Pay yourself the least possible amount you can live on. You can use lots of tricks to take the money out later, but until you smooth out the month to month variations, your company can probably use the money better than you can.
Corporation payroll
I own a corporation which I am the sole employee. The problem is that my company doesn't make steady income. One month it can make a lot of income, and then it can make nothing for the next couple of months. How would I pay myself? Should I give myself a $1000 salary and then just pay myself bonuses?
Also I played with the CRA payroll calculator, how come the net amount is higher with bonuses?
For example
$1000 salary + $5000 bonus:
Salary or wages for the pay period 1,000.00
Total EI insurable earnings for the pay period 6,000.00
Taxable income 1,000.00
Cash income for the pay period 1,000.00
Federal tax deductions 75.10
Provincial tax deductions 47.73
Requested additional tax deduction 0.00
Total tax on income 122.83
CPP deductions 42.84
EI deductions 17.30
Amounts deducted at source 0.00
Total deductions on income 182.97
Total current bonus payable 5,000.00
Federal tax deductions on bonus 699.89
Provincial tax deductions on bonus 282.28
Total tax deductions on bonus 982.17
CPP deductions on bonus 247.50
EI deductions on bonus 86.50
RRSP, etc., deducted from current bonus 0.00
Total deductions on bonus 1,316.17
Total deductions on salary income and bonus 1,499.14
Net amount 4,500.86
$6000 salary:
Salary or wages for the pay period 6,000.00
Total EI insurable earnings for the pay period 6,000.00
Taxable income 6,000.00
Cash income for the pay period 6,000.00
Federal tax deductions 1,274.29
Provincial tax deductions 766.30
Requested additional tax deduction 0.00
Total tax on income 2,040.59
CPP deductions 290.34
EI deductions 103.80
Amounts deducted at source 0.00
Total deductions on income 2,434.73
Net amount 3,565.27
Any advice, tips, strategies is appreciated! Thanks!
Maybe this thread belongs in taxation, didn't notice that subforum existed.
Also I played with the CRA payroll calculator, how come the net amount is higher with bonuses?
For example
$1000 salary + $5000 bonus:
Salary or wages for the pay period 1,000.00
Total EI insurable earnings for the pay period 6,000.00
Taxable income 1,000.00
Cash income for the pay period 1,000.00
Federal tax deductions 75.10
Provincial tax deductions 47.73
Requested additional tax deduction 0.00
Total tax on income 122.83
CPP deductions 42.84
EI deductions 17.30
Amounts deducted at source 0.00
Total deductions on income 182.97
Total current bonus payable 5,000.00
Federal tax deductions on bonus 699.89
Provincial tax deductions on bonus 282.28
Total tax deductions on bonus 982.17
CPP deductions on bonus 247.50
EI deductions on bonus 86.50
RRSP, etc., deducted from current bonus 0.00
Total deductions on bonus 1,316.17
Total deductions on salary income and bonus 1,499.14
Net amount 4,500.86
$6000 salary:
Salary or wages for the pay period 6,000.00
Total EI insurable earnings for the pay period 6,000.00
Taxable income 6,000.00
Cash income for the pay period 6,000.00
Federal tax deductions 1,274.29
Provincial tax deductions 766.30
Requested additional tax deduction 0.00
Total tax on income 2,040.59
CPP deductions 290.34
EI deductions 103.80
Amounts deducted at source 0.00
Total deductions on income 2,434.73
Net amount 3,565.27
Any advice, tips, strategies is appreciated! Thanks!
Maybe this thread belongs in taxation, didn't notice that subforum existed.
1 - 15 of 15 Posts
A bonus is considered a one-time deal that has no continuing effect on your year-end total taxable income. When you add the bonus amount to regular wages the cmpt thinks that your wages will continue at that level for the rest of the year --- pushing you into a higher tax bracket ---- so more tax is withheld.
Call each of your cash draws bonuses with no salary. That way each is considered separately.
How much $$ you need to leave in the business depends on what kind of ongoing costs it has during the lean times.
Call each of your cash draws bonuses with no salary. That way each is considered separately.
How much $$ you need to leave in the business depends on what kind of ongoing costs it has during the lean times.
Thanks that helps..A bonus is considered a one-time deal that has no continuing effect on your year-end total taxable income. When you add the bonus amount to regular wages the cmpt thinks that your wages will continue at that level for the rest of the year --- pushing you into a higher tax bracket ---- so more tax is withheld.
Call each of your cash draws bonuses with no salary. That way each is considered separately.
How much $$ you need to leave in the business depends on what kind of ongoing costs it has during the lean times.
I'm still a little confused though.. The salary + bonus method is taxed lower than just the salary method.. what do you mean by "continuing effect"?
