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Part-time CFO | What Is The Difference Between Dividends And Salary
Business owners may wonder why they have to even make the choice to declare salary or dividends in their business when speaking to their part-time CFO. However, itís important for entrepreneurs to know that any time they take money out of their corporation, it either needs to be done as dividends or salary. The reason for this is because business owners must pay taxes on the money that they take out, and the decision on whether to pay themselves using dividends or salary, or a mix of the two is essentially a tax question. While business owners may think it is really nice to be able to take money out of their business without paying taxes, this is not realistic.
One of the first things that business owners should understand about the difference between dividends and salary is that dividends are not deductible from the income of the business because a business owner directly withdrawals them from the prophets of their corporation. Because of this, the money that the business owner takes out in dividends wonít show up on the income statements of the business. Salary meanwhile is deductible from the income of the business, and get paid in taxes differently.
Some people believe that this salary, dividend and corporate tax rates are integrated. Part-time CFO says that while this may work out in theory, there are so many variables that it doesnít really work that way. However, the theory is that since dividends are not deductible from the income of the business, a business owner pays corporate and personal tax on them. If they at the personal and corporate tax rates together it should equal the amount spent on the salary. In reality there are so many variables that factor into the salary versus dividend question, that while this is a simplistic view, itís not completely accurate.
There are so many variables that business owners need to have taken into consideration by their part time CFO thatís helping them with this decision, that youíre going to have to answer a lot of very personal questions about their life. For example, divorce tends to affect the decision for a business owner to pay themselves in salary or dividends or mixture of the two. The reason for this is because during a divorce litigation, it may be extremely difficult to explain a dividend strategy simply and easily to lawyers on both sides of the litigation. Therefore, taking a salary might be easier for business owner during the divorce. Business owners should also keep in mind that as their life changes, there payment strategy can also change to reflect new circumstances.
Essentially, the decision on how the business owner should get paid is an extremely complex one, that can either save their business thousands of dollars in saved taxes, or cost their business the same amount. Because of the importance and magnitude of this decision, business owners should ensure that they are hiring the most qualified part-time CFO to help them with this answer.
Many business owners donít effectively know the difference between salary and dividends in their corporation says part-time CFO, and because of that failed to understand the importance of developing a great payment strategy in order to help reduce taxes in their business. If a business owner is paying themselves 100% in salary, or 100% in dividends, they should take that as a sign that they may not be utilizing the most efficient tax strategy that they can. It may be time for a second opinion, to help business owners make the right decision, and potentially help save themselves thousands of dollars in their business.
Since this is an extremely complex decision, entrepreneurs should hire an extremely knowledgeable part time CFO that can help them make this difficult decision. The professionals at Spurrell and Associates have created a formalized process through their several years of helping entrepreneurs. This formalized process helps entrepreneurs give as much information as the professionals need in order to make this decision, and then they have processes that are devoted to analysing that information. These processes help them get information more reliably and process it quickly so that business owners can get the answer to how they should be paying themselves and saving taxes efficiently in their business. Business owners should also understand, that if they try to save significant amounts of money on their accounting fees, they may end up with an inexpensive accounting bill, but end up paying far more in taxes.
Salary that business owners take up their business is deductible from the income of their corporation, and shows up on the income statements of their business, while dividends are not deductible from the income of the business because they are a direct withdrawal of the prophets of the corporation. Because of these two differences, taxes are paid differently, and business owners should understand that how they take the money out can drastically impact that tax. An efficient strategy usually has the business owner taking a certain mix of the two.
The part-time CFO will take into consideration if the business owner has any family members who own a corporation. This can definitely factor into an entrepreneurís decision on how to pay themselves, especially if that corporation is associated. The reason for this, is with all of the corporations that are associated max out the 11% corporate tax rate, if they risk going over the $500,000 small business tax rate threshold, a business owner may want to declare a salary instead of dividends in order to help bring that threshold down. This is truth corporations, if the corporations are associated, then the business owner needs to take into consideration the total of all of those corporations together. If all the corporations together total that $500,000, that will have a great impact on the decision to pay themselves in salary or dividends.
Since this decision is complex, and must have many factors taken into consideration, business owners should contact the best part-time CFO they can find for a second opinion on whether there tax strategies are efficient enough.