Running a successful business involves not only generating revenue but also effectively managing how that revenue is distributed and utilised. When it comes to getting paid from your business, there are two primary legitimate methods: wages and dividends. Understanding these options and their implications is essential for business owners seeking to optimize their financial and tax strategies.
1. Salary & Wages
Paying yourself a salary and/or wage from your business is a straightforward and common method of extracting funds. This approach involves setting a regular payment schedule, just like any other employee within your organisation. However, as a business owner, you must ensure compliance with tax laws and regulatory requirements applicable to employee compensation.
Key Considerations:
- Tax Implications: Salaries and wages are subject to income tax, superannuation contributions, and (for larger businesses) potentially payroll tax.
- Regularity and Consistency: Establishing a consistent wage structure ensures stability and predictability in your personal income, aiding in financial planning and budgeting.
- Compliance: Ensure adherence to labour laws and tax regulations in your state regarding minimum wage, overtime, and other employment-related obligations. Though it may be your business, you are still required to adhere to these rules.
- Lodgements: You are required to lodge an activity statement declaring your salary, along with your staff, on a monthly or quarterly basis. You will also be required to lodge your superannuation on a quarterly basis.
- Documentation: Maintain accurate records of salary payments, tax withholdings, and other relevant documentation for accounting and auditing purposes. Great way to do this is through Xero Payroll.
2. Dividends
Dividends are distributions of profits to the shareholders of a company based on their ownership stakes. Typically, dividends are declared by the company’s directors and can be issued periodically (e.g., quarterly or annually) or as a one-time payment.
Key Considerations:
- Tax Implications: Dividends are after-tax profits which can be ‘franked’ based on the company’s tax rate and available franking credits (also known as imputation credits). So when you receive them as an owner, you will generally have a credit that can be used to reduce taxes in your personal name. These payments will also not be subject to superannuation obligation which is a big difference to wages. The tax payable on these dividends will be dictated by your personal tax position so is subject to change.
- Profitability: Dividends are generally distributed from the company’s after-tax profits. Therefore, a profitable business is better positioned to provide consistent and substantial dividend payouts. Dividends are not a tax deduction to the company which is different to salaries and wages which will reduce your taxable profit.
- Shareholder Agreement: Check your company’s shareholder agreement, as it may outline specific rules and regulations concerning dividend distribution. This agreement will outline the actions that are to be taken by the Directors for the purpose of declaring dividends.
- Documentation: Maintain accurate records of dividends declared, the franking component and other relevant documentation for accounting and auditing purposes. Great way to do this is through your accountant.
Understanding the tax and legal implications associated with both wages and dividends is crucial for making informed decisions that align with your business goals and financial strategy.
If you want to know more about maximising profits for your business, contact the Walker Hill team today! support@walkerhill.com.au.
