How do dividends and salary impact taxes?
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Thread: How do dividends and salary impact taxes?

  1. #1
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    How do dividends and salary impact taxes?

    For my small consultancy an accountant has advised me to take $15K for salary and leave the rest aside for dividends. According to him the $15K number is the threshold before I have to start paying taxes. In other words this way I would only need to pay taxes on the dividends.

    However, as I plugged some sample numbers into the SimpleTax calculator (sorry cannot post links yet!) I noticed I may have misunderstood him. For instance when I entered $50K into the dividends box I got $3252 in taxes, but entering $15K for employment income shot up the tax amount to $7142.

    I would appreciate it if someone clarified this for me.


  2. #2
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    Hi:

    You pay taxes on the totality of your income. You are on the right track. Plug in various scenarios into tax software and search for the situation that makes the most sense for you.

    Hboy54

  3. #3
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    Thanks Hboy54. My main confusion here is about how a measly employment income of $15K adds $4K to taxes.

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  5. #4
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    Quote Originally Posted by asadim View Post
    Thanks Hboy54. My main confusion here is about how a measly employment income of $15K adds $4K to taxes.
    because our tax system is based off of progressive rates.

    your total taxes payable is calculated off of your total taxable income which includes income from dividends, salary, etc. however, the way your accountant is structuring your remuneration is to minimize on tax through tax credits.

    It also sounds like your dividend income is pre-gross up. assuming 38% gross up of the dividend your dividend salary is actually 48300 + 15000 employment income to give you a total of 63 300. Which is what your taxes payable is calculated on (assuming no other sources of income)

  6. #5
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    Your accountant may be talking about your corporation's taxes, $15K in salary (added to other business expenses) might be the right amount to reduce your business taxes to zero.

  7. #6
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    Very interesting! Are you saying by expensing the salary the tax that it incurs can be neutralized? That way would it be possible to end up with lower taxes compared to a $0 salary (and all dividends)?

    Quote Originally Posted by redsgomarching View Post
    because our tax system is based off of progressive rates.

    It also sounds like your dividend income is pre-gross up. assuming 38% gross up of the dividend your dividend salary is actually 48300 + 15000 employment income to give you a total of 63 300. Which is what your taxes payable is calculated on (assuming no other sources of income)
    Appreciate the clarification, redsgomarching. Do I need to enter the post- or pre-gross up of the dividend into my tax software?


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