As a business owner, you have to make many decisions that affect your profitability, cash flow, and taxes. One of these decisions is “How much should you pay yourself?” This may seem like a simple question, but as a business owner, your salary has many implications for your personal and business finances. We would like to help you explore some of the factors that you should consider when setting your own salary, and how ATS Accounting and Tax Edmonton can help you optimize your compensation strategy.
Why a Business Owner’s Salary Matters
Your salary as a business owner affects your income tax, payroll tax, CPP contributions, Employment Insurance (EI) premiums, and RRSP limits. Depending on the legal structure of your business, you may have different options for how to pay yourself.
Sole Proprietorship or Partnership
For example, if you operate as a sole proprietorship or a partnership, you cannot pay yourself a salary, but you can withdraw money from your business as drawings. How much you draw should not be more than the company could afford at the moment. To determine this, you need to consult an experienced and trusted accountant in Edmonton.
Corporation
If you operate as a corporation, you can pay yourself a salary, dividends, or a combination of both. Each option has its own advantages and disadvantages, depending on your personal and business circumstances. For instance, paying yourself a salary will increase your earned income for RRSP purposes, but it will also increase your payroll tax and CPP obligations. Paying yourself dividends will lower your payroll tax and CPP costs, but it will also lower your RRSP contribution room and may affect your eligibility for certain tax credits and benefits.
How Much Should I Pay Myself?
However, when determining your compensation as the owner of a small incorporated Canadian business, there are several factors to consider. Begin by evaluating your business’s financial health, including revenue, expenses, and profits. It’s essential to establish a reasonable and sustainable compensation that aligns with industry standards and your role within the company.
Research comparable businesses in your industry to understand the prevailing market rates for similar positions. Take into account your responsibilities, experience, and the value you bring to the company. Balancing the need for fair compensation with the company’s ability to generate profits is crucial. Consulting with financial advisors or accountants can provide valuable insights into tax implications and ensure compliance with legal requirements. Ultimately, your compensation should reflect both the company’s financial status and your contribution to its success, fostering a harmonious equilibrium between personal needs and business growth.
Get a Salary Just Like any Other Employee
Considering what we’ve just mentioned, even if you are the owner of the business, this doesn’t mean you can get as much money from it as you can. In fact, before you do get a salary, it is crucial that you establish a payroll account with the Canada Revenue Agency. The salary you will get will be taxed like the other salaries your employees are getting. To develop a good payroll system, make sure you work closely with an accountant you can trust.
Consider the Taxability of the Salary You Ought to Receive
The nature of your business will help determine the amount of tax you ought to pay the government. When you are running your own business, worrying about the tax might not be one of your primary concerns. For this, you should have reliable Edmonton accountants to do it. The amount you pay is based on the profit your company earns. Let the experts take care of it for you to avoid penalties and surcharges in the long run.
Managing your own business comes with duties and responsibilities, and it’s only right that you get paid for doing what you do. However, the amount you get should also abide by the rules you and the government have put in place. In all this, an accounting firm you can trust can help ensure that you are paid and that your business remains financially secure.
As you can see, setting your salary as a business owner is not a simple matter. It requires careful planning and analysis of various factors that affect your personal and business finances. That is why it is advisable to consult with a professional accountant who can help you design a compensation strategy that suits your needs and goals.
How ATS Accounting and Tax Edmonton Can Help You
At ATS Accounting and Tax Edmonton, we are more than just accountants. We are trusted advisors who can help you with all aspects of your business finances, including setting your salary as a business owner. We have the expertise and experience to help you:
- Understand the pros and cons of different compensation options for your business structure
- Calculate the optimal amount and mix of salary and dividends for your tax situation
- Prepare and file your personal and corporate tax returns accurately and efficiently
- Plan ahead for your retirement and optimize your RRSP contributions
- Implement tax-saving strategies that can reduce your overall tax burden
- Stay compliant with the CRA rules and regulations regarding payroll taxes, CPP contributions, EI premiums, T4 slips, T5 slips, etc.
Whether you are a new or established business owner, we can help you make smart decisions about your salary that will benefit both you and your business. Contact us online or call us at 587-406-3038 today to book a free 15-minute consultation to find out how we can help you grow and manage your business with confidence.