If a bonus is not affected by tax brackets, why doesn't everyone just pay themselves in bonuses bi-weekly rather than in salary.. or is that what most corp owners already do?
I can only assume that you had an accountant set up your corp. Maybe you should touch base w them about which way would be most cost effective.
Nope, I used the quick online registration on Corporations Canada with a default template they provide. If anyone has any in depth advice rather than "speak to an accountant", or would just like to share their stories and experiences this would make this thread really helpful.
Thanks!
Thanks!
The govt wants their money as you make it. They're greedy little buggers. Their calculator will wring everything out of you asap, without looking at the "big picture".Thanks that helps..
I'm still a little confused though.. The salary + bonus method is taxed lower than just the salary method.. what do you mean by "continuing effect"?
If a bonus is not affected by tax brackets, why doesn't everyone just pay themselves in bonuses bi-weekly rather than in salary.. or is that what most corp owners already do?
Leslie is saying that 12 x 1,000 salary = 12,000/year + 5,000 bonus = 17,000 year. Taxes will be based on this. The 5,000 is computed to be a one time thing.
Compare that to 12 x 6,000 = 72,000/year. The 5,000 is computed to be an ongoing thing.
Salary = bonus - they're the same thing in the eyes of the man.
If you own the corp (I believe 40% or more of the controlling shares - I don't have letters after my name) you are EI exempt.
Free advice is worth exactly what you pay for it. Go give a few bucks to someone with letters after their name as they can tailor to your situation. You'll even be able to write their fee off. Ah, write offs... gotta love them eh?
While I agree with Retired's explanation of what I posted above, I do not agree with his conclusion. You are obviously a 'do-it-yourselfer' and I am also and so I'm all for that attitude.
I worked as an accountant so I know what is involved. You CAN do this yourself. Just know when you don't know something and find out first before you make a move.
Remember to make your government remittances for corp tax, workman's comp, salary withholdings, GST and PST. Be sure to buy insurance to cover all contingencies. When your corp year end comes you may need some help with the tax return. But there is a short-form for basic businesses that you can do yourself using their instructions.
I worked as an accountant so I know what is involved. You CAN do this yourself. Just know when you don't know something and find out first before you make a move.
Remember to make your government remittances for corp tax, workman's comp, salary withholdings, GST and PST. Be sure to buy insurance to cover all contingencies. When your corp year end comes you may need some help with the tax return. But there is a short-form for basic businesses that you can do yourself using their instructions.
Thanks for the great advice leslie and Retired_at_31
I am late to the party on this but I have to ask why you are paying EI premiums if you are self employed?
EI was in my postIf you own the corp (I believe 40% or more of the controlling shares - I don't have letters after my name) you are EI exempt.
A few comments:
Why are you considering just salary and bonus - what about dividends? Assuming that you meet the appropriate qualifications (I believe it is Canadian-Controlled Private Corporation (CCPC) and Small Business Corporation (SBC) but you will need to double check) if you dividend out your income will likely be lower. However, if you do not make much ($30k) the opposite could be true.
A benefit of using the salary/bonus approach is that you will generate RRSP room. Otherwise, since you have a set up a corporation, you will not.
Additionally, paying a salary substantially increases the CPP and EI that you need to remit (there is an employee portion and employer portion). I know that if you are a sole proprietor you can opt out of CPP, but I am not sure if you can do that under a corporation.
In short, these issues are a little complex but if you consider that they could save you 5, 10 or 15% in tax on your income it's worth getting it right. I recommend attending some accountant-run learning sessions and/or contacting a professional accountant.
Why are you considering just salary and bonus - what about dividends? Assuming that you meet the appropriate qualifications (I believe it is Canadian-Controlled Private Corporation (CCPC) and Small Business Corporation (SBC) but you will need to double check) if you dividend out your income will likely be lower. However, if you do not make much ($30k) the opposite could be true.
A benefit of using the salary/bonus approach is that you will generate RRSP room. Otherwise, since you have a set up a corporation, you will not.
Additionally, paying a salary substantially increases the CPP and EI that you need to remit (there is an employee portion and employer portion). I know that if you are a sole proprietor you can opt out of CPP, but I am not sure if you can do that under a corporation.
In short, these issues are a little complex but if you consider that they could save you 5, 10 or 15% in tax on your income it's worth getting it right. I recommend attending some accountant-run learning sessions and/or contacting a professional accountant.
I don't think you have to pay WSIB. If I remember properly it is very expensive and I'm not sure as the company owner you can even collect it. So If you want accident and illness insurance best get a private insurance.
Self employed people (sole-props) cannot opt out. You have to pay both the employee and employer portion of CPP.I know that if you are a sole proprietor you can opt out of CPP, but I am not sure if you can do that under a corporation.
1 - 15 of 15 Posts
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