Administer Ajankohtaista Artikkeli Wages vs. Dividends – What Makes the Decision?

Wages vs. Dividends – What Makes the Decision?

Wages vs. Dividends – What Makes the Decision?

Every entrepreneur must make decisions about managing their personal and business finances, and taxation plays a significant role in these decisions. It’s important to carefully consider how to distribute funds from an unlisted company – as a salary, dividends, or both – and how much to take.

The decision of whether to take a salary or dividends depends on several factors, such as the company’s profit, ownership share, current tax legislation, and personal financial needs. The company’s strategy, profitability, net assets, and cash flow also influence the decision. Entrepreneurs need to consider whether they intend to withdraw funds from the company quickly with minimal tax consequences or focus on growing the business with retained earnings.

Sound Financial Management is Key

Sound financial management is crucial for ensuring that accounting and financial statements are prepared correctly, and the company’s financial health is secure. It’s essential to know what expenses are tax-deductible for the company, such as travel expenses and per diems. Separating personal and company finances is also vital. Once these aspects are in order, you can plan how much salary or dividends can be taken.

One significant question is whether the company’s cash flow allows for dividend payments. Dividends can only be distributed if there is enough distributable capital. If the company’s taxable income is zero, and previous financial years have negative retained earnings, it may not be possible to pay dividends.

Salary payments are deductible expenses for the company, while dividends reduce the company’s equity. Tax planning must take into account all taxes affecting both the company and the entrepreneur. Other personal income can also impact the decision.

The Role of Accounting Services

Accounting services can provide substantial assistance in this process. Accounting professionals can offer detailed information about the company’s cash flow, net assets, and their impact on potential dividend payments. Tax optimization requires careful planning and decision-making, and accounting services can help entrepreneurs make informed choices.

When considering whether to take a salary and/or dividends, the following factors should be considered:

  1. Consider how much money you want to allocate for personal use.
  2. Salary payments come with employer contributions such as pension and unemployment insurance, which the company must pay. Salaries are subject to progressive taxation, meaning higher wages are taxed at a higher rate.
  3. Dividends are often subject to more favorable tax treatment than salaries. A portion of dividends is tax-exempt (75% for 8% of net assets), and the remaining portion is considered capital income.

The decision of whether to take a salary or dividends is significant and complex, requiring careful consideration and professional advice.

Ready to make informed financial decisions for your business? Contact us today for expert guidance and personalized solutions.

Ville Halonen

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