A lot of my clients asked me to pay them directors fee rather than wages by saying that this was what their previous accountant told them. So let us compare what really the difference between directors fee and salaries and wages is.
Salary and wage is normally fixed and regular payment while directors fee is more like irregular payment subject to resolution of the company.
The table below compares the difference between directors fee and salary and wage in the calculation of super, payroll tax, PAYG-W and workers compensation
From the table above, we can see that there is no difference between director fee and salary and wage if the payment is made to a working director. However accountant still favor directors fee. Why? Say in a mum and dad company, we cannot really pay mum a salary and wage as she is normally a non-working director of the company. However we can pay her a $5000 directors fee at the end of year, no superannuation guarantee, no payroll tax (as the company payroll is not big enough), no PAYG-W and no workers comp. En, nice and easy. It is even better that $5000 is tax free provided mum is not working anywhere else. In addition she still gets most of family tax benefit. How good is that? For a working director, directors fee is a planning tool. We carefully watch the payment of salary and wage to working director before year end. That is because we want to make sure the company satisfies its super, PAGY-W obligations etc at the same time make sure the company sits in its best tax position. Let me explain this in a little bit detail. Say if we paid dad a $25,000 salary in June 2011, we would be better off paying him a director fee of $12,000 so that he is paying 15c in a dollar while company gets a deduction of 30c in a dollar. Be mindful the rule for superannuation guarantee payment though.
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