We hear this question a lot.
There are two ways a business owner gets paid – salary or owner’s draw.
A salary is when you put yourself on the payroll and deduct the necessary taxes from each pay, just like paying staff. It is rigid yet provides a steady stream of income but you must follow CRA payroll tax rules.
You can withdraw funds anytime you need to as this comes out from the profits of the business. This is flexible as you can dip into it whenever you want, however, you will need to reconcile at each year end for tax liability. Ultimately, you can withdraw only as much as you’ve put into the business (owner’s equity).
The main driver to the decision of salary or owner’s draw is your current business ownership structure. Are you a sole proprietor, partnership, or corporation?
With a corporation, shareholders can be paid either through salary + dividends, though dividends don’t have to be paid out.
If you’re a sole proprietor or in a partnership, which option is right for you depends on a number of factors such as how profitable your business is, how long you’ve been in business, future growth, and your own personal financial situation (you need to be able to pay your bills at home, etc).
Insightful Financial Connections can help with business financials. Chat with us to learn more about our small business bookkeeping services.
Watch this video from QuickBooks Canada as they deep dive into the salary vs owner’s draw in more detail.