How to pay yourself from your company
Establishing and running your own business is something to be proud of.
You make all the decisions, manage your schedule, and have all the flexibility you want.
Simply put, you are your #ownboss
Hey, and as a business owner (or a sole director), you get to choose what will happen with the profits your business generates.
Even though there are various taxes and duties that must be fulfilled with the Australian Taxation Office, you still have the freedom to choose how you will pay yourself.
In other words, you decide how much you earn, how much effort you put in, and what rewards you enjoy.
Clearly, the advantages of being a sole company director are numerous.
Let’s swing into action and take a look at the different ways you can pay yourself if you are in this advantageous situation.
- How do I pay myself from my company?
- How can I be tax-efficient in paying my own salary?
- The dos and donts of paying yourself as a sole company director
How do I pay myself from my company?
Firstly, there are a few factors concerning your business type that will influence the way you pay yourself.
However, these differences are not crucial, as the concept of paying a salary is rather similar among most business types.
Let’s start with how you could pay yourself a salary using a few common and simple methods.
Pay yourself a salary
It is possible to pay yourself from a Pty Ltd company in the form of a salary.
Salary is the recurring payment that is received each fortnight or month. This is the same way employees are paid.
As a sole director, you would get a regular income, just like your employees.
This is the best method if a certain amount of income is important to you and meets your specific requirements.
You will need to set yourself up as an employee. Notify the ATO and pay PAYG tax on the salary. You will also need to pay superannuation on your salary.
It is also possible to receive shareholders’ drawings. This means that you would distribute the profits among each member based on the percentages stipulated in the operating agreement.
In the case you are the only signing party, you can decide on the amount.
Pay yourself a dividend from your company
A dividend is when the profits earned during a financial year are distributed among the Shareholders.
The company declares a dividend, and the dividend is paid by the company to you.
As a shareholder, you will declare the dividend on your personal tax return and will receive a credit for the amount of company tax paid by the company.
This is very similar to how franked dividends work from shares you have bought from other companies, such as CBA, BHP or Wesfarmers.
Accordingly, each director of your company receives the percentage of their profits based on the holdings of each shareholder.
And if you are a sole shareholder, you can decide on the percentage you receive!
Pay yourself through a loan
Say, for example, you personally lent your company a sum of money in order to set it up. When cash flow allows, you are entitled to pull this money back out of the company as a tax-free payment.
If for example, you pull more money out than what you have lent the company – this needs to be treated as borrowing money from your company.
In this situation, it’d be treated as a loan from the Company to the shareholder, director or associate – you. You will, however, need to formalise the loan with an agreement and interest payable by the shareholder to the company.
As the director receiving loans, you will need to make minimum monthly repayments based on the amount borrowed and the interest rate. If the repayment of the loan is with dividends, then you’ll pay tax, otherwise, it is not taxable.
What would happen if you hadn’t created a loan agreement and an interest charge had not been created by the end of the financial year?
The loans will be treated as unfranked dividends to the shareholders, with tax payable at each shareholder’s marginal rate.
How can I be tax-efficient in paying my own salary?
Now you have a better idea of your options, as to how you can give yourself a salary each month.
Let’s explore how you can be tax-efficient while doing so.
Take a straight salary
This is the most straightforward way to pay yourself. Receiving a straight salary is simple, easy to manage, and meets compliance with the ATO.
However, this is not the most tax-efficient option, especially once you start earning a larger salary.
Balance salary with dividend payments
As a business owner, you can also own stocks of your own company.
This means that you could take a minimal salary and then pay the rest out of dividend payments.
This is a tax-efficient method since dividends are taxed less than salary.
Just remember to ensure you check with your accountant to work out the finer details of this payment arrangement..
Consider alternative payment in stock or stock options
Paying yourself through stocks is a very tax-efficient method, so make sure that you consider this option.
Your accountant can help you with this.
Take a combination of salary plus annual bonus
Opting for a combination of a salary with an additional amount gained through annual bonuses is also a good tax-efficient method and helps with your business’s cash flow during the year.
Create a business agreement to pay yourself later
If you want to be tax-efficient but are not looking for money right away, this option may be the best one for you.
Write a business agreement to pay yourself later. This will, obviously, postpone the payment, but it will also become a liability for the company and will need to be accounted for.
The dos and donts of paying yourself as a sole company director
Here are the dos!
- Do pay yourself from profits
Keep in mind that you should pay yourself out of your profits.
In other words, never pay yourself out of your revenue.
Just because money is coming into your business does not mean that you should take it all. So, take everything into account, consider every cost, and then pay yourself a salary.
- Do set up automatic payments
Try setting up automatic payments both for yourself and your employees. This can be done easily with the help of good payroll software.
Build this practice into your business plan from day one and allow yourself a raise when your business starts growing.
You will develop a good habit and get used to the amount of money you are paid.
- Do consider your business’s legal structure.
Consider how much you can pay yourself, when, and what legal restrictions you have.
Remember, everything has to be compliant, regardless of the amount of money your business generates.
For instance, if you are a sole trader, you are free to pay yourself whatever and whenever you want to, but remember, you still have to pay tax on all profits.
This is partly due to the fact that, as a sole director, you don’t have to consider other shareholders.
However, other business types (incorporated businesses) always have the business owner on the official payroll. This means that the owner receives wages regularly just like any other employee of the company.
It is important to check with your accountant before you make a decision.
- Do record all transactions and payments.
Ensure that you record all payments and transactions in your accounting software so that you have an audit record.
And the donts!
- Don’t undervalue yourself
Do not ask for too much, but also value your skills and your time.
Undervaluing your time and work will not only affect your productivity and your business, but it will also affect your reputation and self-esteem.
- Don’t forget to pay yourself regularly
Remember to add yourself to the payroll but do not forget to pay yourself regularly.
Avoid dipping into the company’s funds as and when you need to.