Part-Time CFO | What Is The Difference Between Salary And Dividends?
In order to make the determination of how to take money out of their corporation, business owners talk to their part-time CFO. Since business owners are going to have to take money out of their corporation, and they cannot take the money out tax free, itís an important determination that needs to have a lot of time and consideration devoted to it in order to make the right decision. The first thing that business owners want to understand when it comes to salary or dividends, are what are the difference between the two? Salary is money that is taken out of the business that is deducted from the businesses income, and personal taxes are paid out. Dividends are not deductible from the income of the business, because they are direct withdrawal from the prophets of the business and wonít show up on the income statement.
How should business owners take money out of their business is the most popular question that part time CFO gets. Ultimately, if the question is answered very simplistically, then whoever is answering that question doesnít have a deep enough understanding of the situation. Itís an extremely complex issue, that needs a lot of information to be processed in order to come up with the right answer. One of the reasons why it is so important, is because and inefficient payment strategy can significantly impact not just the business owner, but the business ownerís family. Itís not unusual for entrepreneurs to find out that and inefficient payment plan has cost the business owner several thousands of dollars every month in taxes. The reason why business owners may have an inefficient payment strategy, is because they may have been trying to save their business money on accounting services, and because of that hired to a cheaper accountant. Business owners should understand that paying less on the Accountant may end up costing them far more and accounting fees and taxes than they would have spent on a good accountant in the first place.
Business owners often want to know how they can tell if there are any warning signs that they are paying themselves inefficiently. Part-time CFO says that if business owners see a financial statement or tax return that shows that they are being paid either hundred percent and dividends or hundred percent in salary, that can be a trigger that not enough thought has gone into this.
One of the variables thatís going to this decision, is if the business owner has a spouse, because that can relate to income splitting. And if the spouse has of their income says part time CFO. While business owners may want to utilize income splitting opportunities, that also is going to affect how a business owner pays CPP because if a business owner is paying salary they also have to pay CPP and if they are paying dividends they donít.
The hiring the right part-time CFO in order to fully understand the entire situation, from each business owner and to the business, the right determination can be made how can take money out of their business.
The question on whether business owners to pay themselves salary or dividends is an extremely common question says part-time CFO. One of the reasons why itís extremely popular question, is because itís one that cannot be answered very simply. A lot of information must be processed in order for the right decision to be made. Not only does each business owner made to have their circumstances considered, but also the circumstance of the business must be taken into consideration in order to make this decision. Ultimately, business owners need to take money out of their business, and theyíre not going to be able to do it tax free, so the decision of how they take money out of their business becomes tax strategy. They need to be able to hire the most effective part time CFO they can in order to make the best decision for them.
One of the variables that part-time CFO needs to take into consideration when deciding how a business owner takes money out of their business, is does the business owner have a spouse, if so are they going to be taking money out of the business as well as part of some income splitting opportunities, and if so does the other person of any other income? All of these things must be taken into consideration to help a business owner figure out if they are going to income slipped with their spouse, and if so how much and should that be salary or dividends.
Another important variable for part time CFO to consider is if there are childcare expenses on behalf of the business owner or their spouse. If there is, thatís going to affect salary and dividends, because childcare expenses can only be deducted off of earned income. Therefore the decision must be made who is going to clean those childcare expenses, what is in each personís best interest, and who is claiming them should they take salary instead of dividends?
If there is a divorce or separation agreement, will factor into the salary versus dividend question as well. Part time CFO says sometimes dividend strategies are harder to explain in the litigation or separation agreement, and therefore it may be easier for business owners who are a separation or divorce to take out more money from their business using salary for reasons of simplicity.
Does the business owners spouse have a corporation, or do either of their family members have corporations? Believe it or not, this also can affect the decision if business owners should pay salary or dividends to themselves. Especially if the family members corporation is associated it can greatly affect the decision.
Ultimately, this is such a complex issue that only a well-trained part-time CFO will be able to gather the right amount of information as well as process that efficiently in order to answer that question.