Salary and dividends are two different forms of compensation that business owners can receive from their companies. The main distinctions between salary and dividends lie in their nature, tax treatment, and how they are distributed.
Salary:
Definition: A salary is a fixed regular payment made by an employer to an employee, typically on a monthly basis. It is a form of compensation for the work or services provided by the individual.
Tax Treatment:
Salaries are considered an expense for the business, and the company is required to withhold and remit payroll taxes (income tax, employee and employer contributions, etc.) to the relevant tax authorities.
The individual receiving a salary is taxed on that income at their personal income tax rate.
Benefits:
Receiving a salary provides a steady and predictable income stream.
Salary income contributes to employment benefits such as pension plans, employment insurance, and parental insurance plans.
Ownership Impact:
Salaries are not dependent on the profitability of the company. Even if the business is not making a profit, employees (including business owners who are employees) receive their salaries.
Dividends:
Dividends are payments made by a corporation to its shareholders out of its profits or reserves. They are a return on investment for individuals who own shares in the company.
Tax Treatment:
Dividends are taxed at a different rate than salary income. Dividends are subject to a lower tax rate because the company has already paid taxes on its profits.
The tax treatment of dividends can vary depending on the individual’s overall income, and other factors.
Benefits:
Dividends provide a way for business owners to extract profits from the company.
Unlike salaries, dividends are not subject to payroll taxes. However, they are typically paid out of after-tax profits.
Ownership Impact:
The payment of dividends is contingent on the company’s profitability. If the business is not making a profit, it may not be able to distribute dividends.
The decision between receiving a salary or dividends often depends on various factors, including the tax implications, the financial needs of the individual, and the overall financial situation of the business. Business owners should consult with accountants to determine the most tax-efficient and financially beneficial approach for their specific circumstances.
Tags: Salary And Dividend
