The best way to pay yourself as a company owner
As a business owner, you have a few different ways to distribute funds from your company to yourself. Each method has different tax, cash flow, and administrative implications. You should understand and evaluate these implications before choosing the correct option for you and your company
Option 1: Pay yourself a salary
Having the company pay a director a salary is the most common way owners get money from their business. Salary payments are tax-deductible so the company gets to pay less tax, but the owner is liable for tax on that salary in their personal tax submission.
Paying a salary has a relatively high administrative burden. The company must register for PAYE, Unemployment Insurance as well as the Skills Development Levy, and submit monthly returns to SARS even if no salary is paid.
Additionally, the company will also have to submit a PAYE reconciliation to SARS every 6 months, which reconciles the PAYE returns submitted to the income certificates they send to their employees.
You should consider the administrative costs of this, as you must do this yourself or hire a tax practitioner to make these submissions.
Option 2: Paying yourself a dividend
Dividends are paid out of the company’s profits to the shareholders of the company. The best thing about a dividend is that the owner receiving the dividend usually is not taxed on the dividend.
Unlike a salary, a company cannot claim a tax deduction for a dividend. This means that a dividend is paid from money already taxed at 28%. Additionally, SARS requires that a company withhold another 20% of the dividend and pay it over to them as a withholding tax. This means that dividends are effectively taxed at 48%, which is quite steep!
Even though the tax payment is high, there is a relatively low administrative burden. You must submit a dividend tax return to SARS, but only if the dividend is declared and no further taxes are involved.
Option 3: Taking a company loan
Many small businesses make use of a director or shareholder loan account as flexible means to distribute funds to the owner. The company lends out money to the owner as needed but in the books of the company, the money is seen as a loan.
The best thing about this method is that the owner does not have to pay tax on the money and the company doesn’t have to submit tax returns for this. But just like dividends, loan payments will not give the company a tax deduction.
The company should charge an interest rate on the loan, otherwise, SARS considers the loan to be a dividend. Also consider that if the interest isn’t paid by the company year-end, it will be added to the owner’s account, increasing the loan amount.
The rate of interest cannot be lower than the official interest rate prescribed by SARS. SARS publishes the official interest rate here.
Though be careful if the company decides to write off the loan because the owner will be liable for income tax on the entire loan amount.