Why you should pay yourself regularly!!

Disclaimer:

  1. This post is based on NZ Tax law. NZ Law is friendly to contractors (the IRD don't care about whether are a contractor or employee, they just like you to pay tax!) - unlike e.g. UK!!

  2. This is general advice: please talk with your tax professional! But some accountants don't think laterally on this subject and haven't considered regular owner PAYE!

  3. This scenario assumes that there is 1 owner for the business; if there are multiple owners that also work in the business then you will have to agree a distribution method - e.g. 50:50, 40:60 for two owners


The beginning

A business that hat has been running for a while should be profitable


Distributing profits

  • Profits can be completely left in the business which will attract Company Tax at year end and then Provisional Tax (an estimation of next year's tax) payable during the following financial year.

  • Dividends: These are the payment of post-tax profits to shareholders. Shareholders can sometimes receive Imputation Credits for the company's paid Company Tax to offset on their ta returns,

  • Salary : When you have a small company, paying yourself as an employee.

There are three ways to pay yourself:

  1. Drawings

  2. This is not good: you simply take cash out of the business and record it as drawings!

  3. The accountant will then have to notify the IRD about them and pay tax on it.

  4. You will have to ensure that you have enough money at year end to cover PAYE

  5. Regular - e.g. weekly, monthly Salary:

  6. This is the simplest method: if you pay yourself monthly, you fill in the PAYE return on the IRD website and then authorise the direct debit for the following month.

  7. You can also pay Employer KiwiSaver deductions which are a legitimate business expense.

  8. No end of year payment needs to be made

  9. At the end of the year, your personal tax return will show whether you are due a tax refund or you will have to make a [relatively]-small payment - usually due to having other income.

  10. Shareholder Salary

  11. "Paid" as part of the preparation of the annual accounts

  12. You need to ensure that the business has enough money to cover the PAYE which will be due.


Other advantages of Regular Salary

  1. In NZ, if you are unable to work for more than two weeks due to injury, you are covered by ACC.

  2. ACC obtains employment data from the IRD.

  3. Paying a monthly salary means that your evidence of income is available to ACC, so you will get paid much faster

  4. If you are not being paid income - e.g. due to the business not making money, then you won't get paid anything. Paying a small, e.g. $1000, monthly salary will ensure that you will get at least some payment.

  5. COVID payments: the data that MSD has used was sourced from the IRD. A client had problems obtaining the payment due to not being paid a salary from their company for a while.

  6. Mortgages

  7. When applying for a mortgage or other loan, the bank will want evidence of income. Being able to provide an screenshot of your personal IRD account showing regular income will make things run smoothly.

[Very minor] Disadvantages of Regular Salary

  1. You have to do this regularly !! However, it is very simple to calculate and do the paperwork for IRD - I'd suggest that 15 minutes is on the long side to do this

  2. Some bank staff are rather obtuse - by paying yourself a regular salary to soak up the business' profits, the business will report a minimal salary. Therefore, obtuse bank staff can think that the business is unprofitable - the fast that you've paid yourself a $200k salary means the opposite!

  3. Explaining this to the staffer can be hard and painful- if you get this, then you need to escalate to their senior!

Note: When analysing business profitability, the usual measures are EBIT and Net Profit. To account for Owner Salary, I use EBIT / Net Profit excluding Owner Salaries to get the true profitability



"

How to calculate how much to pay? Please go to the Calculating your Salary post

RECENT POSTS:
SEARCH BY TAGS:

© 2023 by NOMAD ON THE ROAD. Proudly created with Wix.com

  • b-facebook
  • Twitter Round
  • Instagram Black Round
Subscribe to Our Site
This site was designed with the
.com
website builder. Create your website today.
Start Now