Are you a business owner? If yes, then, you might be glad to know that you actually have the option to pay yourself at the end of the year. There are several ways for you to do this. You can pay yourself dividends, salary, or a combination of these two. The question now is, are dividends a great choice for paying yourself dividends?
What Happens When You Pay Yourself Dividends
Dividends are regarded as a form of investment income, making them different from a salary that is considered as a type of personal income. Dividends might yield a significantly lower tax rate compared to what is often paid on a salary because these are still subject to the corporate tax rate.
These dividends are also not considered as an expense of the company and will therefore not reduce the overall taxable income of your company. Most of the time, dividends are being paid out to the shareholders of your company.
If you plan to provide dividends to the shareholders, money will be transferred to the bank account of the shareholder from the corporate account. When you prepare dividends for both yourself and all of your shareholders, you also need to prepare and file the individual statements of income for each individual who will receive one. The same process will also be applicable for you if you decide to pay yourself dividends at the end of the year, as is the case with the other shareholders.
The thing about dividends is that they tend to be a bit tricky since these are paid and issued according to share ownership. For instance, if Company X is planning to issue dividends worth $100,000 to the owners of the Class A common shares, this will be paid out depending on the ownership percentage.
This means that if Mr. Smith owns 20% of the class A shares of the company and the remaining 80% is owned by Mr. Jones, Mr. Smith can expect to get $20,000 while Mr. Jones would earn the residual $80,000.
It is at this point that the process can get somewhat confusing. When there are several shareholders who own the same class of shares, there might be some challenges in allocating varied amounts of income.
You have to remember that there is no need to have a payroll registered and remit the source deductions when your company is under your sole ownership. Opting for the dividend route is recommended for those who don’t want to be forced into contributing to their pension plan. However, it is still important for you to be prepared so that you can be fully prepared for your finances in the future.
There is No Definite Answer
Just like many other things in this world, the question of whether or not you should pay yourself dividends at the end of the year will depend on many different factors. Make sure you review all of your personal needs and come up with a decision depending on what best suits your existing business and personal circumstances.