Drawing VS Salary

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SME owners require transfer money from their company to themselves. It is also common to confuse withdrawals with payroll.

In this article we will make a specific distinction between withdrawals and salary and give you a brief analysis of when it is appropriate to make withdrawals and when it is appropriate to do payroll salary.

Salary

If company funds are transferred from the company to the shareholder via payroll, this transaction is treated as an expense of the company. The shareholder is then paid the amount minus the PAYE (Pay As You Earn) amount, which means that the tax component is paid each time when the salary is paid, rather than being paid in a lump sum at the end of the year.

Benefits.

  • ACC Levies are paid at the time of payroll, which better protects your income in the event of an accident.
  • Payroll cash flow is a simple and direct source of income for the bank when taking out a loan (not excluding the fact that the bank will also review the company’s business situation)
  • KiwiSaver will also be withheld from your salary at the same time.

Drawbacks.

  • Additional Payroll operations are required and there are additional office costs if the company has no regular employees other than shareholders.
  • There is a potential risk of overpayment of tax if the company is in a loss position at the end of the year after the payroll has been paid.

Drawings

To overcome the last point we made above about the disadvantages of payroll, withdrawals are a good solution to this problem. Withdrawals by shareholders are recorded in the balance sheet as shareholder current account and are reflected in this account, not in the profit and loss account, so they do not affect the company’s profit.

In most cases for small company owners, our accountants’ advice is to do withdrawals in the normal course of business and then do a shareholder salary at the end of the year, depending on the actual circumstances. Our accountants will communicate with our clients to do tax planning at each financial year. It should be noted that in some cases the general anti-avoidance provisions may be involved, please contact us for specific cases.

Disadvantages.

  • Requires good planning of cash flow and setting aside the provisional tax portion in advance.
  • KiwiSaver requires the individual to contact the KiwiSaver provider directly for payment.

From the above analysis, we can see that drawings can be a very effective way for small business owner, but at the same time comparing it with salary will require a better tax planning with an accountant.