Welcome back to the Clarico blog, where we aim to make your financial journey as a business owner more transparent and less stressful. Today, we’re diving deep into one of the most-asked questions: “How do I pay myself out of my company?”
We know accounting can get a bit complicated, so if you’d rather watch a video with a bit more detail, check out our explainer here.
What You’ll Learn
- Different ways to draw income from your company
- The advantages and disadvantages of each payment method
- When each method is most effective
Note: Always consult with your accountant to get advice tailored to your specific circumstances.
Wages: The Employee Approach
“Should I take money out of my company through a wage?” you might be wondering. When you pay yourself a wage, you become an employee of your own company, complete with all the bells and whistles.
Paying yourself as an employee means tax is taken out of each paycheck and paid by the Company on your behalf. This helps you avoid that end-of-year tax surprise, making budgeting easier.
Putting money away for retirement
Being an employee means compulsory superannuation payments. These add up over time and contribute to your retirement fund, this is something many business owners forget about.
Accurate Business Reporting
When you pay yourself a formal wage, it gets classified as an expense in the Company’s Profit & Loss report. It’s easier to evaluate the company’s financial health since your salary is accounted for as a business expense.
Employee benefits aren’t free. Think of workers’ compensation, payroll taxes, and other administrative costs. These can add up and impact the business’s bottom line if you are a startup.
Variable Income Tax
If you have other sources of income, you might hit a higher tax bracket because of the wage. This could mean paying more tax than you initially thought.
Best Suited For: Business owners who see their venture as their long-term, primary income source and are involved in daily operations. In other words, for those of you who actually work in the business delivering the goods / services to your customers.
Dividends: The Profit-Sharing Path
Wondering “How much dividends should I pay myself?” Dividends are what you receive when the company makes a profit and decides to distribute it among shareholders.
Depending on your group structure, dividends can be paid and end up in the hands of those who might be in a lower tax bracket, offering a tax-efficient way to distribute profits.
Lower Operational Costs
You can sidestep extra costs like superannuation and payroll tax, giving your business some breathing room.Dividends don’t attract the same payroll-related costs that wages do.
Complexity and Planning
Calculating and distributing dividends can become a cumbersome process, especially if your shareholding structure is complex.
Equity Ownership Matters
Dividends are distributed based on share ownership, so if you are a smaller shareholder, you’ll receive less.
Best Suited For: Those who have other income sources or businesses and want a flexible way to distribute profits.
Loans: The Risky Road
“How to take money out of a company without paying tax in Australia?” Taking a loan from your company might seem like the answer, but proceed with caution. These are commonly known as Division 7A loans.
Deferred Tax Payments
Loans from your company aren’t initially subject to tax, providing a short-term cash flow benefit.
Not only will you need to pay back the loan, but you’ll also accrue interest and potentially pay additional taxes. This can become a financial burden down the line.
Best Suited For: Those looking for short-term financial flexibility and are acutely aware of the future financial implications.
Wrapping Up: Your Money, Your Choice
Every payment method comes with its own set of rules, benefits, and drawbacks. And often, a mix of these methods may suit your personal and business needs best. You don’t have to just pick one.
An example could be:
- Pay a wage to the extent that you work as an employee in the business
- Pay a dividend out of Company profits to reward yourself for your role as a business owner
Just remember, whatever path you choose, don’t walk it alone. Always consult your accountant to make the best decision for you and your business.
We hope you found this guide helpful! Until next time, keep pushing forward with clarity and peace of mind.
We hope you’re enjoying our blog, just a note though. The information provided here is intended for general informational and educational purposes only. While we aim for accuracy, we can’t guarantee that this content will apply to your specific situation—every business owner’s circumstances are unique.
This blog is not a substitute for personalized advice from a qualified accountant, tax advisor, or any other professional. If you have questions specific to your individual circumstances, we strongly recommend consulting a professional for tailored advice.