[Question] Determining owners salary

[league_of_ordinary_men]

Hi everyone,okay can someone please explain to me how this works.Okay if you have a privet company and your the director of the business,how do you show of the monthly pay slip or pay roll system how much you as the director/owner earn a month? By that I mean do you have to show an hourly rate or can you just show the total earnings which you determined after deducting all the necessary deductions? And should you as the owner also receive dividends apart from your salary as the director or is it the same thing?

[Dave A]

You would draw up the payslip just the same as any other employee, except the gross pay line is directors emoluments rather than salary.

If the remuneration is "part time', things can get interesting on the PAYE calculation front though.

Dividends are dealt with totally separately and are not included in remuneration.

[Justloadit]

I suggest you have a fixed salary on a monthly basis, which creates a payslip, PAYE and UIF, which is useful do get accounts, credit cards, loans, and other services which request a pay slip.
Then every 6 months or yearly, or when ever you choose, you make the dividends transfer to your personal account, ensuring you have a record of the values. Choosing 6 months maybe better, as this can coincide with your provisional tax payment.

[league_of_ordinary_men]

I suggest you have a fixed salary on a monthly basis, which creates a payslip, PAYE and UIF, which is useful do get accounts, credit cards, loans, and other services which request a pay slip.
Then every 6 months or yearly, or when ever you choose, you make the dividends transfer to your personal account, ensuring you have a record of the values. Choosing 6 months maybe better, as this can coincide with your provisional tax payment.

Great advise both of you thank you.

@Justloadit,can I transfer the dividends ever month?And why is it better to coincide with my provisional tax payment?

[Justloadit]

You can transfer dividends when ever you like, as long as it does not compromise the operations of the company, or company capital for it's daily operations.
What a payslip creates, is a regular monthly figure both for earnings and PAYE payments.

The coincidence with the provisional payment, is simply easier at that time to insert the amounts transferred as dividends to your provisional tax form, calculate the amount of PAYE paid, and calculate the extra tax required, and create the payment from the dividends received for the income tax. If you already have it in your account then payment would be forthwith.

[league_of_ordinary_men]

You can transfer dividends when ever you like, as long as it does not compromise the operations of the company, or company capital for it's daily operations.
What a payslip creates, is a regular monthly figure both for earnings and PAYE payments.

The coincidence with the provisional payment, is simply easier at that time to insert the amounts transferred as dividends to your provisional tax form, calculate the amount of PAYE paid, and calculate the extra tax required, and create the payment from the dividends received for the income tax. If you already have it in your account then payment would be forthwith.

Thank you this a a major help,what tax or other payments will be due on dividends? You now like on a salary you pay UIF,PAYE...etc.

And this is the kind of information we need to put in one post and make a sticky saying "A beginners guide to business".

[CLIVE-TRIANGLE]

The company is responsible for the withholding tax on dividends, and needs to pay it within 30 days of paying the net dividend to the shareholder. The dividend received will therefore not affect your taxable income and you should excluded it from Taxable Income on your provisional tax return.

[Justloadit]

You will need to look at the tax tables, as the amount of tax paid, is directly proportional to the total amount earned/received for the year.
Just remember that the dividends from a small company, may not follow the rules of corporates. eg. Corporates pay tax on the profits, and then disperse dividends to it's share holders, whilst a typical small company, the company makes a profit, but the owner takes the profit out of the company as an expense - wages/expenses, so effectively the small company never makes a profit, as the owner takes it all out, however the owner now pays tax on the money taken, deemed as remuneration, and not as a dividend.

[Miro Bagrov]

Salaries bear the PAYE tax.

Profits bear companies tax and VAT.

Buying capital equipment on the business name is a depreciateable expense. Business property expenses are deductible.


Ideally you would find a way of paying the least amount of tax in combination of these three. I can't say more without numbers or working closely but the idea is earn more, pay less tax..

[Dave A]

Just remember that the dividends from a small company, may not follow the rules of corporates. eg. Corporates pay tax on the profits, and then disperse dividends to it's share holders, whilst a typical small company, the company makes a profit, but the owner takes the profit out of the company as an expense - wages/expenses, so effectively the small company never makes a profit, as the owner takes it all out, however the owner now pays tax on the money taken, deemed as remuneration, and not as a dividend.

I've been trying to work out why this post troubles me so much. It's not that the points are wrong necessarily - I'd certainly agree that owners are paid out of profits and you can certainly draw money on as regular a basis as you wish and the company can afford.



Perhaps it's that it must be pretty rare that an owner can actually draw all the profits out of a private company as an expense. And of course, if it's a qualifying SBC, that may not even be advisable.

