For most Small Business Owners, they have a hard difficult time deciding whether salary or dividends are more advantageous for tax planning.
- Dividend – a sum of money paid regularly by a company to its shareholders (yourself) out of its profits (or retained earnings, net of corporate tax)
- Salary – what you pay yourself for your time during the fiscal year (before corporate tax)
The tax system has evaluated this dilemma and made both salaries and dividends, in order to equalize the effects of both to provide nominal benefit to either option. Given that the recipient of the funds is taxed at the highest marginal tax rate, there is little to no tax advantage in paying dividends versus salaries in any given year; there is an advantage to deferring the payment of such, which would create a tax deferral advantage. Tax deferral advantage is when the profits is taxed in the given year and then paid out on a future date, which will yield the biggest tax break (and is totally legal).
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