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Part-Time CFO | Should Entrepreneurs Pay Themselves Salary
The question whether business owners should pay themselves salary or dividends is one of the most popular questions that part-time CFO gets in their practice. The reason itís so common, is because itís such a difficult question to answer easily. Chartered professional accountants have to go to school for four years and then article for three more years just to fully understand this question. If anyone answers this question simply, they clearly donít understand the situation enough to be able to make that determination.
Two understand that answer, business owners need to know the difference between salary and dividends. Salary is deductible from the income of the business, and dividends are not deductible from income, they are a direct withdrawal of the prophets of the business and wonít show up in the income statements. Since business owners have to take money out of their business in order to live, and any money they take out of the business is subject to tax, part-time CFO says this is an important question for business owners.
Many entrepreneurs think that they can save themselves money by hiring a part-time CFO that is the least expensive they can find, and what ends up happening is they end up getting an inefficient tax strategy that ends up costing them far more in taxes than it would to pay a good accountant. Business owners should understand that they will be able to save more money in their business if they hire a great accountant, who can help them take money out of their business efficiently and save them in taxes.
If business owners are wondering if they have an inefficient tax strategy when it comes to paying themselves, one way that they can see if things might be done incorrectly, is by looking at their tax return, or their financial statements. But the business owner needs to be looking for is if they are being paid hundred percent in salary, or hundred percent dividends. If they are being paid completely one way or another, that should be assigned that not enough thought has gone into the decision. Business owners can contact a different chartered professional accountants, get a second opinion.
Whoever they seize get a second opinion will need to completely understand the situation both the business owners circumstances as well as the companyís circumstances. Theyíre going to ask several questions in order to figure out what is truly best for the entrepreneurs. Some things that theyíre going to take into consideration will be things like does the business owner have a spouse, does their spouse have other income that they have, does the business owner have other income, they claim child care expenses, is either one in a divorce or under a separation agreement, do any of their family members on a corporation.
When business owners need to make the decision about how theyíre going to take money out of their business, they should hire a professional that can help them make the best decision possible, because it is a complicated situation. By getting the right opinion, business owners can ensure that they are getting great tax strategy, that will allow them to get paid as well as save money in taxes.
One of the most important decisions a business owner will make is how to take money out of their business says part-time CFO. The reason why this question is so important, is because taking money out of the business efficiently will help the business owner grow their own wealth, as well as save significant amounts of money in taxes. If they donít take out the money efficiently, not only will they end up paying more in taxes, but they could also make things more difficult for themselves, their family members and their business. Itís one of the most important questions a business owner can answer, and for that they need professional help.
The reason why business owners have to declare one or the other, salary or dividends says part-time CFO, is because when ever a business owner takes any money out of their corporation, and needs to be done one of two ways, salary or dividends. Although many business owners want to be able to take money out of their business tax rate forever, thatís not practical or allowed. Eventually, they must pay taxes on money they take from the company.
Some entrepreneurs think that salary, dividends and corporate taxes can be integrated as a efficient solution. While this works in theory says part-time CFO, the issue is actually much more complex than that, and doesnít actually work in practice. The theory basically is since dividends are not deductible from the businesses income, a business owner pays corporate and personal tax. If you add those personal and corporate tax rates together, it should equal the amount on the salary. So theoretically this works, but in reality there are so many variables that it doesnít really work that way.
Some of the variables that business owners need to take into consideration when they are making this decision, is other than this corporation, does the business owner have other unrelated income that they are getting paid? Do they have a spouse that they can income split with, does their spouse have other salary coming in, and if so is it salary or dividends? Does the business owner or their spouse pay child care expenses, or either one of them under a divorce agreement for a separation agreement? Do either the business owner or their spouse have family members who own a corporation? Are they moving their business soon, has their business lost money in the past or is it scheduled to lose money in the future? What type of supplier or customer contract exists in the business? These are all extremely important questions that actually can significantly impact the decision whether a business owner needs to take out salary or dividends in their business, or a mixture of the two? Business owners need to hire the right part-time CFO who will be able to answer that question best for them.