Tax brackets are one of the simplest things to understand when figuring out your tax bill. Very simply, tax is accessed based on your income, and the highest your salary, the more tax you pay.
So let’s say that a husband and wife are making $200,000 per year, collectively. If one person is making $150,000 and the other $50,000, the first person’s tax bill will be remarkably higher than the second. Why doesn’t the person making more money transfer some of that income to the second, thereby reducing their tax bill and saving money?
Unfortunately, they can’t.
They can’t for a very simple reason. What would stop someone from paying all members of their family crazy salaries to save on their tax bills? For example, one parent makes over $250,000 per year, so to save on their taxes, they pay each child $50,000 per year to do their chores. That’s not acceptable and they’re not allowed to do it.
Here’s how it works – instead of accepting a salary, you incorporate yourself as a company. Your employer doesn’t hire a person, but pays a company to do the work. You don’t receive a salary from the employer but from your company. Now, the company gets paid $250,000 per year, pays you $100,000 salary, and then pays a dividend of the remaining after-tax money to your partner.
This is one of those reasons why seeing a chartered professional accountant for personal tax planning or small business accounting is such a good idea. This is an example of one simple tax loophole that not everyone knew about but a good accountant can prepare you for. Naicker & Associates, serving Burnaby, Port Moody, and the Lower Mainland, are accountants who can help your small business.