A Business Owner's Guide to Payment Options and Taxes
Updated: May 24
Many start businesses for various reasons, but whatever their goals are, all business owners have one common motivation — to get paid.
Depending on your lifestyle and living expenses, the amount of income you need will differ from others. However, as a business owner, there are different ways to pay yourself while running a business, and not knowing the best option for you can waste your money since you end up paying too much taxes.
For this reason, it's recommended for Australian business owners to hire small business accountants in the Gold Coast to ensure that their accounting and booking needs are in order. And of course, you've chosen the right payment option for yourself so you won't be surprised with all the fees and payments during tax season.
Learning the best income option for you and understanding the tax liabilities associated with it can help you maximise your and save more of your hard-earned money.
Income Options and the Taxes You Should Expect
Essentially, there are four payment options for company directors, and each has its own tax obligations. Let's take a closer look and find the best one for you:
One of the most popular director income options is drawings, but the tricky part is its taxes. When drawing your business, you need to either pay 30% income tax or repay your business's loan for seven to 25 years with a 5% interest rate per annum.
With this type of income option, you need to consider where you're putting your money into, which means you need to chip out a small part of your income and save it in a separate account. However, since you don't have to pay for taxes along the way, you'll usually get to increase your personal cash flow annually.
2. Director's Fees
You don't need to be an employee to pay for a director's fee. In fact, you, as a director, can also receive this fee. According to the Corporations Act, you are required to meet certain obligations when choosing this option and not following the requirements may lead to heavy consequences.
With this option, tax is an effective way to compensate directors by paying superannuation contributions. If you're still within your super contribution limits, the government will only receive a 15% tax rate.
Another option is by choosing to receive a salary. With a paycheck, your business will pay for your tax and superannuation payment. This option is incredibly convenient for business owners since you don't need to worry about calculating your personal tax liability.
This is why it's crucial to hire a small business accountant in the Gold Coast so you won't need to worry about the complications of paying taxes. You need to note, however, that salary payments do have a downside. Since you're paying your taxes monthly, personal cash flow may be much lower than drawings.
With the dividends, this payment option isn't subject to superannuation, payroll tax, or worker's compensation insurance. This is because your company has already paid for these taxes, and your payment terms will depend on whether the dividend was franked or unfranked and your personal tax bracket.
Choosing dividends can be a bit complicated since you need to understand the disadvantages of not having worker's compensation insurance. But when you focus on your income and how much tax you'll receive, you can increase your cash flow and spending power.
The Bottom Line: With A Variety Of Payment Options, Choosing The Best One That Fits Your Lifestyle Is Key
Now that you know the different payment options for business owners, all you need to do is choose one that best fits your lifestyle and would benefit you in the long run. Ideally, working with a small business accountant in the Gold Coast is key for smoother accounting, payroll, and tax management.
How Can New Wave Accounting Help You?
Income, accounting, bookkeeping, and taxes are tasks you want to stay away from since it often comes with a throbbing headache, especially when tax season is slowly approaching. Fortunately, New Wave Accounting has made money-handling much easier for you and your business.
We are small business accountants in the Gold Coast that provide end-to-end accounting and bookkeeping services to help scale and grow our client's businesses. Having worked with over 600 businesses, we understand how small businesses tick, giving you better money solutions that will help you flourish. Reach out to us today!