Running a business can feel like juggling flaming swords while riding a unicycle. One of the biggest questions entrepreneurs ask is, “When do I start paying myself?” And when you do, what’s better? A salary or a dividend?
Let’s break it down in a simple, no-stress way.
You’re Not Being Greedy, You’re Being Smart
First off, paying yourself isn’t selfish; it’s essential. You’re not just the owner, you’re the engine of the business. If you’re constantly pouring into your company without taking anything out, burnout is around the corner.
But how do you know when it’s time to take that first paycheck or dividend?
Step 1: Make Sure Your Business Can Afford It
Before paying yourself, your business needs to be in a stable place. Ask yourself:
- Is the business consistently generating profit?
- Are all your bills, employees, and taxes paid on time?
- Do you have a cash buffer for unexpected expenses?
If the answer is yes to all of the above, it may be time to pay yourself.
💡Pro Tip: A good rule of thumb is to keep at least three months of operating expenses in the bank before taking a regular salary or dividend.
Salary vs. Dividend: What’s the Difference?
Here’s where things get interesting. As a business owner in Canada, especially if you’re incorporated, you have two main ways to pay yourself: salary or dividend.
Salary:
- You pay yourself just like you would an employee
- Comes with CPP contributions, income tax, and payroll obligations
- Counts as an expense on your company’s books
Dividend:
- A payout from your business profits
- No CPP or payroll deductions
- Taxed differently than salary, usually at a lower rate, but not always
💡Pro Tip: If you want to contribute to the Canada Pension Plan and create RRSP contribution room, a salary is your best friend.
So Which One Should You Choose?
Here’s a quick cheat sheet:
- Salary is better if you want regular income, qualify for personal loans or mortgages, or want to invest in your RRSP.
- Dividend is often preferred when your business has excess profit, and you want to take money out, potentially more tax efficiently.
Many business owners use a mix of both, depending on their cash flow and tax strategy.
Timing Is Everything
So, when should you actually start?
- New businesses: Wait until you’ve covered your operating costs and have a reliable monthly profit.
- Established businesses: Consider a salary if you’re working full-time in the business. Consider dividends if the business has accumulated profits and you don’t need a predictable paycheck.
- Healthy Sales Pipeline: When you can see a consistent volume of sales in the future.
💡Pro Tip: You can adjust your salary or dividend amounts annually. Just make sure you review your tax situation with an accountant first.
Get Expert Guidance (Because Guesswork Is Risky)
Choosing between salary and dividend isn’t just a math problem, it’s a strategic move. At Vistance, we help small business owners build smart compensation strategies that work for their lifestyle, tax goals, and business stage.
We’re pros at balancing tax efficiency with financial stability, and if you need help with your bookkeeping, financial controller services, or tax services, we’ve got your back.
Want help with your business finances? Contact our team today to get expert support tailored to your needs.
👉 Visit VistanceAccounting.com
