Running a company? 3 ways to pay yourself you need to know

One thing accountants often encounter is small business owners who are uncertain how to pay themselves from their company. Sonia Gibson of Accounting Heart says there are three simple ways to get paid from your own company, and that every business owner should be aware of all of them.

Three ways to pay yourself from your company

1. You can take a formal wage or salary

This is a fairly direct way to work things. You treat yourself as an employee of the company, paying yourself an after-tax wage.  Your company then pays the tax withheld and superannuation. The total net wage plus the tax withheld within a tax year is the ‘gross annual wage’ that you’ve been paid.

To do this, you’ll need to register the company for PAYG withholding and file your payroll data with the Australian Tax Office (ATO) each time a payment is made (talk to your accountant if you don’t know how). The company then needs to submit activity statements monthly or quarterly to the ATO again, declaring the wages paid and tax withheld.

The company is also required to pay an amount equal to 10.5 per cent of your wages for superannuation, and this must be paid quarterly.

The good news is that gross wages and your super contributions are tax deductible when it comes to your company’s tax return.

Paying a bonus or director’s fee is treated in exactly the same way as paying a wage or salary. Bonus or director fee payments are appropriate for when you might be paying yourself irregularly, or want to take some extra cash from the company.

2. You can pay dividends to yourself

Assuming your company has accumulated profits, you can declare all or part of the profits a ‘dividend’ and pay it from your company to you.

This amount will be credited with any tax paid by the company, but you must then declare both the cash payment and tax credit (known as a franking credit) in your personal tax return. Both the dividend and franking credit will be added to your income, and you will be taxed at the appropriate marginal rate for your income band, receiving a credit for the tax paid by your company.

Amounts paid by the company as dividends aren’t tax deductible to the company, as they are paid from after-tax profits.

3. You can take company drawings of your financial contributions to the company

Finally, any money you put into the company to help set it up, as long as it was properly accounted for, may be pulled back out at any time, and this is tax-free. However, if you draw more out than you have contributed to the company, this is then treated as you take a loan from the company. This arrangement should be formalised in writing in what is called a Division 7A Loan Agreement.

You should speak to your accountant about the nitty-gritty of setting up a loan from your company if you find yourself in this situation.

Final thoughts on paying yourself

Paying yourself from your company accounts is pretty straightforward, but getting it wrong can lead to an unexpected tax bill. If you don’t know how to handle any given form of payment, it can be worth chatting to your accountant to help set it up for you.

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