MMM: Why self-employed people “pay less tax” (explained)

If you’re self-employed and have no idea why your accountant tells you to pay yourself a certain way…

Or you’ve heard that business owners “pay less tax” but don’t really understand how…

Let’s break it down with real numbers.

A Real Scenario

I recently worked through this with a client while filing their return.

Their corporation earned about $50,000 in net income in its first year.

They needed the cash, so leaving it in the corporation wasn’t an option.

So the question became:

How should you pay yourself?

Your Two Main Options

As a business owner, you typically have two ways to pay yourself:

• Salary

• Dividend

Same $50K.

Very different tax outcomes.

Option 1: Salary ($50K)

Here’s how it works:

• The corporation pays you a $50,000 salary

• Corporate income is reduced to $0 → no corporate tax

• You pay personal tax + CPP (both employer and employee portions)

End Result:

Approximately $15,000 in total tax and CPP

Option 2: Dividend

This option involves a few more steps:

Step 1: Corporate Tax

• $50,000 × 12.2% = ~$6,100

• Remaining: $43,900

Step 2: Pay Dividend

• You receive $43,900

• Grossed up to about $50,500 taxable income

Step 3: Personal Tax

• Federal tax: ~$6,800

• Federal tax credit: -$4,300 → $2,500 net

• Ontario tax: ~$2,200

• Ontario tax credit: -$1,800 → $400 net

End Result:

$6,100 (corporate tax) + $2,900 (personal tax) = ~$9,000 total tax

The Trade-Off Most People Miss

At first glance, dividends look like the obvious winner.

You save about $4,000 in taxes

But here’s what often gets overlooked:

• No CPP contributions

• No RRSP contribution room

Many business owners don’t even realize they’re making this trade-off — it often gets defaulted during tax filing.

Why This Changes Over Time

The math isn’t static.

At different income levels, the strategy shifts.

Example at $100K income:

• Dividends → ~$22,000 tax

• Salary → ~$28,000 tax + CPP

You still save with dividends — but the gap narrows.

And at higher income levels, things like RRSP room and long-term planning become more important.

My Take

The goal isn’t just to pay less tax…

It’s to make better financial decisions over time.

How you pay yourself is one of the most important financial levers you have as a business owner.

Final Thoughts

There’s no one-size-fits-all answer.

The right strategy depends on:

• Your income level

• Your need for cash

• Your long-term financial goals

If you’re self-employed and unsure what makes sense for your situation, it’s worth taking the time to get this right.

Because small decisions today can have a big impact over time.