So you decide to start working for yourself and have your own business, but now how do you pay yourself? First and foremost, remember you started your business so you can earn money – so don’t forget to pay yourself! If you don’t, why are you doing this?
There are different strategies to consider whether you are a Sole Proprietor or an incorporated business.
With sole proprietor businesses, there are limited options as far as how to report the money you pay yourself – T2125 is a schedule on your T1 Personal Income tax return, where you report your business earnings each year and you are considered to “earn” the amount reported each year – CPP on self-employed earnings is automatically calculated, and there are no EI contributions as you are ineligible. Because of the way you have to report, you can just take the money out of the bank account whenever you need money and no differences need to be made.
With an incorporated business, there are options here. Most importantly, you need to realize that whatever you take out of the corporate bank account will make an impact on both your corporate tax reporting and your personal tax reporting. There are options on how we report the money you will be taking out of the corporation – whether it be through frequent payroll or through shareholder dividends.
In most cases, dividends are the most tax-efficient way to report the money you take out of the business however there are considerations that come into play as to whether that is the best thing for you.
Are you planning to go for loans or mortgages? If so Salary/Employment income looks better and may make a difference in your qualifications and rates
Do you want to contribute to RRSPs? If so, you need salary/employment income to generate RRSP room – which is 18% of your earned income.
Do you want to subscribe to a health benefit plan for you and your family and deduct the premiums through the business– you need a salary to do this.
These are all questions that you need to consider and we recommend you give us a call to help you figure out what is best for you.
In the meantime, there is a great payroll calculator by CRA to help you see the amounts for tax withholdings and CPP that you would need to remit if you were to pay yourself through payroll. Note: as a shareholder of the corporation, you would be EI exempt, which also means you cannot collect EI if you are no longer drawing a salary from your corporation.
For more details or a complimentary initial consult, Connect with our team of Tax experts today!