary and dividends. Part-time CFO says that salary is deductible from income, while dividends are not. They are a direct withdrawal of the profits from the business and wonít show up on the income statements of the business, while salary will.
Many entrepreneurs believe that salary, dividends and corporate taxes all integrate together. And while this is true in theory, part time CFO says that this doesnít actually work in reality because there are so many variables. But what this is referring to is if a business owner adds up corporate and personal tax rates together from the dividends, it should equal the amount of the taxes on salary. While this is a very simplistic view, business owners need to understand that itís a lot more complicated than that.
Some things that affect the decision include if a spouse of the business owner or their family members have a corporation. This is especially true if the corporation is also associated. If all the corporations that are associated together max out the 11% corporate tax rate, and the businesses are at risk of going over the $500,000 small business tax rate threshold, one of the business owners might want to declare salary in order to bring that amount down. This is an example of one of the things that we part time CFO is going to take into consideration when making the decision.
Part-time CFO must do a deep dive into the circumstances of each business owner as well as their business, in order to come up with a determination of what salary and dividends each business owner should take out of the business in order to maximize savings in taxes.
Any part-time CFO that answers the question simply of how business owners to pay themselves, in salary or dividends, then they probably donít clearly understand the situation enough. The reason for that, is because several variables must be considered, and several factors have to be learned about in order for anyone to get a clear enough picture of the situation in order to make a determination. In order to come up with a tax strategy that is in the business ownerís best interest, there must be a lot of information that has to be processed. By hiring a great accountant, business owners will be able to save far more in taxes than they will pay and accounting services.
Business owners often donít understand the difference between salary and dividends, salary is deductible from the income of the business, and shows up on the income statements of the business, while dividends are not deductible from income, because they are direct withdrawal of the prophets of the business. Many entrepreneurs claim that there salary, dividends and corporate taxes are integrated, and while that works in theory says part-time CFO, because the theory is if a business owner adds the corporate and personal tax rates together from the dividends, it should equal the amount of taxes paid on a salary so it is a nice theory, but in reality there are so many variables that need to be considered but it doesnít actually work that simplistically.
How business owners should pay themselves is one of the most common questions that part time CFO gets. In order to make that determination, they are going to have to ask a significant amount of questions in order to help them understand the business owner and their business. If the business owner has unrelated income, if they have childcare expenses, and if they are under in divorce or separation agreement also all going to factor in to the mix of salary and dividends that the business owner takes over the business. Ultimately, while many business owners try to understand so they can make the decision themselves, itís so complicated that part time CFOís need to study for four years to get a degree and then through years of articling in order to completely understand the subject matter.
Business owners should hire a part-time CFO that has a formalized process and how to get the information, so that all of the information can be taken by the accountant without leaving anything out., The accountant must be able to process the numbers efficiently in order to come up with a tax strategy thatís not going to take a significant amount of time to come up with.
Ultimately, this is an extremely important decision that business owners are not going to want to leave to nonprofessionals, and they will want done correctly, so that they can save as much taxes as possible in order to make the most amount of money that they can.