Spread the Love
We all know just how fun it is to receive a call from our accountant only to learn that you have to find $15,000 for terminal tax, so why not pay your slaves. Many of you are probably thinking since when does your accountant tell you to give your money away and who has slaves?
Often all we think about is our jobs and letting the accountant sort out how much tax we should pay at the end of the year. However, this is simply poor planning. If we stop for just 10 minutes and think about this, what are we really going to accomplish by doing this. Accountants are only players in the game and as the business owner you can change the game. Most business owners do all the work and collect all the money. That’s great if you’re single and have no children or a partner that help you in your business and you don't mind giving a large portion of your hard earned dollars to Inland Revenue.
However, most business owners have a partner that manages their books or helps with deliveries and never gets paid for this. So what this means is that your income is at the top marginal tax bracket and paying tax a third of your money to Inland Revenue. Meanwhile, your partner is at home with no income and working for you as a slave. If we think about this before the end of the tax year and discuss the options with an accountant many people would be surprised to learn that you could quite easily save over $5,200 just by paying your partner for the work they do (based on $80,000 taxable income), Now if you have children that work for you, you may want to consider paying them to spread your wealth further. No doubt you charge board and lodging to your kids, after all charity went out with slavery didn't it?
Unfortunately, sole-traders cannot pay themselves a wage. This means you might be left paying provisional Tax. WHAT another tax you say, well yes and no. Anyone who has had to pay provisional tax before would remember that they had less tax to pay at the end of the year as provisional tax is just income tax paid in advance. This tax is normally paid by Trusts and Companies and any individual that has not had their income taxed throughout the year. Provisional tax is based on last year’s taxable income if you are an individual. However, if you have a business entity, such as a company, then you are expected to know what your profit position is during the current year that why it’s important to keep accurate accounting records during the year. If you don’t you are likely to be charged Use of Money Interest (UOMI). After all Inland Revenue see the provisional tax that should have been paid as being their money so if it’s not paid they see you as using them as a bank and charge interest.
So how much should I pay myself you ask? In a perfect world this is just the difference between your sales and expenses for GST purposes. However, this is not a perfect world and a number of factors need to be taken into consideration including home office expenses, depreciation and interest just to name a few. So why not give your accountant a call and find out more.
Posted on Fri, 1 July 2011
by Shawn O'Grady