Drawings Vs Wages

As a company owner, should you pay yourself a salary or drawings?

This is the Million Dollar question. There are pros and cons to both approaches. The whole area of shareholder remuneration is complex and we recommend you contact us for a discussion on what method may be best for you and your unique business.

Salaries (PAYE)

If you take a salary, you’ll account for pay-as-you-go (PAYE) tax throughout the year.

PAYE is paid to the IRD on a monthly basis and so this can be easier on your cashflow with smaller, more regular payments. Bear in mind that late filing or being unable to pay may mean penalties and interest.

You will have a confirmed income for ACC purposes so that in the event of an accident, your income is certain. Any Kiwisaver contributions will be paid monthly along with your PAYE obligations.

You will have a regular income which can make it easier if you are trying to raise a mortgage or a personal loan with a bank.

Drawings

The key advantage of this method is that you can be assured that you are minimizing your overall tax liability for both the company and you as an individual.

This is a great method if you are very disciplined and can put aside tax for the three provisional tax payments you’ll need to make across the year. That means that you are paying tax less often than if you were on PAYE.

It is difficult to know how much to take in drawings throughout the year. Any money you take out will be a net amount and it’s not until we complete the annual accounts that we will know how much you should have taken to ensure that you have not overdrawn in your shareholders current account. Remember that if you overdraw your current account, we need to charge interest as it becomes a fringe benefit.

PAYE salaries are an expense and appear in the Profit and Loss Account. The more you pay in salaries, the lower your profit.

Drawings are not expenses and don’t impact the company’s profit. They end up in the Balance Sheet and you pay the income tax personally.

We can help you figure out the best approach for your business. Get in touch.