What is Better – Drawings or Wages?

 

Clients often ask which is the best way to pay themselves from their company – wages or drawings? Here is an explanation of the differences.

Wages

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.

Drawings

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


About Kiwitax – Award winning business improvement, tax and accounting service

Here’s the thing. As a businessrental property owner or start-up, you get a kick out of having your own gig. But chances are dealing with your tax and accounting leaves you cold. Good news! We love it, so hand it over to Kiwitax and we’ll look after it all for you.

Whether you deal with us online, by phone or drop into our Napier office, you’ll find a friendly, professional hardworking team ready to work with you, however you keep track of your financial information and from wherever you do business. And all for a fixed price, it takes just two minutes to get a quote right here.

Plus if you’re at a loss to know how to improve aspects of your business – from growth planning to cashflow management, even tax debt and so much more – we’re all over that too. Our Business Improvement advisors can help you make a plan and put it into action.

If you liked this article and want to make improvements in your business, with quarterly coaching sessions specifically tailored to support you to identify and achieve your business goals, lets chat!

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