How to Pay Yourself as a Business Owner | QuickBooks Canada Blog (2024)

FAQs

How do business owners pay themselves in Canada? ›

Owner's Draw: When a business owner withdraws money for personal purposes. Draws can take place on a schedule or as needed. Salary: Each standard pay period, the business owner cuts themselves a paycheque based on the fixed wage or sum of money they have determined for themselves.

That's because paying yourself a salary isn't a deductible expense for tax purposes when you're a sole proprietor. The IRS considers any payments you make to yourself a draw (and on the flipside, it considers any profits your business makes to be your personal income).

You can pay yourself as a business owner by setting a regular salary or taking owner's draws. Maintain clear financial separation between personal and business accounts, and choose an amount that aligns with your business's financial health.

As the owner of an LLC, you don't get paid a salary or wages. Instead, you pay yourself by taking money out of the LLC's profits as needed. That's called an owner's draw.

It really depends on your unique circ*mstances. If you're planning to apply for a home mortgage or loan, paying yourself a steady salary is the way to go. If you want to keep more cash in your corporation, paying yourself via dividends is the better option.

If your business has limited cash flow, a salary may be the better option since it guarantees a consistent income. On the other hand, if your business has surplus cash flow, you may be able to take an owner's draw without impacting your ability to pay bills and other expenses.

Some tax professionals recommend paying yourself 60 percent in salary and 40 percent in dividends to stay clear of IRS problems unless this means your salary would be too low compared to others in your field.

No taxes are withheld from the check since an owner's draw is considered a removal of profits and not personal income. Pros: Using the owner's draw method can help you, as an owner, keep funds in your business during times when your business may not be able to afford paying yourself a salary.

The 60/40 rule is a simple approach that helps S corporation owners determine a reasonable salary for themselves. Using this formula, they divide their business income into two parts, with 60% designated as salary and 40% paid as shareholder distributions.

If you have a single-member LLC, or a multi-member LLC operating as a partnership, you can take draws regularly by either writing a check to yourself from the LLC or simply transferring funds between your business account and your personal account.

Can a business owner pay themselves whatever they want? ›

In general, there are two options for business owners to pay themselves: owner's draw or salary. The method that's best for you will depend on a number of factors. Your business structure makes a difference, as does your personal financial situation.

An owner's draw lets you transfer funds from your business account whenever you choose. If you like, this can be as regular as a standard paycheck. Here are the main pros and cons: Pro: You can easily change the amount depending on how well your business is doing financially. Pro: You can pay yourself instantly.

Treating yourself as a W-2 employee or taking profit distributions can make more sense for many LLC owners. However, if you want to start earning income as an independent contractor, paying yourself as a 1099 independent contractor can make sense.

If you choose to pay yourself as an independent contractor, you must file IRS Form W-9 with the LLC. The LLC then files IRS Form 1099-MISC at the end of the year. LLC members can also take a loan from the business.

First, subtract the cost of your business's expenses (such as employees' salaries, rent for your office space, etc.) from your gross revenue to find your net income. Once you subtract the amount of taxes to set aside, you will pull your pay from this figure.

Federal rates

The basic rate of Part I tax is 38% of your taxable income, 28% after federal tax abatement. After the general tax reduction, the net tax rate is 15%. For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 9%.

To give you a couple of examples, some business owners take 50% of net income for their salary, leaving 20% for savings and 30% for taxes. Another option is to split net income between your salary and business savings, 35% apiece, still using the other 30% for taxes.

Eligible Dividends and Alternative Minimum Tax

AMT starts when the dividends reach $55,002 (2022 $54,403). Federal AMT is applicable for dividends above this amount, until the amount of the dividends reaches $175,218 (2022 $161,215), when the regular federal tax equals or exceeds the minimum amount.