Perhaps the biggest tax planning opportunity for small business owners is owner’s compensation.
When your corporation earns income, it must choose to pay the owners dividends or wages. You should talk to your accountant about what the right decision is for you for the year ahead. Just remember that a corporation's cash does not belong to the owners. You cannot use the cash or assets of the corp for your personal use without paying tax. Your corporation can’t even lend you money without tax consequences. Here is a summary of the differences:
DIVIDENDS: You get paid as the owner (aka shareholder) of your business. Dividends are a distribution of the profits, which means the business has profit, so the corporation will pay some of the tax, and then you personally will pay some of the tax.
WAGES: You get paid as an employee of your own business. Your corporation pays taxes for you and your wages are a tax deduction for the business.
For a full explanation of wages and dividends, download our eBook, The Path To Starting Your Own Business,
We also talk about dividends and salary on our blog.