As a business owner, what should my salary be?

Many business owners mistakenly believe that any income generated by their business automatically belongs to them and can be used or withdrawn at any time without tax consequences. However, it is important to understand that a company is a separate legal entity, distinct from its owners. Just as individuals have ID numbers, companies have registration numbers, and both are linked to their own unique Income Tax numbers issued by SARS. As a result, SARS requires an annual income tax return to be submitted for each entity.

The taxable profit of a company (in simple terms) is calculated by subtracting deductible business expenses, incurred in the process of generating income, from the total business income. This profit is then taxed at a flat corporate tax rate of 27%. If you draw a salary from the company, that salary is treated as a deductible business expense, reducing the company’s taxable profit. However, the salary you receive will then be taxed in your personal capacity according to the individual income tax brackets, as follows:

Once an individual’s annual taxable income reaches approximately R850,000, their effective personal income tax rate is roughly 27%, aligning with the company tax rate. Income below this level is taxed at a lower effective rate. Therefore, it’s important to compare the taxable profit of the business with your personal taxable income to determine how much salary can be drawn from the company before the personal tax rate effectively matches the company tax rate.

If you withdraw funds from your business that are not part of your taxed salary, these amounts are recorded as owner’s drawings against your loan account and reflected as an asset in the company’s books — meaning you owe that money back to the company. Conversely, when you contribute personal funds into the business, this is credited to your loan account, showing a credit balance which reflects that the company owes you that amount. Withdrawing from this credit balance has no tax consequence, as it simply repays money you previously lent to the company. However, if your loan account reflects a debit balance — meaning you owe the company — SARS requires that interest be charged on this outstanding amount at the SARS prescribed rate (currently 8.5% per annum), which is treated as additional taxable income for the company.

When you start your own business, it’s quite common for personal and business expenses to overlap. For example, your cellphone, motor vehicle, Wi-Fi, and computer may be used for both personal and business purposes. When clients ask me, “As a business owner, how much should I pay myself as a salary?” my advice is as follows:

1. Write down what your total monthly expenses are individually. This would typically consist of: Rent, water & electricity, cell phone contract, wi-fi contract, car premium, fuel, insurance, medical aid, school fees, groceries, entertainment, etc.

2. Identify which of these expenses may legitimately be paid by the business. Keep in mind that any expense must be directly connected to the income-generating activities of the business. For example, as an accountant, I cannot claim dog food as a business expense because it has no relation to the services I provide. However, for a pet kennel or dog breeding business, dog food would be a valid deductible expense as it directly relates to the income they earn.

3. The remaining expenses, which are purely personal and not related to generating business income, will form the minimum amount you need to earn as your net salary. I also recommend including certain fringe benefits in your salary structure, such as medical aid and retirement annuity contributions, as these can offer valuable tax advantages. (For more detail, refer to The Basics of Individual Income Tax in South Africa and Medical Tax Credits previously posted on our website.)

I know this is quite a lot to take in, but I’d be happy to discuss it further and answer any questions you may have. Starting a business is challenging enough — your accounting and tax matters shouldn’t add to that stress. My goal is to help simplify this part of your journey.

Best regards,

Simónne Roodt (SAIPA)

CEO and Director

OPTIMUM RATIO