What are the advantages of wages/salaries payment vs withdrawing money from the owner drawing account?
You will notice that in both cases the owner got 120,000 (Gross). In the financial statement (profit and loss and balance sheet), you can see the differences in the table below.
In legal term, the owner and the company are two separate legal entities. They are both taxed independently. Depending of the owner and the company situations, it may be best for the owner to get his remuneration though owner drawing account or through wages (PAYE).
Owner Drawing
| Owner Drawing | Advantages | Disadvantages |
|---|---|---|
| Profit | Your company will look more profitable | |
| Tax | You don’t need to pay tax up your initial investment amount (in the example above, you will still need to pay tax on (120,000-50,000 = 70,000) | Owner drawing are non-deductible (up to your initial investment), it means that your business will pay more tax. |
| Flexibility | Flexible, you can withdraw and add money through tax years, having some high and low months depending of your need and your company needs. | |
| Administration | More complex to manage. Owner personal tax is paid quarterly via provisional tax and at year end. If you have not saved money for tax, owner may feel like they are paying more. |
Owner Wages/Salary
| Owner Salary | Advantages | Disadvantages |
|---|---|---|
| Profit | A more accurate picture of your company health, recognizing the time and work you put into it | |
| Tax | Deductible, your company will pay less tax. | |
| Flexibility | Less flexible, need stable cash flow | |
| Administration | Stable lump-sum to control your personal spending |
Misconception Owner drawing and taxes
There is general misconception that you will pay less tax with owner drawing. This is partly true, up to the value of your personal investment in the company, after that your account needs to either:
- Declare a shareholder salary
- Declare a dividend
- Or pay Fringe Benefit Tax with IRD prescribed rate (you will ultimately pay more tax)
- Also the money will be taxed in the hand of the owner, and it will feel like you pay more.
Which could lead to paying more or having more administration costs.
https://support.wiseadvice.co.nz/en/drawing-or-salary-for-the-shareholders