Now that we’re in the middle of tax season, I’m getting emails on how I structured the blog for income tax purposes. In my last post about blogging and income tax, I stated that if you make money online, you must pay taxes on it. While legal deductions can help lower the tax you pay, structuring your blog properly can have an even bigger impact on the tax bill.
How I Do It
*Disclaimer – This is how I do it. It does not mean this is how you should do it. Your situation will be completely different and you should seek professional advice to find the best method for you.
I run this blog as a corporation instead of a proprietorship. The number one reason for doing it this way is income tax. The corporate tax rate for a CCPC (Canadian Control Private Corporation) is 17% (15.5% for 2008) on the net income up to $400,000. While paying $68,000 in tax may seem like a big dollar amount, it’s far better than paying $160,509 if that $400,000 was earned as a proprietorship.
Every year, I file two tax returns – one for the myself and one for the corporation (I actually file more than two because I own more than one corp). In the eyes of the tax man, the blog and John Chow are two separate, legal entities. One is taxed at the corporate rate and the other is taxed at the personal rate. For most people, the personal tax rate is always higher than the corporate tax rate.
One for You, Two for Me
In addition to tax savings, running the blog as a corp offers some very creative income splitting. If your corp nets $450,000 a year, the first $400,000 is taxed at 17%. However, the amount above $400,000 is a taxed at a much higher rate (34.12%). This is where the ability to split income comes in handy. By paying yourself and your wife $25,000 each, you’ll reduced the corporate profit to $400,000 and keep it in the lower tax bracket. The $25,000 each that you and your wife took out will be taxed at the personal rate. At $25,000, the average tax rate is the same as the corporate rate. Yes, it’s true. In Canada, a person pays the same rate on $25,000 as a CCPC pays on $400,000.
In my situation, my salary from the corp is zero. I get paid by dividends. Dividends are paid from corporate retained earnings (after tax money) and if your sole source of personal income is dividends, you’re allowed to receive $33,000 of it each year totally tax free. The company has already paid tax on the dividend so it can pass to me tax free as long as I stay under the limit. If I receive more than $33,000, I will owe additional tax.
The advantage of this setup is dividend is not considered earned income and therefore neither myself or the company have to pay CPP (Canada Pension Plan) on that money. The other advantage is one doesn’t need to work for the company to receive a dividend. They just need to be shareholders. If the company is own by four people and everyone was paid by dividend, it’s a neat way to transfer $132,000 out of the company and into the owners’ hands without the owners paying tax.
The one disadvantage (and it’s really not a disadvantage) of paying by dividend is it doesn’t qualify for RRSP (Registered Retirement Saving Plan) contributions. You need earned income for that.
How Do You Live On That?
If very important to remember that the corp and you are completely separate in the eyes of the law and the tax man. You can’t go withdrawing corporate funds to buy personal toys. If you do, the money used will be considered income to you and taxed at your personal rate (which will be higher than the corp rate). This is why I don’t drive a Ferrari. I only make $33,000 a year!
How do I live on only $33,000 a year? In my next post, I’ll show you how to take large sums of money out of a corporation without incurring a tax liability. 😈