Paying Yourself: Wages, Drawings or Dividends?

By Tina Zawila

One of the most common questions small business owners ask is: “What’s the best way to pay myself?”  The answer depends on your business structure, the profitability of the venture and your own personal tax and financial position. 

Sole Traders and Partnerships

If you operate as a sole trader or in a partnership, you don’t “pay” yourself a wage. Instead, you may take drawings throughout the year, and your share of profit is declared in your personal income tax return.  It’s important to remember drawings are not tax-deductible expenses, and the tax you pay is based on the business’ taxable profit (not how much cash you’ve withdrawn) and the tax bracket you are in.

Companies

If your business operates through a company, you have more flexibility—but also more responsibility. You can pay yourself:

• A salary or wage, which is subject to PAYG withholding and superannuation just like any employee.  A salary provides you with regular income and builds your super balance, but it does require some compliance: Single Touch Payroll and Superannuation Guarantee obligations. This expense is a tax deduction for your company.

• Dividends, distribute after-tax profits to shareholders. These can come with franking credits (which may reduce your personal tax position) but can only be paid if the company is profitable and compliant.  Dividends are not tax deductible to your company, but are assessable income to you, and therefore need careful tax planning.

  
  

Trusts

If you use a discretionary trust, things get more complex. You don’t “pay” yourself wages, but you can receive distributions. These need to be resolved in writing before 30 June each year, and the income is taxed in your hands.

The Bottom Line

Everyone’s circumstances are different and therefore what’s “best” depends on your business structure, goals, tax bracket, and business performance.   Potentially, it might be a mix of drawings or wages for cashflow and super, with distributions or dividends for flexibility and tax planning.  The best person to help you make this decision is your accountant and tax agent. 

Getting it right can make a big difference.

If you need help managing your business and meeting your compliance and taxation obligations, call the professional team at UHY Haines Norton CQ on 0749721300 today.