As a company owner, should you pay yourself a salary or drawings? That’s a very common question we’re asked and like most tax questions, the answer is not cut and dried.
There are pros and cons to both approaches. We take a look at them in detail below.
Salaries (PAYE)
If you take a salary, you’ll account for pay-as-you-go (PAYE) tax throughout the year. That means that if your salary is your only source of income, your personal tax obligations should always be up to date.
- PAYE is paid to the IRD on a monthly basis and so this can be easier on your cashflow with smaller, more regular payments. Bear in mind that late filing or being unable to pay may mean penalties and interest.
- You will have a confirmed income for ACC purposes so that in the event of an accident, your income is certain.
- You will have a regular income which can make it easier if you are trying to raise a mortgage or a personal loan with a bank.
- Any Kiwisaver contributions will be paid monthly along with your PAYE obligations.
You should be aware though that you may end up paying more tax than you might otherwise if the company is making a loss. This is common in the first year of trading. In other words, the amount of tax paid for both the company and the individual overall is higher than it should be.
Remember that a company is a separate legal entity to you and so even if you are the majority shareholder and a director, you will still need to sign an individual employment agreement by law. So as bizarre as it sounds, you should to write to yourself with an individual employment agreement in order to employ yourself.
Drawings
Another method is to pay a shareholder salary at the end of the year. The key advantage of this method is that you can be assured that you are minimising your overall tax liability for both the company and you as an individual.
- This is a great method if you are very disciplined and can put aside tax for the three provisional tax payments you’ll need to make across the year. That means that you are paying tax less often than if you were on PAYE.
- Provisional taxpayers do need to be disciplined. If you are not good at saving, or are tempted to use tax money on other things, you may not have the money available when the provisional tax payment is due. Even if you are a thrifty kiwi, you may experience variability in cash flow and find it difficult to budget for the provisional tax payments.
- Provisional tax payments by their nature vary from year to year so planning can be difficult.
- It is difficult to know how much to take in drawings throughout the year. Any money you take out will be a net amount and it’s not until we complete the annual accounts that we will know how much you should have taken to ensure that you have not overdrawn your shareholders current account. Remember that if you overdraw your current account, we need to charge interest as it becomes a fringe benefit.
- Any income for ACC purposes is limited to the amount of the drawings paid during the year which may be inadequate to meet your needs. It should be noted that this risk can be mitigated with ACC Cover Plus or Income Protection Insurance. We strongly recommend clients take out personal income protection insurance. Please contact us if you would like some advice and a no obligation referral.
- If your drawings figure is much larger than in previous years, it follows that your ACC levies will be larger as well.
PAYE salaries are an expense and appear in the Profit and Loss Account. The more you pay in salaries, the lower your profit.
Drawings are not expenses and don’t impact the company’s profit. They end up in the Balance Sheet and you pay the income tax personally.
One thing you should be aware of is that if you opt for PAYE, it’s an all or nothing approach. You can’t mix and match and chose to pay yourself a non-PAYE salary or bonuses at the same time. Once you are committed to PAYE for a particular income year then you must deduct PAYE – end of discussion.
The whole area of shareholder remuneration is complex and we recommend you contact us for a discussion on what method may be best for you.
One thing we often hear about is how business owners have poured every cent back into their business to build it up to where it is today. Of course, we never hear about those business owners who did just that only to see the business fail. Whichever method your choose, make sure you pay yourself something no matter how small from day one.
We hope you found this blog useful. As always, the commentary is general in application. This is not a substitute for professional advice. If you would like an answer tailored to your specific circumstances, please do not hesitate to get in touch.
38 thoughts on “Salary or Drawings – What’s Best?”
Shouldn’t you give the Auckland Chamber of Commerce some credit for copying their article? http://www.aucklandchamber.co.nz/media/960177/company-owner-salary-vs-drawings.pdf
Hi Michael. You’ll notice that the Auckland Chamber article is attributed to us. We are a specialist provider to the Chamber so we welcome them sharing our content.
Haha Michael got owned! Anyway…if we take drawings do we declare that on our personal income tax at end of year? Or does the company pay the tax? And does what we take come off a dividend payout? Thank you.
Hey Monique
If you take drawings, you would prepare an IR3 return and pay the income tax in your own name. A dividend is an entirely different thing. The company would usually pay the tax on the dividend by using a combination of Imputation Credits and Dividend Withholding Tax. We have another blog article on that so check it out.
Great article. I googled drawings vs wages and this hit top of google. Thanks for clearing this up for me.
An absolute pleasure, Richie.
Great read,
Thanks
Hi, Wonderful information, thank you… I was wondering what % shareholding do you need to hold in a Limited Liability Company to allow you to take Shareholder Salary?
We are not aware of a minimum, Katie but as always it pays to get advice. In most cases, any shareholding would qualify.
