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If you're in business, you will need to pay yourself to meet your personal living costs. How you do this depends on the business structure you are operating under.
If you're a sole trader
As a sole trader, your business doesn't exist as a separate legal entity. All your business income and expenses are included in your Individual income tax return (IR3) at the end of the tax year.
To pay yourself, you can take regular cash drawings from your business profits for your personal use, such as day-to-day living costs.
Key things to remember about drawings
- Drawings are still included in your overall profits, so you'll need to pay income tax on them at the end of the year. You don't include drawings as a deductible business expense.
- It's easier to reconcile your accounts if you take regular cash drawings weekly, fortnightly or monthly (just like a regular salary or wage).
- You'll need to carefully record your drawings in a cash book, or using accounting software. This allows you to easily see what was taken for personal use.
- You'll need to ensure there's enough money in the business to cover any bills owing after drawings have been taken.
If you're a partnership
To pay yourself out of a partnership, you can take regular drawings from the business profits just like a sole trader. However, these drawings can't be included as a deductible expense in the end-of-year partnership return. The split of profits to the partners at the end of the year doesn't take into account any drawings taken from the profits.
A partner who works for the partnership can be paid a salary or wage if there's a written contract of service. The salary or wage would have PAYE deducted like a regular employee. This salary or wage would then be claimed as a deductible expense in the partnership's end of year tax return.
If you're a company
A company is a business that is a legal entity in its own right, separate from its shareholders.
In a company structure shareholder-employees can:
- periodically draw money from the company during the year. The amounts taken out are recorded in the shareholder current account as a loan to them. At the end of the tax year the company credits the current account with a salary amount calculated from the company profits which the shareholder will have to pay income tax on. This salary is declared on the their Individual income tax return (IR3), and is a deductible expense for the company.
- be paid a regular salary (at least monthly) with PAYE deducted like a regular employee if an individual employment contract exists between the shareholder and the company. This salary or wage can be claimed as a deductible expense in the company's end of year return.
- receive dividends from the company profits, once the tax on those profits has been paid.
Directors and management fees are also paid from the company profits. These can generally be included as a deductible expense in the company's end-of-year tax return.