How Do I Pay Myself from My Company?!
There are 4 ways to pay yourself from your company as follows:
1) Pay yourself a formal wage
Under this method, the company sends money from its bank account to your bank account. The total of what has been paid to your personal bank account during the financial year is to be considered the GROSS annual wage paid by the company to you.
When a company pays wages, it must be registered as a “wage payer”. This is easily done (and we can organise for you if need be). Within reason, wages registrations can be back dated. Once registered, a company will generally be required to submit quarterly “activity statements” to the ATO which declare the gross wages paid to the individual/s each quarter. These activity statements also declare the tax withheld for the quarter on the wage. Attached to the activity statement is a BPAY slip through which the tax on the wage can be paid by your company to the ATO. Therefore, in theory, the company should be setting aside the tax on the wage each week in order that it has the money to remit to the ATO each quarter.
How is “tax withheld” Calculated?
Generally, this will be calculated by referring the current ATO personal income tax thresholds. As an example say you took an annual wage of $40,000 paid to you throughout the year (say weekly). The net amount would be paid to you each week. Then, each quarter in the ATO activity Statement, the gross wage and associated tax would be declared- with the tax for the quarter being paid to the ATO.
At the end of the financial year, the company prepares a group certificate (exactly the same as one you would get issued as an employee). One copy is given to you for your personal return. The other is submitted by your company to the ATO (we can help with all of this).
By law, if you receive a wage from you company, you must also organise for 9.5% super on the GROSS wage to be paid into your nominated superfund each quarter.
Both the gross wage and the superannuation expense are deductible expenses within your company tax return.
2) Pay yourself as a “contractor” to the company.
Technically, this means that the company pays you an income which is declared as income in your personal tax return within a “sole trader business schedule.”
In order for this to occur, you must have a personal ABN. This method is quick and easy and avoids the company having to register for PAYG Withholding (wages). The downside to this method is that there are limitations to the deductions that you can claim in your personal return against this income. (*for more information on this please request my Personal Services Income Leaflet). Having said this, we would expect the majority of tax deductions to be claimed within your company anyway, so this should not matter.
In addition, if you receive a contractor payment from your company, there is no requirement for your company to remit superannuation to your superfund on your behalf. Pending the cash flow within your company and your personal goals to be putting money aside into super, this may or may not be of benefit to you.
Payments to yourself as a contractor will be a tax deduction to your company and declarable as income in your personal tax return.
3) Pay yourself as a “dividend” from your company.
This involves paying yourself out of “after tax” company profits. Basically this means that a dividend is declared and paid by the company to you. The dividend will be listed within your personal tax return and you will receive a credit of any company tax paid by the company.
4) Company Drawings
If you have contributed a sum of money to your company in order to set it up (i.e. you have paid for expenses on behalf of your company personally); then you are entitled to pull this money back out of the company to take for yourself tax-free at any time pending cash flow.
When you pull more money out of your company than what you have contributed to it – this needs to be treated as borrowing money from your company.
Borrowing Money from your company:
Drawings are a way for Shareholders to withdraw money from the business without paying PAYG withholding payments or the other costs as outlined above. Drawings are treated as a loan from the Company to the shareholder. Drawings require the formalisation of a loan agreement which will include interest payable by the Shareholder to the Company. The Shareholder will be required to pay interest back to the Company as well as tax on the cash received.
Where a loan agreement and interest charge are not put in place by year end, the drawings will be treated as unfranked dividends to the Shareholders, with tax payable at their marginal rates.
If you draw from your company, this is not a tax deduction to your company and will not be declarable in your personal tax return.