One of the big questions you might have when running your own business is, “How do I pay myself?” It’s a key part of managing your finances and ensuring everything’s above board with taxes. Let’s break it down into three main options: Salary, Drawings and Shareholder Dividends.  The best option for you depends on your business’s situation – if you are a company, sole trader or partnership, your tax obligations and your personal goals. If in doubt you can talk to SBA about the right way to pay yourself from the start.

1. Pay Yourself a Salary

Paying yourself a salary is really common if your business is set up as a company. You get a regular paycheck and it keeps things nice and predictable.  This option isn’t available if you’re a sole trader as you can’t be an employee of yourself, you will pay yourself drawings instead.

Why It’s Great:

• Salaries are a business expense, so they reduce the company’s taxable profit.
  PAYE (Pay as You Earn) tax gets taken out automatically, so less hassle for you at tax time.
• If you are on KiwiSaver, you will contribute out of your wages, but your company will also contribute to your fund (currently 3%) and this is claimable as a business expense in the company’s books.
• Wages make it easier to get support from ACC if an accident occurs or when looking to secure lending as they show a record of regular earnings.

Things to Think About:

• Make sure your business has steady cash flow to cover your salary.
• As an employee of your company, you’ll need to follow employment laws.
• If you travel due to the work you do, there can be better allowable tax deductions to employees of a company, than just a shareholder employee or sole trader, depending on the employment contract you draw up.

Example: Let’s say you pay yourself a salary of $80,000. The company deducts PAYE and KiwiSaver and what’s left is your take-home pay. The salary reduces the company’s taxable profit, which could lower the company’s tax bill. However, you’ll still pay personal income tax on your salary at your marginal tax rate.

2. Taking Drawings

For many small business owners, sole traders or partnerships, drawings are the most common way to pay themselves. Simply put, drawings are personal withdrawals from the business, paid in advance. At the end of the financial year, your SBA accountant will calculate your shareholder salary, which is a bit different from a regular wage or salary and you will need to pay tax on it.

One of the perks of taking drawings is the flexibility it offers. It allows you to plan for potential tax savings for both you and your business, especially if your profits are low. However, managing drawings can get a bit tricky compared to a straightforward salary, so it’s always a good idea to chat with SBA for guidance.

Why It’s Great:

It’s straightforward and flexible—no need for payroll systems.
There’s no separate tax on drawings; you’ll just pay tax on your business’s total profits at the end of the financial year.

Things to Think About:

• It’s a good idea to pay yourself a regular weekly or monthly wage to help with cash flow, then increase as cash reserves build up.
• Drawings aren’t a tax-deductible expense. You’ll need to set aside some of that money for your income tax. For example, if you take $800 per week in drawings, you should be saving at least $200 of that for tax.
• A common pitfall is living as if your gross income (before tax) is all yours, which can lead to trouble when tax time rolls around.
• Also, if you’re contributing to KiwiSaver, those payments will only come out of your own pocket since your company won’t make contributions to your fund.
• You’ll still pay income tax on all business profits, even if you don’t withdraw it all.
• Keep an eye on your business’s cash flow so it has enough to cover expenses.

Example: As a sole trader, your business earns $90,000 in profit. You take $50,000 as drawings. While it’s tempting to think only the $50,000 is taxable, you’ll pay income tax on the full $90,000. Make sure to set aside enough for your tax bill.

3. Taking Shareholder Dividends

Dividends are another way to pay yourself if you’re a shareholder. They’re paid from the company’s profits, so this option works best when your business is doing well.

Why It’s Great:

• Dividends come from after-tax profits and don’t affect the company’s taxable income.
• You use imputation credits* to offset tax you owe on dividends, which is a nice bonus.

Imputation Credits:

An imputation credit is a credit for tax already paid by the company – it’s passed onto the shareholders and ‘attached’ to the dividend generally at 28%. Shareholder Dividends must be taxed at 33% withholding tax (DWT) before paying out to shareholders. If there are enough imputation credits, the company can attach up to 28% imputation credits and deduct just 5% DWT to take it up to the 33% total.

