How to Pay Yourself as a Small Business Owner in Singapore

If you’re running a small business in Singapore, it can be hard to know where to draw the line between paying yourself a salary and reinvesting in the business. Even once you’ve decided what to pay yourself, how do you actually do it?

Unfortunately, it’s not as simple as transferring the money. It can be a pretty complex process, made all the more complex depending on your business structure. Sole proprietorships, partnerships, and private limited companies all have different procedures.

Whatever type of business you run, you’ve got to get it right. If you don’t, you could end up with tax and compliance complications. 

This guide will help you not only keep cash flow smooth but also protect you from tax or legal issues later down the line.

Understanding your business structure

Knowing how to pay yourself as a business owner in Singapore will vary based on your business structure. Each structure comes with its own legal and tax implications:

• Sole proprietorship: As a sole proprietor, your business and personal finances are legally the same. You don’t really receive a salary in the traditional sense, instead, you withdraw what you need from the business account. However, this is still legally considered personal income, so it’s taxable, not a business expense.
• Partnership: Before entering into a partnership, you’ll agree to a profit share ratio. From there, it’s similar to a sole proprietorship salary, only you split it. It’s not a traditional salary (unless otherwise provided for). Just like with a sole proprietorship, it is still taxable.
• Private limited company (Pte Ltd): Here, your business is a separate legal entity. As the director, you have three options to choose from,you can take a salary, director’s fees, or dividends. Of course, a salary is subject to CPF contributions and income tax, however, dividends aren’t. 

Compensation methods for sole proprietors

If you are a sole proprietor in Singapore you won’t pay yourself a salary in the conventional sense.

Instead, you’ll compensate yourself in a different way. As you and your business are legally one entity, you can withdraw money directly from your business profits for personal use. This is called an owner’s draw.

However, just because you can draw money as and when you like, doesn’t mean there aren’t any rules to follow. This method is simple and flexible, but it’s important to maintain accurate records of these transactions for accounting and tax purposes.

The profits of a sole proprietorship are not taxed at the business level. However, your net trade income is added to your personal income and taxed according to individual income tax rates.

If your net trade income is over S$6,000 a year, you’ll also have to make MediSave contributions. This is part of Singapore’s Central Provident Fund (CPF) scheme, and helps cover future medical expenses.

You should also note that sole proprietors don’t receive employer CPF contributions or benefits, so you are responsible for planning for taxes and retirement. It’s a good idea to set aside a percentage of your earnings for tax and MediSave.

So, getting paid is relatively straightforward, however, there’s a lot more personal responsibility, as you’re directly responsible for tax and MediSave.

Compensation methods for company directors

If you’re a director of a private limited company, you have three options for getting paid—salaries, director’s fees, and dividends. As you’d probably expect, each option has different tax treatments and CPF obligations.

Here are the differences:

• Salary: This is the most common form of compensation. Even though you direct the company, it’s a separate entity, so you are considered an employee. Of course, as a salaried employee, that means Central Provident Fund (CPF) contributions. At least, if you’re a Singapore Citizen or a permanent resident under 55. This salary is taxable under personal income tax, just like any other employee of the business.
• Director’s fees: If your role is more to provide strategic oversight than run day-to-day operations, you might be considered more like a consultant than an employee. You’re essentially charging for your services, however, any fees you charge would have to be approved at the company’s Annual General Meeting (AGM). Plus, they’re still taxable, however a major difference is that director’s fees are not subject to CPF contributions.
• Dividends: If you want a tax-efficient way to earn profits, dividends are a popular option, especially when the company is generating strong earnings. The great thing about this is that dividends aren’t subject to personal income tax, because they’re paid from after-tax profits. However, dividends can only be paid if the company has sufficient retained earnings and must be declared by the board of directors.

Don’t forget, you don’t have to land on just one option. What you’ll usually find is a combination of salary and dividends.

Owner’s draw vs salary: Key differences

So, if you’re a small business owner in Singapore, how do you choose between a salary and an owner’s draw? What are the main factors at play?

It largely depends on your business structure and administrative capacity. You want to make a choice that’s both good for you and your business, but also supports compliance.

Here’s a quick overview:

• Owner’s draw: More commonly used by sole proprietors and partners. In these setups, business income is already treated as personal income, so it’s relatively straightforward to withdraw what you need. This means:
• No formal payroll process
• No CPF contributions
• All profits are taxed as personal income
• Mandatory MediSave contributions if net trade income exceeds S$6,000
• Discipline to set aside the right amounts
• Salary: While sole proprietors cannot pay themselves a salary, if you’re running a company, you can. Here’s a quick overview:
• Processed through payroll
• CPF contributions (if you’re Singaporean or a PR)
• Subject to personal income tax

For many, an owner’s draw is a simple and flexible option. Plus, it allows you to adjust how much you take based on the business’ performance, which can be handy in underperforming months. 

