How Do I Pay Myself as a Business Owner?

One of the biggest questions business owners in New Zealand ask is, "How do I pay myself?" The way you take income from your business depends on your business structure. Whether you're a sole trader, company owner, or in a partnership, it's important to do it correctly to stay compliant with IRD while maximising tax efficiency.

Let’s break it down in simple, practical terms so you can confidently pay yourself the right way.

Sole Trader: Paying Yourself Through Drawings

If you're a sole trader, your business income and personal income are essentially the same. You don't receive a formal "salary"; instead, you take money out as personal drawings.

How It Works:

• You withdraw money from the business bank account as needed.
• These drawings are not tax-deductible expenses for the business.
• You pay income tax on your net profit, not the amount you withdraw.

Tax Considerations:

• At the end of the tax year, your total business profit is taxed based on personal income tax rates.
• You may need to pay provisional tax if your tax bill exceeds $5,000.

Best Practices for Sole Traders:

• Keep personal and business finances separate with a dedicated business account.
• Put aside a percentage of earnings for tax obligations (GST, income tax).
• Consider registering for GST if turnover exceeds $60,000 per year.

Company: Salary vs. Dividends

If you run a company (Limited Liability Company in NZ), you’re technically an employee of your own business. That means you have two main options for paying yourself:

1. Paying Yourself a Salary (PAYE Employee)

• The company hires you as an employee and pays you a salary.
• Your salary is subject to PAYE tax (Pay As You Earn) just like any other employee.
• The company withholds income tax and KiwiSaver contributions (if applicable).
• This salary is a tax-deductible business expense, reducing the company’s taxable profit.

2. Paying Yourself Dividends

• A dividend is a share of company profits paid to shareholders (including yourself).
• The company must pay tax on profits first, then distribute dividends.
• Dividends come with imputation credits, reducing your personal tax bill.
• This option is more tax-efficient if the company is making strong profits.

Salary vs. Dividends – Which is Better?

• Salary: Provides steady income, is tax-deductible, and simplifies personal budgeting.
• Dividends: Can be more tax-efficient, but you need to ensure company tax obligations are met first.
• Many business owners use a combination of both to balance tax and income stability.

Partnership: Splitting Profits

If you're in a business partnership, things work a little differently.

How It Works:

• The partnership earns business income, but the business itself doesn’t pay tax.
• Instead, each partner reports their share of the profit in their individual tax return.
• Payments to partners are not considered a salary but rather a distribution of profits.

Tax Considerations:

• Each partner pays tax on their share of profits based on personal tax rates.
• GST registration is required if turnover exceeds $60,000 per year.
• If partners take money out of the business, these are treated as drawings (not tax-deductible expenses).

Best Practices for Partnerships:

• Have a clear partnership agreement on profit distribution.
• Set aside enough for tax payments.
• Maintain accurate financial records to track each partner’s share.

Which Payment Method is Best for You?

There’s no one-size-fits-all approach to paying yourself. It depends on:

• Business structure – Sole traders take drawings, companies pay salaries/dividends, and partnerships split profits.
• Tax efficiency – Salaries are tax-deductible, while dividends can be more tax-friendly for profitable companies.
• Cash flow needs – Salaries provide a steady income, while drawings/dividends offer flexibility.

For expert advice tailored to your business, talk to us at TaxFix – we’ll help you structure payments in the most tax-efficient way while keeping IRD happy!