If the shareholder tax rate is 33% then they have no further tax to pay. If the shareholder tax rate is 39% (individuals over $180k income, trusts from 1 April 2024), the shareholder will pay an extra 6% income tax.

Things to Think About:

• Dividends aren’t subject to PAYE, so you’ll need to plan for income tax when filing your Individual Tax Return (IR3).
• Your business needs to be in good financial shape to declare dividends.
• How Gross Dividends and Imputation Credits Work in NZ.

Example: Your business makes a profit of $100,000 after expenses. It pays company tax of 28% ($28,000), leaving $72,000.  Later your business then declares a gross dividend of $40,000 which comes with imputation credits of $11,200. These credits represent the 28% tax your company has already paid on that income. Additionally, a 5% withholding tax (WHT) is deducted when the dividend is paid to you. When you file your personal IR3, the imputation credits plus the withholding tax postpones when you ultimately have to pay the full rate of taxes to the time you removed the funds from the company (assuming you are on a 33% tax rate).

Here’s what happens step by step:

1. Gross Dividend Breakdown:
   • Total profit $100,000 and company tax paid at 28% = $11,200
   • Declared Dividend: $40,000
   • Imputation Credits: $11,200 (tax already paid by the company)
   • Net Cash Dividend: $40,000- $11,200 = $28,800
2. Withholding Tax (WHT):
   • The company also withholds 5% of the gross dividend ($2,000) and pays it to Inland Revenue (IRD) on your behalf.
3. Personal Tax Return (IR3):
   • When you file your personal income tax return (IR3), the gross dividend ($40,000) is added to your taxable income.
   • You claim the imputation credits ($11,200) and WHT ($2,000) as tax already paid, reducing what you owe.
4. Balancing Tax at 33%:
   • If your marginal tax rate is 33%, the total tax on the $40,000 dividend is $13,200 (33% of $40,000).
   • After applying the imputation credits ($11,200) and WHT ($2,000), your tax liability is fully covered, or you may have a small balance to pay.

How Does a Shareholder Current Account Fit In?

For company owners, a shareholder current account is an important tool for tracking money movements between you and your business. It keeps a record of:

• Funds you put into the company (like loans or extra capital).
• Funds you withdraw (such as dividends or drawings).

If you take money from the business that isn’t declared as salary or dividends, it’s recorded as a withdrawal in your shareholder current account. This is fine if the account has a positive balance, but if it goes into debit (meaning you owe the company money), there can be tax implications. For example:

• Overdrawn Account: Inland Revenue might treat it as a loan, which could attract fringe benefit tax (FBT) if no interest is charged.
• Dividends: Declared dividends can be credited to the shareholder current account instead of being immediately paid out, allowing flexibility in how you access funds.
• Shareholder Salary: A way to allocate the balance of business profits to a shareholder for the work they’ve done, regardless of how much they’ve taken out as drawings and can be used in combination with a PAYE Salary structure.

Keeping your shareholder current account in check ensures you’re staying on top of both cash flow and tax obligations.  You can talk to your SBA accountant at the end of your financial year to see what shape your SCA is in and they will work with you to ensure it is in the best shape possible.

What’s the Best Option?

It depends on your situation.  Sole traders and partnerships usually stick to drawings, while company owners can choose between salary, dividends or a mix of both. Think about your cash flow, tax situation and long-term goals to find what works for you.

A Bit of Both: Mixing Salary and Dividends

Sometimes, a combination is the way to go. For instance, you could take a modest salary to cover your regular expenses and use dividends for those “bonus” moments when the business does well. It’s all about balance.

Need a Hand?

We know taxes and payments can get a bit overwhelming. We’re here to help small business owners like you navigate the ins and outs of paying yourself. Get in touch with your local SBA today for the right advice about how to pay yourself.

Please note the information in this article is for general information only and is not intended as personalised business or financial advice. We’ve done our best to make sure everything is accurate, but it’s always a good idea to check in with your local SBA or other professional before you make any business or financial decisions. They can provide guidance that’s tailored just for you and your unique situation.