That said, it requires discipline, since you're responsible for setting aside tax and managing other obligations yourself.

Some company owners prefer a salary. It requires more admin, but it’s also more structured and clearly separates personal and business funds.

Tax and compliance considerations

Tax and compliance obligations can be complex, especially since each compensation method may come with its own legal requirements.

For sole proprietors and partners, you’ll need to take care of your own taxes, meaning:

• Business profits are treated as personal income.
• You’ll need to file your Form B (for sole proprietors) or Form P (for partnerships) with IRAS during tax season.
• Your net trade income is taxed based on Singapore’s tax rates, which range from 0% to 22%.
• You’ll need to make MediSave contributions if your income exceeds S$6,000 (and you’re either a Singapore Citizen or a PR).

For private limited company directors:

• Both salaries and director’s fees are subject to personal income tax.
• Income must be reported in the company’s annual IR8A submission.
• Salaries require CPF contributions from both the employer and employee.
• Director’s fees don’t require CPF contributions but are still taxable.

Dividends work a little differently:

• Not taxed at the personal level under Singapore’s one-tier corporate tax system.
• The company pays corporate tax on profits (17%), so dividends distributed thereafter are tax-exempt.
• Dividends must be documented and declared.

Using QuickBooks to manage owner compensation

Knowing how to pay yourself as a business owner is one thing, knowing how to implement it is another. It’s not always easy to keep track of all the moving parts, especially if you have employees to pay, too. 

Luckily, you don’t have to do it alone. Today, thousands of small business owners in Singapore and beyond are using QuickBooks for easier, cleaner accounting. 

Here’s how QuickBooks can help you:

• Sole proprietors: Like the sound of being able to easily record owner’s draws as equity transactions? QuickBooks does just that. You can track how much you've withdrawn over time without it affecting your profit and loss statements. This helps you keep personal and business finances separate and ensures clean books for tax reporting.
• Directors of private limited companies: QuickBooks does payroll management like no other. Yes, that includes automated salary calculations, CPF contributions, and income tax deductions. All on one platform. It goes further, too: you can even set up recurring salary payments and generate monthly payroll salaries. 
• Cash flow management: Don’t just pay yourself. Make sure that every time you do, it’s measuring up against your business’s financial health. You can run real-time reports on retained earnings and expenses to make sure you’re on top of things, too.
• Compliance: When tax season comes around, there’s no need to find yourself scrabbling around for the right documents. QuickBooks automatically organises your financial data and integrates features like GST tracking for detailed IRAS-ready submissions.

Best practices for paying yourself

Whichever method you choose for paying yourself, it will require planning and discipline. Unfortunately, many small business owners in Singapore find themselves facing hurdles despite their best efforts.

Here are some top tips for paying yourself right and staying compliant from day one:

• Keep separate bank accounts: Always make sure your business and personal finances are separate and clearly defined. This will make your accounting and cash flow management much easier.
• Set a regular payment schedule: Even if you’re paying yourself with an owner’s draw, we still recommend sticking to a regular withdrawal schedule. This helps with budgeting and keeps everything clear, especially when forecasting business expenses.
• Understand your tax obligations: Keep yourself in the loop with tax updates. It’s a good idea to head to the IRAS and CPF Board guidelines every now and then to see what’s new.
• Plan for taxes and retirement: Be disciplined about setting aside a specific amount of income for tax payments and long-term savings, especially if CPF contributions aren’t required for your compensation type.
• Consult a financial advisor or accountant: If you’re ever unsure about any of your bookkeeping activities, or simply want to develop a more structured approach to salaries and expenses, engage a professional. They can provide insights tailored to your business structure and goals.

Conclusion

There’s no right way to pay yourself as a business owner in Singapore. That said, there is a right way for you, and finding it requires a little research.

In most cases, it comes down to your business type and your capacity. Sole proprietors often use owner’s draws, while company directors might prefer a salary combined with dividends. Each has its own tax and CPF obligations.

To make it easier, invest in comprehensive accounting software like QuickBooks, which helps with:

• Tracking
• Compliance
• Assessing your business’ financial health
• Planning taxes and savings
• Professional support

See what QuickBooks can do for your business and find the right salary option for yourself today.