How Do I Pay Myself?
Starting a business is a scary venture for anyone. There are risks and so many questions that arise.
The most common question that comes from potential clients and in many social media groups, is “How do I pay myself, now that I am in business?”.
Well it depends. What type of business entity are you? Are you incorporated or a sole proprietorship?
For Sole Proprietorship
A sole proprietorship, also known as a solo entrepreneur, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.
What this means is that all income you receive is yours and you are taxed on it accordingly as an individual filing personal taxes.
When it comes to paying yourself, you can not be on payroll. You would just withdraw money from the business and it comes out of your owner’s draw. You are taxed on your income minus expenses.
You would not pay EI unless you are on the Special Employment Insurance Benefits program.
There are 6 types of social benefits covered under this program:
- Family Caregiver benefit for children
- Family Caregiver benefit for Adults
- Compassionate Care
Having a sole proprietorship business is one of the easiest businesses when it comes to paying yourself.
There are two options in paying yourself as an owner of an incorporation, which is explored below:
- Payroll To pay yourself a wage you need to register a payroll account with Canada Revenue Agency – CRA, and each time you are paid source deductions are deducted except for EI. Again you would need to register for the special program shared above. Your source deductions are then due on a monthly basis. The great thing about being on payroll is that you can adjust to your needs but your taxes are already deducted.Having a T4 income will allow you as the business owner to continue to invest in RRSPs, collect particular credits such as the child tax benefit, and make it easier when applying for financing as well.
- Dividends Depending on your personal situation (such as, if you do not have kids) you may not need to apply for financing. You may prefer to take dividends. Dividends are taxes at a lower rate than salary, a simple process to pay yourself and dividends can be declared at any time.
Some disadvantages are that you will not have income for investments such as RRSPs and you will not be able to claim other personal income tax deductions for expenses such as child care.
As a Business Owner, how you pay yourself is a personal decision that should be made based on your financial situation, as well as those that benefit you the most.
Our team at Censea consists of Certified Bookkeepers and Designated Accountants, giving you peace of mind that your books and your business are well taken care of.
~ Jennifer, CPB