Tax Tip: Paying a Shareholder

As a business owner, one of the reasons you are in business is to ensure you get paid, but choosing the right method can present its own challenges.

You may already know that shareholders can be paid via a PAYE salary e.g., a shareholder-employee. It’s uncomplicated and ensures that your income tax is paid monthly. Plus, you can contribute towards KiwiSaver and monthly tax commitments such as student loans. However, suppose your PAYE earnings vary throughout the year. In that case, you may end up paying more tax for the year or even be required to pay terminal tax at the end of the year, bringing you into the realm of provisional tax considerations.

Another option is to pay yourself a shareholder salary at the end of the year, which is offset by the drawings made throughout the year. This could be a better option if you want to only record a salary in line with the company’s taxable profit. Watch out for traps around provisional tax and any overdrawn current accounts that could give rise to Fringe Benefit Tax if not managed accordingly. If you’re still unsure which method to choose, you could always go for a mixture of both!