The Salary Question
Hello All,
As we approach the tax filing deadline for T4s (and RL1s in Quebec), I thought it might be useful to (briefly) explore salaries for small business owners, and their implications.
When you’re an employee of a business to whom you are not related, your salary is a representation of the value that you bring to the job that you are doing and is often based on a market rate. If you are a small business owner, you often do not have the luxury of paying yourself a market rate (especially in the early years).
If you are a sole proprietor (unincorporated), many of you will simply take out whatever you can , that is leftover, after you pay your expenses. Since you are taxed on the profits of the business, the amount that you withdraw has no impact from a tax perspective.
Owners of corporations, who take a salary, have to set an amount but this can also vary from month to month depending on how well the business is doing.
Ideally, however, rather than an ad hoc approach of drawing what is available, it can be useful to actually establish think about what your salary should be and pay yourself that amount. One of the ways to determine a fair salary is to assess the market value that you would pay to an independent third party to perform a similar job (of course business owners tend to wear many hats so this can be harder to evaluate, but an approximation will do). Another way would be to calculate your regular living expenses and draw an amount that corresponds to that. It does not have to be extensive exercise, and can also be changed at any time. If you do decide on an amount and your business is doing better than expected, your salary can then be supplemented by a bonus for good performance.
Regardless of how much you decide to pay yourself, it is important to:
a) ensure that you take some remuneration (salary for corporate owners or simply drawings for sole proprietors)
b) pay yourself on a fixed schedule (eg. weekly, biweekly or monthly)
The primary reason you would want to do this is that it gives you a better sense of the costs of running your business and whether your business is actually profitable once you have taken your own salary into consideration. That is why assigning (or withdrawing) an approximation of market value is important.
The second (obvious) reason is that you need to eat, pay rent, save and have some money left over for (at least a little bit) of fun stuff if possible (and if you are a sole proprietor, remember to allocate a portion for taxes)..
Finally, it helps impose financial discipline both on to your business and your personal finances. When you have a fixed amount coming in, you are better able to predict and therefore budget, which can be extremely useful when it comes to taking control of your money and ensuring financial success
Blog Post
Two popular posts at this time of year relating to T4 filings:
Information on Filing T4s/RL-1s and T4As for Small Business Owners
When I was employee, I never really gave much thought to the T4 (and the Quebec equivalent RL-1) process. I knew that sometime around February an envelope would appear on my desk with a tax document
How to File T4s using Quickbooks Desktop
For all Canadian businesses that have employees on their payroll, the deadline to file your T4s is February 28th, The good news is that it has become much easier to prepare and submit the T4s partic
Small Business Articles/Tips
CBC Interview: Another CBC interview with me on personal finance, tax, RRSPs, FHSA etc. as we get ever closer towards tax season.
Setting Your Salary As a Business Owner: A useful article with a calculator on how to approach the calculation of your salary.
Canada Still Adding Jobs: In fact 150,000 new jobs in January of which a significant number are in the construction industry.
Tax Stuff:
Tax Credits and Deductions: A list of some lesser known tax credits and deductions including the home office deduction and caregiver credit.
CRA Prescribed Interest Rate Increase: For many years, the interest rate charged on loans between family members for a “prescribed rate strategy” was very low (1% from 2020 to 2022 ). This has now shot up to 5% and consequently impacts the decision to implement this strategy.
QuickBooks Tip:Non Business Transactions
Ideally, all business should have a separate bank and credit card for their businesses (I give this advice often frequently to the occasional irritation of my clients). However, there are times when personal transactions cannot be avoided.
To allocate personal expenses in QBO:
If you are an unincorporated business set up a new account called “Owner’s Equity” in the Equity section and allocate all personal transactions to this account. There is no tax impact.
If you are an incorporated business, all personal transactions should go to the shareholder loan account. They should then either be repaid or added to any other borrowing from the company and declared as dividends.
Books and Resources:
Small Business Tax Facts(Sole Proprietorships/Registered Businesses/Self Employed Workers)
This book helps you have a better understanding of tax (brackets, tax rates, deductions etc), how it applies to your unincorporated small businesses and how to do your own tax return (or at least understand what your accountant does). It also includes a comprehensive breakdown of deductible expenses, by category with special sections on more complex deductions such as home office, vehicle and capital cost allowance.
FastStart Your Corporation(Corporations)
A step by step guide to starting your small business corporation, including what you need to know about incorporation, setting up your accounting and tax considerations.
QuickStart your QuickBooks(Sole Proprietorships and Corporations)
A comprehensive guide that takes you through the many features of QBO and gives you step by step instructions on how to setup and work with QBO day to day. It is ideal for beginners who have never used QBO before and also for those who are currently using it, but have questions or need guidance.
FastStart Your Business (Sole Proprietorships)
A step by step guide for anyone who is planning to start a Canadian business or become self employed (and does not want to incorporate) and wants to know what they need to do or simply has questions.
Small Business and Your Dividends (Corporations)
For incorporated small business owners who want to know more about small business dividends, the differences between salary vs dividends and which is better and step by step instructions on how to file your own dividend declarations (T5s).
Use discount code “special” to save 20% on any (or all) book(s) when you purchase from the website.
Please note that all books on my website are in PDF format.
If you prefer a print version, all books are also available at Amazon . Note that print versions purchased on Amazon include a complimentary PDF - you just need to email me and include proof of purchase.
Free Resources
Business 2023 Tax Deadline Calendar (New!)
Starting A Corporation Checklist
Start Your Business Checklist
Dividend Declarations Checklist
Small Business Tax Return Checklist
QBO Set Up Checklist.
Small Business Calculators
Previous newsletters
Consultations
I also provide consultation services where I can answer your specific questions relating to your small business and/or finances, provide clarity and give you guidance. Additional details can be found here and here. Note that I no longer provide ongoing accounting or tax preparation services.
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Wishing everyone a lovely weekend.
Ronika
