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By Luigi Galante, Founder of Elite Office SA and the “Elite Fondations” occupational benefit institutions
As a business owner working in my own company, how should I set my salary? Between earnings that are too low and penalised by social security, and a salary that is excessive and condemned by the tax office, calculating the ideal remuneration requires a holistic approach. While there is no one-size-fits-all answer, specific criteria can help you define the ideal salary in each situation before considering dividend payment options.
These are the right questions to consider, in order, and in six steps:
If, as a business owner, you wish to grant yourself a salary that only just covers your private standard of living, you should first prepare a detailed budget of your expenditures. A frequent mistake in this calculation is to omit the income deriving from private assets. It is essential to assess all your income comprehensively. Also, it is not generally acceptable for you to work without pay, so only paying yourself dividends must be avoided.
Underpaying yourself to avoid income taxes and social security (AVS/AHV) contributions is very poor policy in the short and in the long term. The reasons are explained below. Moreover, if a dividend is paid, the AVS/AHV authorities will notice the anomaly, especially if your salary does not at least correspond to the accepted salary for the same activity in a comparable position, and if the dividend paid is more than 10% of the company’s tax value (practitioner’s rule-of-thumb).
Once the minimum salary is calculated in accordance with the above two criteria, you will have to ensure that it is high enough to protect you and your family against death and disability risks. When you increase your salary, you increase your social security and personal insurance costs; at the same time, however, this is how to achieve the ideal benefits coverage. You can thus avoid “underinsurance” or “overinsurance”, as they are commonly known, with substantial savings for yourself and your company.
If your salary was set after careful consideration taking into account the three above-mentioned criteria, then it might be worthwhile increasing it. Why, you might ask, if only to pay more taxes and higher personal social security contributions? A higher salary will strongly improve your occupational benefits coverage and, therefore, your potential for tax optimisation. Reminder: a CHF 100,000 buy-in contribution to your pension fund enables you to save approximately CHF 40,000 in taxes on a taxable income of over CHF 120,000. Your pension plan and pension plan costs are decisive in setting your ideal salary. As for the additional salary and social security contributions, they will be partly offset by the lower taxes on your company’s profits. Furthermore, if Switzerland is to maintain its social security system and fund the 13th month’s pension approved by referendum on 3 March 2024, it will need the social security contributions levied on high-earners, as well as an increase in the VAT on luxury goods. I also believe that those among us who are better off should simply waive their AVS/AHV pensions. By combining all these solutions, it should be possible to alleviate the burden on the lowest income brackets.
Be careful not to get carried away with salary increases once you acquire a taste for tax optimisation. An extremely attentive “watchdog” is lurking in the wings: the tax authorities. Relying on a judgment of the Valais Cantonal Court, upheld by the Federal Supreme Court, the tax authorities impose a ceiling on the salary of shareholder-employees. This approach, known as the “méthode valaisanne”, defines what the tax authorities consider an excessive salary. In a nutshell, the purpose is to prevent such remuneration from worsening a company’s profits. Canton Geneva is the strictest in applying this method. Nevertheless, it is possible to anticipate the problem and avoid costly and tedious tax reassessments.
The decision whether surplus income should be paid as a salary or a dividend can and should only be considered after the circumstances have been assessed following the above five steps. The cost and gains of each option in terms of company and personal taxes must be evaluated. In certain cantons, notably Geneva, Vaud and the Valais, activating the tax shield will tip the balance strongly in favour of a dividend payment. Indeed, the cumulation of income and wealth taxes can create a tax burden exceeding the business owner’s income. The tax shield is designed to prevent prohibitory taxation. In some cases, substantial dividends can be distributed without increasing income tax.
In conclusion, setting a business owner’s remuneration means striking the right balance between salary and dividends. Coupled with the purchase of contribution years in an occupational benefits scheme and a detailed assessment of the tax shield, these measures can achieve tax savings of up to 71.5% of the marginal tax rate. In other words, a CHF 100,000 deduction could generate tax savings of CHF 71,500.