Getting Paid from a Company

A company is a separate legal entity from its shareholders, the owners in the business. An ordinary company pays tax separately from its shareholders (see below for quick note about LTCs), and we record funds to/from the shareholders as loans or advances known as shareholder current account.

This is an important distinction because the amount of salary you allocate to yourself will impact on the amount of tax you and your company pays.

Let’s look at two different types of salary: PAYE salaries and shareholder-employee salaries. If you are a working shareholder, you can earn both types, but they are slightly different.

PAYE Salaries

If you work in the company, you can receive a PAYE salary like any normal employee. This means that every payday, your salary has income tax, ACC, student loans and Kiwisaver contributions deducted and the net pay is paid to your personal bank account.

PAYE salaries are great for people who prefer to pay their income taxes as they go, rather like compulsory saving for tax and retirement. The downside is when your salaries are too high, your company makes a tax loss, and it is too late to claw back the salary overpayment. If you constantly change your PAYE salaries during the year, so your personal income fluctuates, you may have terminal tax to pay or tax refunds at year end.

Shareholder-Employee Salaries

As the name suggests, you must be a shareholder owning at least one share to take advantage of this type of salary. If the shares are owned by your trust or another family member, then you can only receive PAYE salaries.

Instead of receiving a consistent salary throughout the year, your salary is determined when your chartered accountant is preparing the annual accounts. In this way, you won’t decide a salary that’s more than taxable profit (unless you have a reason to). The downside is that you will be liable for income tax on your personal income, paying provisional tax and terminal tax in lump sums throughout the year. The company pays a separate ACC levy for shareholder-employees, and shareholder-employees must arrange their own Kiwisaver contributions directly with their Kiwisaver provider.

You could decide to do a mixture of both PAYE and shareholder-employee salaries to get the best of both worlds.

Shareholder-Employee Salaries and AIM Tax Payments

If your company profits fluctuate or it has some seasonality, then combining shareholder-employee salaries and AIM provisional tax payments can be useful. Every AIM tax period, you calculate a portion of the company’s profit to be allocated to shareholders as salaries, then pay the company and shareholders’ taxes in one payment. If you pay too much AIM provisional tax in an earlier payment, then you can easily get it refunded in a subsequent period.

You can read more about AIM provisional tax here: https://www.jdw.co.nz/aim-provisional-tax-finds-its-target

How Much Salary Can I Pay Myself?

There are many factors to consider, so deciding an appropriate salary can feel more like an art than a science! These are the factors we discuss with our clients, when helping them decide on their salaries.

Market Salaries

How much would you pay someone else to do your job? Consider the tasks you do, the skills and experience you have, the hours you work. Also factor in the additional responsibilities and risks you have if you are also a director in the company. Directors sign a resolution that they believe that your salary is fair and reasonable for the work that you do.

Solvency

Directors sign a solvency certificate, that there will be more assets than liabilities, and the company can pay its debts after the salary is paid. If you want to leave more cash in the company, then you can record the shareholder salary as a journal entry. The shareholders can then draw the funds out later.

Personal Services Attribution Rules

Specific tax rules apply for personal services companies, such as consultancies, so that individuals can’t avoid higher income tax rates by having a company structure in place. If at least 80% of the company’s income from personal services comes from one buyer (or associated group of buyers) and at least 80% of the income is earned by the working person and/or a relative and the net income is more than $70,000 then the attribution rule applies. In these circumstances, taxable income left in the company after salaries are treated as taxable income of the working person. There are some exemptions, but we won’t go into those here.

Cash Requirements

Some shareholders prefer to allocate out all the company’s profits to individual shareholders, so they can draw out the funds for personal spending. Some prefer to leave profits in the company for reinvestment. You can take drawings from your shareholder current accounts which are not taxed, if you don’t draw out more than you put in (via funds introduced or salaries and dividends credited). If you overdraw your shareholder current account, then you will either need to pay interest to the company, pay Fringe Benefit Tax (FBT) to IRD or treat the foregone interest as a deemed dividend.

Company Profits and Tax Rates

Individual shareholders have a range of marginal tax rates from 10.5% to 39%, and companies pay tax at a flat 28%. It can be tempting to allocate salaries to get the lowest taxes overall, but this only one factor. You may be delaying the inevitable, as profits left in the company may someday be paid out as dividends, and taxed at the shareholders’ tax rates.

Shareholder Agreements

Shareholder and director remuneration is ultimately decided by the board of directors, but there may be formulas or clauses set out in agreements signed by the voting shareholders.

A Quick Note about Look Through Companies (LTCs)

Look Through Companies (LTCs) are treated like partnerships for tax, so shareholders pay tax on their share of annual profits in their personal tax returns, based on their percentage shareholding. If you have a LTC shareholder who works in the company and deserves more than their percentage shareholding, you could pay them a salary. It must be a PAYE salary though, and the shareholder needs to sign an employment agreement for it to be valid.

Whether you have a PAYE salary throughout the year or decide on a shareholder-employee salary after year-end and how much to pay each shareholder is a topic for keen debate. With all these factors in mind, deciding an appropriate salary can be perplexing! That’s where an experienced chartered accountant can help guide you in making the right decision. You can have this discussion at any time in the year. Reach out to your chartered accountant for tailored advice to suit your situation.

-         Serena Irving

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, business consultants, tax advisors, trust specialists and business valuation specialists.

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An article like this, which is general in nature, is no substitute for specific accounting and tax advice. If you want more information about the issues in this article, please contact your advisor or the author.