Shareholding Founders will typically have two means to pay themselves, via Founder Drawings and paying a salary or wage via payroll.
It's a good idea for Founders to pay themselves:
- it shows a legitimate cost to the business
- founders need to survive on more than built up savings
- the company needs a system in place for when it grows to have employees
The benefits of taking Founder Drawings through the year and repaying this via a Shareholder Salary at the end of the financial year means that the Founder is responsible for payment of tax. In practice because Founders often spend all their drawings, this means the company is responsible for the tax at a later date through the Terminal and Provisional Tax regime.
In the first few years the impact of tax payments for Founders that have taken Drawings in the past can have a huge impact on cashflow as the company tries to grow.
On the other hand the company can register as an employer with the IRD and deduct PAYE, Kiwisaver and Student Loan amounts from the Founders salary, and pay this to the IRD each month.
This gives an additional reporting and payment responsibility to the company, even though there are good software tools to manage this.
The easiest way is to blend the two approaches and pay founder drawings and contributions to founder taxes as the year progresses. This means at the end of the year the company won't have a large burden to plan for, and the impact on cashflow is smoothed out.
In order to calculate the correct amount of salary to pay, the IRD have a useful Annual Income Tax calculator here
For example, if a Founder wants to be paid an annual salary of $60k, the tax on this amount equals $11,020. Depending on the frequency of payments to the Founder, they will receive:
- Monthly: $60,000 salary - $11,020 tax = $48,980 net salary / 12 months = $4,081.66 per month
- Fortnightly: $60,000 salary - $11,020 tax = $48,980 net salary / 26 fortnights = $1,883.84 per fortnight
The company would also setup automatic payments for Founders contribution to taxes which would be either $918.33 monthly or $423.85 fortnightly. (Making Electronic Payments to the IRD)
This will mean the company won't need to register as an employer with the IRD, and complete monthly returns.
Contributions to ACC, Kiwisaver and Student Loans are handled differently compared to under an employment scenario. Contact us to find out how these work in practice.
For any other queries, please don't hesitate to reach out
Disclaimer: Information provided to the best of the authors knowledge at time of publication. Laws are subject to change and independent advice should be sought. The above information is general in nature and should not be construed or relied on as a recommendation.