Shareholder Salary: Should you receive one?

You have most likely seen ‘shareholder salary’ on your tax return before. If you’re new to business, then don’t worry, you will probably see it on your next tax return 😊

A shareholder salary is what the company has elected to pay you for your work as a shareholder-employee of the company.

For most small businesses in New Zealand, there is one shareholder and one director.

The shareholder is usually the same person as the director and works in the business.

They will often have control over the company bank accounts and have sole charge of the business and its affairs.

If that’s the case for you, then you are probably used to taking drawings throughout the year.

I explain what drawings are in my article here.

Anyway, the shareholder salary is how the company remunerates you for your work through the year, as a shareholder-employee.

Your accountant will normally process the shareholder salary at the end of the year when they prepare your company’s financial statements and tax return.

This is an accounting entry, there’s very little for you to do or worry about.

The salary is usually for the amount of the profit the company made out, and normally correlates closely to the amount of drawings you took during the year.

As ultimately, you can only draw out the profits the business has made. That’s normally what’s been left over in the company bank account, and what you transfer to yourself as your reward for working!

Because drawings are technically tax free, the shareholder salary offsets this and is what you pay your tax on.

Is a shareholder salary right for you?

Maybe not.

Drawings isn’t the only option out there to pay yourself.

When you take drawings and get awarded a shareholder salary at the end of the year, you will have to pay provisional and end of year (terminal) tax.

That’s not for everyone, as your tax payments are not as certain as they would be if you were on a PAYE salary.

You need to set aside a portion of your drawings so that you can pay your tax bills when they fall due.

If you’re on a PAYE salary, this is easier as your payroll software will tell you how much to set aside each month and how much to pay IRD.

There’s a higher frequency to your tax payments, so a smaller chance of something going wrong.

If your business profits are changing significantly from year to year, then a PAYE salary may be a better option for you.

Your provisional tax payments will often then be out of whack with reality, as they are based on the previous tax year rather than the current tax year or current profitability levels.

If you are on PAYE, you can adjust the amount the company pays you as often as you pay yourself. Making it highly adjustable to current conditions.

So yes, the combination of drawings and shareholder salary are usually what business owners use to remunerate themselves, but it’s not the only way.

If you want to know how to pay yourself a PAYE salary, I wrote an article explaining how to do it (it’s pretty easy).