Hi Angus. Thanks for the comparison. I did find the following confusing:
“Drawings are not expenses and don’t impact the company’s profit. They end up in the Balance Sheet.”
I looked further and found the following on the IRD site (http://www.ird.govt.nz/business-income-tax/paying-yourself/pay-yourself.html). It might be worth noting with regard to Drawings:
“At the end of the tax year the company credits the current account with a salary amount calculated from the company profits which the shareholder will have to pay income tax on.”
Doesn’t this mean that it will impact the company’s profit (at year-end), thereby reducing the company tax payable? I guess, at the end of the year, whether you take Drawings or a Salary, you’ll end up with the same number of dollars in your personal bank account. Is that a fair statement?
thanks.
Hi David
Yes. That’s called a shareholder’s salary and isn’t covered in the article. It’s a tricky area so feel free to give me a call if you want to clarify it.
Regards
Angus
If you take drawings every week of the same amount and put aside the tax proprtion into another account, would this be a better way of paying yourself comapred with paying wages and PAYE. Also, if you take regular drawings (of the same amount), are you still covered by ACC the same as you would be if using the salary/PAYE system?
Hi Kim
I’m not sure it’s a better way of paying yourself. It’s just one of the two options.
With regard to ACC, there can be advantages in taking drawings and ACC Coverplus Extra. We suggest you talk to a risk advisor or contact us for a referral.
Hi, I found the above thread of conversations very useful. Perhaps somebody could help me clarify my confusion. I have a Limited Company which was set up in late 2015. I also have a sole trader which has been running since 2006. Both businesses have different objectives hence they need to be kept separate. To earn personal income from the Limited Company, I would have gone for PAYE but my Accountant has advised me that if I am only making a Drawing of less than £600/m, I am except from PAYE. He then advised me to take Drawings and record the amount I take per month. When the Accountant has prepared my P&L, he disregarded the drawings and just calculated the P & L based on Income minus business expenditure. The Drawings were not included under Expenditure nor they appear on the Balance Sheet. All the profits were then taxable.
On the other hand, he also advised me that any Drawings I had from the Limited Company that fell during my Sole Trader Accounting period had to be included as my income for the Sole Trader which I did.
By doing that, I feel that I have allowed my Drawings from the Limited Company be subject to tax twice. Am I right to believe that this is the case? Just to clarify that the accounting period for the Limited Company was Nov 2015- Nov 2016 so any Drawing I had from the Limited Company that fell between 6 April 2015 – 5 April 2016 has been counted as Income on my Self-Assessment Tax Return.
Hi Maggie
Reading between the lines, we think you may be based in the UK. The article above is only of use in New Zealand so I’m sorry we can’t help here.
Hi In the accounts for the company I am trying to prepare the end of year return for I have a loss brought forward which is from the amount of money originally put into the business. This year we can take drawings for that amount and clear the loss. Do we still need to pay tax on that amount?
Jules
Hi Julia
Thanks for your question.
There are two things to think about here. The money you put into the company was presumably working capital to get it up and running. That money is credited to the shareholder’s current account. So long as that account is in credit, you can draw down on this without any tax concerns. If you think about it, the capital you put into the company was from a tax-paid source, so there is no need to tax it a second time. You can read more about shareholder’s current accounts by clicking here .
Any loss relates to your Profit and Loss account from last year. Presumably you spent more than your earned, so as a result you ended up with a tax loss. Because you have a company, this loss can be offset against this year’s profit, which will either eliminate or reduce the tax you have to pay in the company depending on the amounts.
The shareholder’s current account and the loss are not related.
I hope that answers your question, but if you’d like specific advice, please don’t hesitate to call and make a time to pop in. As always, our answers are general in their application as we simply don’t have the detail. Professional advice tailored to your specific circumstances is always best.
Hi we operate a small partnership business with 2 persons sharing profit / loss equally. partner A is the active one managing the business whereas partner B (me) inject cash as and when required. Partner A takes regular sum each month as his drawings so the books presently have no wage earner so no PAYE is deducted. I’d like to find out if the drawings taken by Partner A is subject to income tax, and if yes how would the partnership do it and whether he has to show the drawings in his personal income tax as income from other source presumably if the partnership makes money he would be entitled to an equal share.
Thanks
Hi Kenneth
The drawings taken by Partner A will be subject to income tax. Give me a call to discuss.
Angus
Hi Angus brilliant article.
Here is a situation I am wondering about. Some conditions;
The Shareholder-Employee is paid a regular wage as an employee and pays PAYE.
Her current account is in healthy credit from funds introduced to the business.
She takes a one off drawing to meet some new personal expense, the current account is still in credit afterwards.
So this drawing is income on top of the usual employee wage.
