I've been searching for some answers regarding how much to pay yourself and haven't come up with much.
I've recently incorporated and the accountant asked me to figure out what I need to live on, well that's easy but I want to be able to pay down some debt.
What have some of you done that are self employed? Take a certain percentage? Take as little as possible?
I've been searching for some answers regarding how much to pay yourself and haven't come up with much.
I've recently incorporated and the accountant asked me to figure out what I need to live on, well that's easy but I want to be able to pay down some debt.
What have some of you done that are self employed? Take a certain percentage? Take as little as possible?
Be careful how you calculate it, because it can screw you in a lot of aspects of your life if you set it too low. I know screwing the government out of any penny you can is important to a lot of people, but.... I see a ton of clients that make an excellent living, yet have zero borrowing power, because they are now living in a $500,000 home, with a 24k/yr salary. So when they want to buy a new vehicle, or get a loan or line of credit, their debt servicing is through the ceiling. And unless you have typically 2-4 years of financial statements from the company, most banks will not use it as valid income.
Your accountant should be the one giving you the advice here. The answer is, as always, it depends. How much does your corporation make? What is your personal financial situation? Are you married? Does your spouse work? Do you have dependents? Do you have investments? What age are you? etc. etc.
Here are some general guidelines. If you want to maximize your RRSP contribution, you need to have approximately $125,000 in salary in order to contribute $22,970. If you own 40% or greater of the corporation, you don't need to contribute to EI. You can take shareholder withdrawals out of the corporation, but the withdrawals need to either be repaid to the corporation or taken as income before the end of the second fiscal year. Bonuses can be accrued in the corporation at year end, but must be paid to the employee within 180 days of year end, and appropriate withholdings remitted to CRA.
These are all things your accountant should be going over with you.
__________________
My thanks equals mod team endorsement of your post.
Quote:
Originally Posted by Bingo
Jesus this site these days
Quote:
Originally Posted by Barnet Flame
He just seemed like a very nice person. I loved Squiggy.
Quote:
Originally Posted by dissentowner
I should probably stop posting at this point
The Following 4 Users Say Thank You to squiggs96 For This Useful Post:
I haven't done so myself, but many friends I know have left it too low & had trouble qualifying for mortgages etc.
As already mentioned, your accountant will need to help you decide what's best for your situation but keep things like that in mind.
I am getting started in my own business as well, and have been paying myself a bare minimum thus far, just until I get the intial start-up costs paid off.
Then I intend to give myself a good salary. Need to buy a house, car etc.
I paid myself 15K a year for 5 years and qualifying for my mortgage took a bit longer, but going with the bank that held my corporate accounts seemed to help a lot and I was able to qualify with no problem in the end.
Maybe my accountant just isn't that good then, seems I do a lot of the work and decision making. There are no startup costs, I am essentially contracting myself so I will start with a good income right off the bat. Not overly concerned with borrowing as we have our mortgage, vehicles etc, and a LOC just in case.
Was more curious about what others have done, my calculations seem to indicate I am better of paying my wife and I in dividends regardless of the amount. Not concerned with RSP room or CPP eligibility, this will most likely not be a long term thing.
Thanks for the input everyone, have worked for 'the man' for all my life so this is pretty new territory for me.
Maybe my accountant just isn't that good then, seems I do a lot of the work and decision making. There are no startup costs, I am essentially contracting myself so I will start with a good income right off the bat. Not overly concerned with borrowing as we have our mortgage, vehicles etc, and a LOC just in case.
Was more curious about what others have done, my calculations seem to indicate I am better of paying my wife and I in dividends regardless of the amount. Not concerned with RSP room or CPP eligibility, this will most likely not be a long term thing.
Thanks for the input everyone, have worked for 'the man' for all my life so this is pretty new territory for me.
There are so many things between this post and your original one that you need to talk with an accountant that goes over this stuff with you. Dividends can be the way to take money out of the corporation, but if you're doing it personally and are the only shareholder, it usually doesn't make the most sense. Dividends can be used for income splitting throughout your family, which it sounds like you might want to do. If your accountant isn't giving you this advice, you'd sound like you be better served with one who is more versed in this type of business. Yours sounds more like a bookkeeper.
