Top 3 differences between Drawings & Wages

The two main methods to ‘pay’ yourself in your company are wages and drawings. We’ve broken down what we believe to be the top three differences between these two methods to help you decide what’s best for you and your business.

ONE... Tax

With wages, tax is paid to IRD as you go meaning no big surprises when it comes to your tax bill at the end of the year. But you can run the risk of making your wages too high and putting your business in a loss position, this could mean paying extra tax unnecessarily.

With drawings, you don’t pay any tax as you go. At the end of the financial year your accountant will allocate you a portion of the business profits, this is called a ‘Shareholder Salary’ and it should be in line with the drawings you have taken throughout the year. You will pay tax on whatever the shareholder salary is.

TWO... ACC

With wages, ACC is paid in your wages and as you go. With drawings your ACC is based again on the shareholder salary you are allocated at financial year end. A few months after your tax return is filed you will get a pesky bill for the full year! Any ACC entitlement will be based on your 'filed' income (not your drawings). So have a chat to your Accountant to discuss if this will be sufficient in the event of an accident.

THREE... Kiwisaver

With wages Kiwisaver is covered and is deductible as a business expense. If you go down the drawings route you can still voluntarily contribute to your Kiwisaver but it isn’t a tax deductible business expense, it’s just a further drawing. You should also make sure you contribute enough to receive the government contribution.  

I think we are starting to see a theme here! In all three areas wages gives the ability to pay as you go and not have any surprise expenses, but there is also a fine balance to get your wages level right and not pay too much tax! New businesses starting out may take a while to find a base level of wages to pay. So, some may choose to go down the drawings/shareholder salary route and take the bills as they come.