Often, as business owners, we don’t want that huge tax bill at the end of the tax season. Some decide they want to just pay themselves a salary so they can pay taxes as a regular employee, receive CPP benefits when the time comes, and take advantage of Employment Insurance (EI) benefits. Whether or not you pay yourself a salary is a tax planning decision.
If you own a sole proprietorship, you cannot pay yourself a salary. However, you can pay others this way.
On the other hand, if your small business is incorporated, you can pay yourself a salary. If you decide to do this, you are required to deduct income tax and CPP premiums from your salary. But as the owner of the business, you aren’t eligible to be covered by EI. (source: Canada Revenue Agency)
How do you plan for that big tax bill at tax season? This is a tricky question. As long as your net income as a small business is under $500K, you are classified as a small business and pay tax rates on this amount. You can find current tax rates online (e.g. https://www.taxtips.ca/smallbusiness/corporatetax/corporate-tax-rates-2021.htm) If your net income (revenue less expenses) is $10,000, you will pay $1,400 in taxes (in NS 2021). Basing the amount on the previous year’s taxes will give you an idea of how much to save.
Your personal tax rates are the same as everyone else. Ask your accountant for advice about how much to set aside for this or base it on previous years’ tax bills.