Or maybe I'm in the wrong business

[Miro Bagrov]

I've been trying to work out why this post troubles me so much. It's not that the points are wrong necessarily - I'd certainly agree that owners are paid out of profits and you can certainly draw money on as regular a basis as you wish and the company can afford.



Perhaps it's that it must be pretty rare that an owner can actually draw all the profits out of a private company as an expense. And of course, if it's a qualifying SBC, that may not even be advisable.

Or maybe I'm in the wrong business

Hi Dave.

It's not an expense.

The drawing of money out of the business goes straight to the Balance Sheet as an Asset (Meaning the owner took out a loan). So typically you find balance sheet item called, "Loan to Mr. K. Koo R100 000 Debit".

As far as SARS is concerned, you can not use drawings to reduce tax, because the owner loans don't reduce profits as they never make it to the income statement.

What you can do, is try use the "refund" route. How it works is, you buy stock for your company and you issue an invoice to the business to pay you back for your petrol, your stock, and other expenses. The invoice with all other supporting documents does reduce tax and constitutes an expense. Also keep all slips of restaurants and meals, you can write them off as expenses saying you were in a client meeting.

So I think there is definitely something wrong with the logic of drawing out profits in a registered company. You can play that game in partnerships and sole props.

[Dave A]

Gees Miro. I think we missed each other by a million miles there

When I refer to drawing money out of a private company as an expense, it would be as a directors emolument (vs a dividend). And I suspect that's what Justloadit was referring to as well.

Sole proprietorships and partnerships are, of course, a different beast completely because there the owners get taxed on the profits in their own hands, like it or not, and what you actually draw from the business has nothing to do with the tax calculation at all.

[league_of_ordinary_men]

Hi Dave.

It's not an expense.

The drawing of money out of the business goes straight to the Balance Sheet as an Asset (Meaning the owner took out a loan). So typically you find balance sheet item called, "Loan to Mr. K. Koo R100 000 Debit".

As far as SARS is concerned, you can not use drawings to reduce tax, because the owner loans don't reduce profits as they never make it to the income statement.

What you can do, is try use the "refund" route. How it works is, you buy stock for your company and you issue an invoice to the business to pay you back for your petrol, your stock, and other expenses. The invoice with all other supporting documents does reduce tax and constitutes an expense. Also keep all slips of restaurants and meals, you can write them off as expenses saying you were in a client meeting.

So I think there is definitely something wrong with the logic of drawing out profits in a registered company. You can play that game in partnerships and sole props.

Miro you mind if I ask you when I have a question you sound like you know what your doing.

[CLIVE-TRIANGLE]

There are a few problems in this thread.

1. First, assume the shareholder and the director are one and the same person, because shareholders receive dividends, not directors.

2. Assume there is no shareholder / director loan. The director’s remuneration is simply the total drawings less dividends. If not then the difference is a loan to the director. If this is the case then you must firstly ensure that the company meets the solvency provisions in the companies act and secondly, if you do not charge interest at 8.5% presently, then the interest not charged is deemed a dividend. Note: not the loan, the interest not charged.

3. Assume there IS a shareholder / director loan to the company. You can split the total drawings between repayment of the loan, salary and dividend. You select the amount of the three components that makes the most tax sense.

4. If it is important in your particular company, you might also need to consider the effect on your balance sheet.

An interesting related issue that concerns new companies, or companies that have adopted an MOI under the 2008 Act, is that dividends paid are subject only to the solvency tests, and not capital preservation provisions, which are that assets must exceed liabilities and any payments to shareholders / directors (inlcuding loans) must not render the company incapable of meeting it’s normal trade obligations. This means you can even pay dividends out of capital.

5. The challenge in (3) above is predicting the outcome so that during the year the correct PAYE can be paid on the director’s remuneration.

[Justloadit]

3. Assume there IS a shareholder / director loan to the company. You can split the total drawings between repayment of the loan, salary and dividend. You select the amount of the three components that makes the most tax sense.

5. The challenge in (3) above is predicting the outcome so that during the year the correct PAYE can be paid on the director’s remuneration.

This is the reason that I mentioned to have a fixed monthly salary, in which the PAYEE is predictable, and the provisional tax bi yearly payment is to correct the figure for the other drawings taken during the provisional tax periods. I am not sure on this one, as I have not been taking extra during the last few years due to financial pressures, but there used to be a third provisional corrective payment in the following year, usually August, in which you could adjust the tax payment if you short paid for the year in question, if there was a greater profit than the drawings you took, to adjust the tax and avoid a penalty for under declaring income.