Owning a small business is stressful at the best of times. You work hard, putting in precious time and energy to keep it running successfully. You’re then faced with the tough decision on how best to pay yourself. There are two main options available: salary or dividends. To help you decide, we’ve compared the advantages and disadvantages of both.
Salary Payment Advantages
A big advantage with paying yourself a salary is that you have a personal income. This means that:
- You are able to contribute to the Registered Retirement Savings Plan (RRSP)
- You will be paying into the Canada Pension Plan (CPP), which both set you up for retirement.
- Your salary will be tax deductible for the corporation
- Splitting income with a related family member becomes easier
Salary Payment Disadvantages
There are some disadvantages as well when it comes to salary payments. For one, having a personal income is a con as well as a pro. It means that:
- Your salary is 100% taxable
- You will have to pay CPP as both an employer and an employee
- You will have to set up a payroll with the CRA
- All related paperwork will have to be completed for the CRA
Dividend Payment Advantages
If you’re not sure paying yourself through a salary is for you there is also dividends. Dividend payments have the following advantages:
- They are taxed at a lower rate
- Not paying into CPP means saving more money
- It is a simpler paying process
Dividend Payment Disadvantages
There are also some disadvantages to receiving dividends. Such as:
- Not allowed to contribute to the RRSP
- Not paying into the CPP directly effects how much you receive when you retire. Both of these things put your retirement in jeopardy.
- Tax deductions such as childcare might not be available to you
- Wage replacement for injuries and disabilities is harder to calculate
Which Payment Method?
There are advantages and disadvantages to both payment methods. The answer to which method you should pay yourself with is that it depends entirely on your personal financial circumstances. Talk to you accountant to discuss which option is better for you.