PTY LTD paying a wage to myself and my husband

[SwishFiona]

Hi All,

My husband and I have been in business about three years - and were looking to record a nice little profit up until the beginning of the year! We are in event management and have been hit pretty hard.
Anyway what I wanted to ask was that as we are a PTY LTD and not a partnership, I've had to put us on the 'payroll' so while we are techincally making money, as far as the books are concerned we are going backwards - the wage I have to draw just to survive on bare minimum as a family is still quite large. (110k or so per year).
Is there any way around having to draw a salary as employees of our company?? why can't I just do what I did when we were a partnership and pull money out as profit, and get taxed on it that way????

Thanks!

[Heidi Price]

Hey Fiona

From a family of 4 that knows how to live reasonably well on about 30k a year - Maybe you should have a chat with FS's very clever Budget Bitch. By the sound of what you have written, the business would benefit from it.

I accept that I do not know your circumstances, but sometimes we as business owners do have to make sacrifices in the short term to gain the benefits later on.


Heidi

[SwishFiona]

Hi Heidi,

Thanks for your reply - I'll look into the Budget Bitch - I need all the help I can get!
But you are right - you dont know my circumstances and I dont intend on explaining them all here - I only wish I could live on 30k a year. I dont drive a flash car or live in a big house, I dont go out much on weekends and we put everything we have into our business - I'm not a SAHM so to suggest I dont sacrifice enough is a little offensive to me.

[Stephen Kyriakou]

Originally Posted by SwishFiona

Hi All,

Is there any way around having to draw a salary as employees of our company?? why can't I just do what I did when we were a partnership and pull money out as profit, and get taxed on it that way????

Thanks!

When you draw out money you don't have to categorise it as salary. You can debit the shareholder's loan account. You should speak to your accountant (assuming you have one) first though as there could be some Division 7A (tax law) issues.

You should consider having the company act as trustee of a family trust. Most of our small business clients use this structure. Your accountant should be able to advise you on the benefits using a family trust. If not then you should get a better accountant.

[Heidi Price]

Hey Fiona

No offense intended - just a general observation. Every one of us is different. I merely offered up an opinion that if your business is going backwards financially, that contacting budget Bitch may be of help.

Maybe I should have chosen different words, as the circumstances I was referring to were business related.

I only mentioned our situation to highlight my understanding of, and empathy for, any frustrations the situation may be causing you.


Heidi

[Classicb]

Hi Fiona

Alternatively, you can treat the money you take from business as director’s fee. In this way, you will be taxed at the end of year. However, you need to put away some of the saving to meet future tax liability.

Depending on the circumstances, there are a few other options...

[Dardee]

Whether you pay yourself a wage or take it out as profits as you would if you were a partnership it doesn't matter. You still have to pay tax on it. If $110k is the magic number you need then profits or wages is irrelevant. You don't have to take the same amount each week either. You can take out whatever you need as long as you calculate the correct amount of tax on it and remit that on your BAS.

Alternatively if the company has made profits in the past and hence paid tax you might be able to get some income out by paying yourselves some franked dividends. When you do it will already effectively have tax taken out of it (I'm very much simplifying this).

Speak to your accountant is the easiest answer. He will know your circumstances best and is therefore the best person to advise you on what is right for you.

[beanydc]

Originally Posted by SwishFiona

Hi All,

why can't I just do what I did when we were a partnership and pull money out as profit, and get taxed on it that way????

Thanks!

You can. It's called drawings. But some accountants don't like you doing this in a company because of the risk of taking too much money out of the company.
Given that I'm working with Kiwi tax, I won't go into specifics, but a company is a separate "person". At the end of the year, your current account is "credited" with the company profit, which should be enough to offset the amount you've taken out. (Funds introduced, less drawings and other personal payments, plus salary, = balance in current account). Your current account needs to be "in funds" at the end of the year, otherwise you have borrowed from the company. In NZ, you need to pay interest on this borrowing from the company (because otherwise you'd have to have borrowed it from somewhere else).
My preference is always to take drawings, and to have savings set aside for tax, for three reasons
1. If you don't make as much profit, then taking salary forces the company into a loss, and you've paid too much tax
2. If you make too much profit you need to square up your end of year profit in April on the final month of PAYE/G payments (maybe kiwi specific)
3. If your profit is less than xx (in NZ$70k), there is no extra tax to pay as an individual.
The only time I am more happy on PAYE is when the individual is simply unable to save for tax.

I'd suggest you talk to your accountant, or maybe another accountant (there are a few CA/CPA's on FS) - you need to be comfortable in your head about how the profit is taxed. And it might be that you need to revert a partnership - sometimes this is a perfectly valid option.
It seems to me that you are dealing not just with the tax question, but also with a business that isn't making what you need, and again, I'd start with your accountant. One thing you can specifically ask for is a benchmarking comparison against your peer group, and this will show you compare with others in your industry

All the best

[McAdam Siemon]

Hi Fiona,

As many of the replies have mentioned you really need to go and seek professional advice on this from you accountant. They will be able to advise on the best way for you to draw money out of the company without breaching any company/tax laws and creating unnecessary tax bills.

There are two ways to draw money out of the company in the long run, 1. Salary and wage which is what you are doing currently I understand and may be paying too much tax upfront which could be better used in the cashflow of the business and 2. Dividends, if the business has previously made a profit and paid tax you can distribute this tax/income back to the shareholders via a franked dividend. This dividend can come to you with as much as 30% tax already paid.

The problem with directors/shareholders loans as a few people have mentioned is that if you take money out of the company as a loan you have to put it back into the company before the end of the following financial year. If you do not it will be deemed a dividend and the full amount will be taxable in your individual name (not a nice result in many cases). So I would try and stay away from director/shareholder loans as a means of payment for services as realistically any payments you take out of the company you do not really want to put back in (in most cases).

There may be chance in this case of using a combination of Wages and dividends to get you the overall amount you are looking for in the most tax effective way.

Speak to your accountant.

Thanks Fiona, happy to help further if I can.

[whateverbusinesssolution]

Hi,
I would have to say that the previous response providing the option of either dividends or as wage deductions is as I see the position, in the absence of existing shareholder loan accounts which provide that the company currently owes you money.

The other perspective here is whether business operations can be improved to generate a sufficient return, otherwise your company will inevitably slide towards failure.

This is an area that we have significant experience with and I would be pleased to explain what would be involved with the review of your operations. Get in touch with us if you think we may be of assistance.