I don’t see this attracting FBT but how is income and her tax calculated for the Shareholder-Employee?
Cheers
Jim
Hi Jim
Thanks for the feedback. If the current account is still in credit after she has taken funds, all she is doing in this example is to repay some of the money she has loaned the business. This is a very common transaction and there should no tax to pay.
If the account was left with a debit balance, this would be an entirely different situation.
Regards
Angus
HI – generat conversations – many thanks! When a person withdraws a Shareholder Salary, does it have a GST component that can be claimed as a GST expense??
Hi Jane
No. GST is applied only to goods and services, not remuneration or capital.
thanks so much! great service
Hi Angus,
After reading this article, I now assume that drawings will
incur provosional tax. Im assumaing this will be at the company tax rate of a non refundable sum @28% + a provisional 28% (in my case as its my first year) so for example.
-If i take $14k in drawings, ending my first year, I will pay $7840 in tax.
-If I pay myself, as an employee, an annual salary of $14k, I will then need to pay $1470 in tax.
Could you please, if possible, confirm that: I am, or am not on the right track?
Thanks, Ben.
If your residual income tax is above $2,500 for the year, you will become a provisional taxpayer. That means that you may be paying provisional tax for both the company and yourself.
The drawings are taxed at the individual marginal tax rates so I’m not sure your calculations are accurate. We’re always happy to help you pull this together so don’t hesitate to get in touch.
Hey Angus you are an Accounting Guru, great article, should write an article on shareholder salary as well, just got a quick question, so if a company has 2 equal shareholders and let’s say they make net profit $80k, so would it be ok to split that leaving $40k each as a shareholder salary, leaving $0 in Company account, and eventually the both can pay Income tax and declare the $40K in their Ir3,
Many thanks
That would depend on whether or not the shareholders had other income, such as PAYE from another job, dividends from investments or overseas income.
We’re always happy to help so let us know if you would like an opinion.
Hi Angus. I am a partner in a small company—two directors only. We have set up our accounts so that each month, 30% of the total income earned by the company is saved in a squirrel account (for tax purposes). With the remaining funds, my partner and I take drawings as a salary. Do we still need to set aside another 30% of the drawings for personal tax payments? Thanks in advance.
Hi Rachel
A good question, and good on you for ‘squirreling’ away some money for the IRD.
Remember that you have to pay company tax on the company’s profit. The current company tax rate is 28%.
On the other hand, drawings will be taxed by using the marginal tax rates that are applied to individual income earners. That means that there are income bands that attract different rates of tax. Putting aside 30% might be a bit generous, but it’s hard to know without knowing how substantial your drawings are.
You can view the marginal tax rates by look at the link below.
IRD Marginal Tax Rates
Hi Angus,
I am a sole trader and am thinking of switching to a company, and was wondering if there is a certain profit threshold where it is beneficial to become a company in terms of paying income tax?
For example, on 160K of taxable income, the company rate of 28% would pay $44,800 tax, and taxation on the same as personal income would be $43,720.
Or are there many more factors involved in this decision.
Cheers,
Brendon
Hi Brendon
There really isn’t a threshold for forming a company. The critical thing is that a limited liability company gives you protection from your creditors and ring-fences your personal assets from the business.
Your personal income will still be taxed at the appropriate marginal tax rate so it isn’t really relevant in making the decision to move from sole trader to a limited liability company structure.
hello i need a wage/salary print out where do go for that
Hi Jason
Just log into MyIR on the Inland Revenue Department site.
From there you can request your personal tax summary.
I am a director of a business and use the drawings method. The company is still in it’s baby shoes so I have had to introduce funds during the year. There was a small profit allocated to me at year end against my loan account, showing as directors remuneration.
When applying for a mortgage, will the bank look at directors remuneration allocated to me (which isn’t much) as income, or will they take drawings into concideration?
My loan account does have a credit balance as at year end.
They will probably consider both.
My advice is to run it past a business broker. Always shop around for business banking.
Hello. I found this article really useful and the comment stream a great insight. I just had one question. I have a Ltd Company with my partners and we both take weekly drawings as the owners and directors of the company. This roughly equates to $2K per month. Based on this what do need we need to fill out for the company Year End as well as our personal tax return? My husband also works full time so his drawings are smaller than mine as I am the main contractor working. Are there pay grade tax % like with wages that means you have to pay X amount of tax based on your ‘earnings’ as such? Many thanks Sabrina
Hey Sabrina
Thanks so much for the feedback! I’m really pleased you found it useful.
When you take drawings, you declare these in your individual IR3 return. The income tax is based on the same marginal tax rates that are used for PAYE employees. Google marginal tax rates to see the various thresholds.
And yes, you will need to complete an IR4 company tax return as well.
I hope this helps. Give us a ring if you’d like us to help.