You know that one of the most important tax decisions you’ll make as a small business owner is how to pay yourself. But what about paying your spouse or common-law partner? Does it make sense to offer them a salary when they are already receiving benefits from being in shared ownership with you?
Why make your spouse an employee?
The obvious benefit is you can deduct their income as a business expense. Having an earned income will also provide room in their RRSP contributions, which means they could save even more tax now and and in the future.
But the federal tax rules around employment including payment and benefits can be complex. When you're self-employed, the last thing on your mind is keeping up with these rapidly changing rules. It pays off to rely on a professional to cut down on time wasted digging for the information you need when making the decision to pay your spouse a salary.
Keep records of payment
The best way to show you’re employing your spouse is by paying them. Keep records of payment, such as cheque stubs or receipts, for CRA purposes — this will help prove the hours spent on employment-related activities like commuting between home and workplace! You can also keep a log of specific dates and times the work was performed, if relevant, as well as a signed contract from the spouse.
Pay a reasonable wage
If you hire your spouse as an employee to help run your small business, you must pay them a salary at a fair market value rate you would pay a third-party employee. Look at other companies in similar industries or fields where the person may perform similar duties, so you can get an idea about average salary ranges. You don’t want to make a salary decision for your spouse that appears too high.
Create a contract
Designating your spouse as an employee, not a contractor can help with taxes. It doesn’t hurt to have things in writing, especially if the CRA starts asking those pesky questions about salary or wages. Create an employee contract with the job description and salary.
Put your spouse on payroll
As an employer, you need to register for a payroll program account through the Canada Revenue Agency and make sure your spouse is being taxed correctly — and don’t forget about filling out the T4 slip for your spouse at the end of the year. This will avoid tax implications for your business and keep your spouse from questions if they are employed by another party.
What about income splitting?
The income splitting rules are a bit complex, but the basic idea is you can choose to split your dividends between spouses, rather than paying your spouse a wage. This can be a good idea if one spouse makes significantly more than the other and you want to reduce your overall tax bill.
There are some rules that you need to be aware of before you decide to split your income. For example, you can only do this if both spouses are Canadian residents and they are not filing separately. You also need to make sure that your spouse qualifies for the dividend tax credit. Our team of trusted advisors is here to help answer your questions and ensure you’re making the right decision for your business, and your family.
Let us run the numbers
We know the laws change often and they can have a big impact on your business, so we work with you every step of your entrepreneurial journey. Our CPAs can talk you through the pros and cons of salary or wages vs. dividends, and calculate your after-tax income under various scenarios to help you determine what’s best for your specific situation.
We’re here to provide bookkeeping and tax services to small business owners in Alberta, including everything from deductions, write-offs, expenses, tax returns, GST filing and more. Book an appointment with us.
How should you pay yourself as a small business owner? Learn more in our blog, Should you pay yourself dividends or salary?
Read more about Starting a Business topics that may be helpful to you and your small business.