Clients often ask which is the best way to pay themselves from their company – wages or drawings? Here is an explanation of the differences.
If you decide to set yourself up as an employee of your company you will pay yourself a wage, deduct PAYE tax (like a normal job) pay yourself the net pay and pass on the PAYE tax to Inland Revenue each month. Wages are a tax deductible cost and reduce the profit of your business because tax is being paid on it as you go.
Also if you are in 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.
Taking drawings from your business is not a tax deductible cost – you should be aware that you will need to put aside a bit of money for income tax as well. For example say you take $800 per week drawings you want to be saving at least an additional $200 per week for tax – some people fall into the trap of living on a gross income rather than a net (after tax) income. It’s easy to do when taxes are only worked out annually.
If you are in KiwiSaver you will have to pay this out of your own money and there are no contributions from your company into your fund.
Overall the amount of tax that you pay will be the same in either scenario – but most businesses prefer to go down the wages path once their business is established and they have regular cashflow. When you are just starting out drawings are usually used because you don’t quite have that steady income yet to pay yourself a wage.
If you would like advice which is best for your situation please get in touch
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