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How to Pay Yourself as a Business Owner: A Step-by-Step Guide

Entrepreneurship can be a thrilling yet intimidating journey, especially when it comes to determining how to pay yourself as a business owner. Many new entrepreneurs have questions about how to compensate themselves, particularly if they are not familiar with the world of business ownership. One of the most commonly asked questions among potential clients and social media groups is, "How do I pay myself now that I'm in business?"

Fortunately, there are various options available depending on the type of business entity you have. For example, if you have a sole proprietorship, which is a business entity that is owned and operated by a single individual and where there is no legal distinction between the owner and the business, all income you receive is yours, and you are taxed accordingly. To pay yourself, you can withdraw money from the business, and it comes out of your owner's draw. You are taxed on your income minus expenses, and you would not pay EI unless you are on the Special Employment Insurance Benefits program. The six types of social benefits covered under this program are Maternity, Parental, Sickness, Family Caregiver benefit for children, Family Caregiver benefit for Adults, and Compassionate Care.

On the other hand, if you have an incorporation, there are two ways to pay yourself as the owner. First is through payroll, where you need to register a payroll account with Canada Revenue Agency (CRA), and each time you are paid, source deductions are deducted except for EI. The special program mentioned above is also applicable in this case. The source deductions are due on a monthly basis, but the advantage of being on payroll is that you can adjust your taxes to your needs. Having a T4 income as a business owner allows you to continue investing in RRSPs, collecting particular credits such as the child tax benefit, and making it easier when applying for financing.

The second option for corporations is through dividends. Depending on your personal situation, such as not having kids, you may prefer to take dividends. Dividends are taxed at a lower rate than salary, and it is a straightforward process to pay yourself. You can declare dividends at any time, but you will not have income for investments such as RRSPs, and you will not be able to claim other personal income tax deductions for expenses such as child care.

Ultimately, how you pay yourself as a business owner is a personal decision that should be based on your financial situation and the method that benefits you the most.

Censea has a team of Certified Bookkeepers and Designated Accountants who can provide peace of mind that your books and business are well taken care of.

Jennifer Walsh, CPB

Article by Jennifer Walsh, CPB

Jennifer Walsh has been a bookkeeper for over 20 years and she's loved every minute of it. She loves helping business owners reach their financial goals so they can live the life they love, without having to worry about the numbers.