Who decides how much I should pay myself?
In the context of a sole owner, the question does not even come up, because the entrepreneur has the latitude to give himself the salary he deems appropriate according to the ability to pay the company and his personal needs. But in the case of a business with other partners or operated with external shareholders, the entrepreneur must justify his decisions, including the salary issue. It is quite delicate; we choose the path of entrepreneurship to free ourselves from employers, and yet we find ourselves enslaved with financial reporting. Moreover, between partners, who decides how much everyone earns?
Equity is also an important issue because what may be perceived as fair by some may not seem fair to others. I would say that, first of all, you are the one who should get to decide the salary. If you have worked in your organization without paying yourself for years and you have demonstrated that you are building the sustainability of the business by reinvesting the profits, and that you endorse all the debts of the company, I believe that your judgment in this matter should not be doubted by anyone.
In fact, you will probably be less generous to yourself than your value in the job market as it is difficult to take money out of your baby (the company you created) for which you have given everything for it to become profitable.
The best way to pay yourself
The entrepreneur is also a shareholder, which implies that he has the privilege of paying himself dividends from his own company. It is important to be properly advised considering that the choice of remuneration can have a significant impact, both for you and for your company.
Paying yourself a salary rather than dividends has tax implications and you need to consider other factors as well. In my case, I made the mistake of not planning a different class of dividends in order to pay myself without having to pay dividends to the other shareholders.
When I was the only shareholder, this was not a problem, but later things got complicated… Nevertheless, here are the main points to consider.
If you decide to pay yourself a salary, here is what that involves:
- At the company level
The salary paid by your company is considered a tax-deductible expense and will therefore reduce the taxable income of the business. On the other hand, the company will pay an additional expense, in the form of social security contributions, when a salary payment is made. In addition, the salary paid by the corporation will be subject to withholding taxes.
- At the individual level
The gross amount of salary income (before source deductions) is considered employment income and is subject to tax at your marginal tax rate in the year in which the income is received. You may be able to claim certain non-refundable tax credits in addition to a basic personal exemption amount. Also, a salary of $151,278 in 2019 allows to make the maximum contribution of $27,230 to the RRSP in 2020, while dividend income does not fall within the “earned income” used to set the RRSP contribution limit. Nevertheless, contributions to an RRSP are deductible from any type of income, including dividend income. Income from a salary is considered pensionable earnings for CPP/QPP purposes, as opposed to dividend income. A salary of $57,400 in 2019 maximizes participation in the QPP. Benefits from this plan (retirement, disability and death) have value.
Paying yourself a salary would allow you to be eligible for the creation of an Individual Pension Plan (IPP), a defined benefit pension plan established by the company for an individual.
If you pay dividends as compensation or as a supplement to your remuneration, here is what it involves:
- At the company level
A dividend payment is not a deductible expense for the company.
- At the individual level
The payment of dividends causes the payment of instalments. In addition to the basic personal amount, you would be eligible for a non-refundable dividend tax credit.
Obviously, the variables are numerous, and each situation is unique. It is necessary to take into consideration the financial performance of the company, the composition of the shareholding and the personal situation of the entrepreneur. The involvement of a financial advisor is desirable in order to make the most of the options available to the entrepreneur.
How much do I pay myself?
And in my case, how much do I pay myself? I would tell you, but I don’t know yet; it will depend on the financial performance of the company and the projected investments for 2020. This will be a surprise until spring 2020, following the release of the annual financial statements, the amount that I will pay myself in salary/bonus for the current year and if I also pay myself dividends. Let’s hope for good results!