__________________
My thanks equals mod team endorsement of your post.
Quote:
Originally Posted by Bingo
Jesus this site these days
Quote:
Originally Posted by Barnet Flame
He just seemed like a very nice person. I loved Squiggy.
As others in this thread have pointed out it really depends on your personal financial situation.
As a small business owner I try to take around $40K a year in dividends. By keeping money in the company my hope is to pay myself a sustainble rate throughtout my retirement. It helps that my wife is a nurse who has high earning power which allows us to qualify for loans easier.
Your relationship with your banker should also affect the decision. Banks differ on how they deal with small business owners looking for loans.
For the record I am not a designated accountant... but I did spend five years getting my accounting degree at U of C.
There are too many variables to consider here for anyone to give you a correct answer. You don't need to pay yourself anything in salary and you can take out the entire earnings as dividends. Don't forget if you take out salary have to pay the government CPP and EI up to about $40K in salary.
There are too many variables to consider here for anyone to give you a correct answer. You don't need to pay yourself anything in salary and you can take out the entire earnings as dividends. Don't forget if you take out salary have to pay the government CPP and EI up to about $40K in salary.
CPP yes, but EI no. Since he is paying himself he would be EI exempt.
__________________
"The problem with quotes on the Internet is that it is hard to verify their authenticity" -Abraham Lincoln
CPP yes, but EI no. Since he is paying himself he would be EI exempt.
You are EI exempt if you own 40% or greater of the shares. He likely does in this situation, but it's not guaranteed from the information. It's not an assumption I'd make.
__________________
My thanks equals mod team endorsement of your post.
Quote:
Originally Posted by Bingo
Jesus this site these days
Quote:
Originally Posted by Barnet Flame
He just seemed like a very nice person. I loved Squiggy.
You are EI exempt if you own 40% or greater of the shares. He likely does in this situation, but it's not guaranteed from the information. It's not an assumption I'd make.
I figured it to be a fairly safe assumption from what he stated so far. Also, there are more factors to EI exemption then just the 40% ownership number.
__________________
"The problem with quotes on the Internet is that it is hard to verify their authenticity" -Abraham Lincoln
CPP yes, but EI no. Since he is paying himself he would be EI exempt.
That's true. But many times I advise owner operator businesses the hazard of paying yourself salary in that you pay both the employer and employee portion of the CPP which amount to over $4000 a year.
If you know how to manage your money, a better return could be had investing the $4000 CPP premiums yourself than from CPP. Plus you have more flexibility of avoiding OAS/GIS clawback if you invest outside of CPP.
There are so many things between this post and your original one that you need to talk with an accountant that goes over this stuff with you. Dividends can be the way to take money out of the corporation, but if you're doing it personally and are the only shareholder, it usually doesn't make the most sense.
I've done some simulations for clients having about $100K after tax profit. And it really doesn't matter much whether it is dividend or salary from a income tax perspective. Integration is at work here.
Other factors, like CPP, EI and RRSP room are more important in this kind of situation.
This is going to be heavily tax motivated so it depends what treatment your company's income is getting and what your goals are. Half the point of incorporating a small business is the deferral advantage. If you take out a salary, you can deduct it at the corporate level (provided it's "reasonable") but you'll end up paying marginal rates. If you're paying small business rate at the corporate level that's a pretty strong incentive to leave everything up to $500k / year in there. There's also a strong incentive to boost your share value if your shares are QSBC shares, to make use of the lifetime exemption. That being said, if you're in that situation and making a lot of investment income you may want to pay dividends, which would be tax-free to the extent of 1/2 of capital gains and you'll get a refund of some accrued RDTOH. Whether any of these possible scenarios actually applies or will give you an actual cash advantage depends on your circumstances, there are too many potential considerations to address in the abstract.
The Following User Says Thank You to AR_Six For This Useful Post:
How much to pay yourself?
