{"id":8563,"date":"2023-10-03T03:52:28","date_gmt":"2023-10-03T03:52:28","guid":{"rendered":"https:\/\/www.ownr.co\/blog\/?p=8563"},"modified":"2023-12-07T14:02:58","modified_gmt":"2023-12-07T14:02:58","slug":"dividend-vs-salary","status":"publish","type":"post","link":"https:\/\/www.ownr.co\/blog\/dividend-vs-salary\/","title":{"rendered":"Dividend vs. Salary: Which is Better for Your Business?"},"content":{"rendered":"

Small business owners in Canada can choose to pay themselves a salary or earn a personal income through dividends.<\/span><\/p>\n

While there’s no wrong answer, the option you choose will play a role when the time comes to file your income taxes, and ultimately, is dependent on what kind of<\/span> Canada Pension Plan<\/span><\/a> or<\/span> retirement savings plan<\/span><\/a> you have in mind for yourself.<\/span><\/p>\n

This article will examine the differences between a salary and dividends, including the pros and cons associated with each.<\/span><\/p>\n

Dividend vs. Salary: key differences<\/b><\/h2>\n

Both a salary and dividends provide a source of employment income.<\/span><\/p>\n

Salaries are paid out by the<\/span> corporation<\/span><\/a> and thus, are considered an expense by the business. Individuals paid a salary are responsible for claiming all taxable income on their personal tax return at the end of the year.<\/span><\/p>\n

As a steady source of income, a salary can also act as a record of consistent financial revenue and make it easier to secure a bank loan for a mortgage or a car or even open a new credit line.<\/span><\/p>\n

On the other hand, a dividend is the distribution of a set amount of the company’s earnings to some of its shareholders. Dividends are considered investment income, and as such, they are not subject to the standard tax deductions that many employees on salary see on their pay stubs.<\/span><\/p>\n

Salary vs. hourly wages<\/b><\/h2>\n

To pay yourself a salary (or a wage) is a necessary cost of doing business as an entreprenuer.<\/span><\/p>\n

Deciding between paying out a business salary and paying an hourly rate is something every small business owner must decide, and there are pros and cons of each.<\/span><\/p>\n

Salaried employees receive a fixed rate of pay. This means that their personal income is the same each pay period per year (unless a salary increase is determined), and there are no surprises or calculations done in error.<\/span><\/p>\n

On salary, one can work as many or as few hours as they would like in a day, and the pay will always be the same.<\/span><\/p>\n

Salaried employees also receive a T4 for their personal income tax records.<\/span><\/p>\n

How the transaction works<\/b><\/h3>\n

If you, a small business owner, are paying your <\/span>employees<\/span><\/a> an hourly wage or decide to pay yourself an hourly wage, you must register a payroll account with Canada Revenue Agency on behalf of the corporation. From there, your payment will be subject to source deductions from the corporation that must be submitted to the Canada Revenue Agency (CRA).<\/span><\/p>\n

Hourly wages can pose a financial problem for business owners who are looking to eventually grow and expand their small business while looking to keep their overhead costs down. Paying yourself or your employees by the hour can become quite expensive, especially in the early stages of opening the business. It\u2019s usually normal for the owner to work long hours.<\/span><\/p>\n

As an owner, if you need your employees to work past the legal eight-hour workday and they are on an hourly wage system, by law, you must pay them overtime, which equates to their hourly rate plus half. Long-term, this can become quite expensive and may not be sustainable for small business owners who are just starting out.<\/span><\/p>\n

Why choose a salary?<\/b><\/h3>\n

As many who have been paid a salary know, your gross salary on paper is never equal to the amount you actually collect via a paycheck.<\/span><\/p>\n

By law, anyone who earns a salary or a taxable benefit is required to subtract source deductions from the rate of pay for that particular period. Then, those deductions are submitted to the Canada Revenue Agency (CRA).<\/span><\/p>\n

If you choose to pay yourself a salary, you will likely be responsible for paying into a Canada Pension Plan (CPP), a registered retirement savings plan (or RRSP contribution), an employment insurance plan, as well as your federal, provincial, or territorial income tax.<\/span><\/p>\n

Due to these involuntary contributions that are deducted automatically from earned income, being paid a salary makes it much easier to save for retirement.<\/span><\/p>\n

Salaried employees also receive paid time off (vacation, maternity\/paternity leave, bereavement leave, and sick leave) dependent on provincial guidelines, as well as additional employer-sponsored benefits, like healthcare packages and insurance plans.<\/span><\/p>\n

Employees paid hourly generally are not entitled to paid vacation or a leave of absence and are generally responsible for their own healthcare.<\/span><\/p>\n

To summarize, deciding to pay yourself a salary can provide several advantages, including:<\/span><\/p>\n