Many entrepreneurs in Ghana, particularly owners of small and medium-sized enterprises, often choose not to place themselves on payroll. The most common justification is straightforward: “the business does not generate enough cash flow.” While this concern is valid from a cash management standpoint, it raises important tax and compliance issues under the Income Tax Act, 2015 (Act 896).

Let’s unpack this dilemma from a tax consultant’s perspective.

1. The Business vs. The Individual: The Entity Concept

Under Ghana’s tax regime, a company is treated as a separate legal entity distinct from its owners. This principle is embedded in the application of corporate taxation under Act 896.

• Section 1 and 2 of Act 896 establish that income tax is charged on the income of both individuals and entities separately.
• This means the company’s income is not the same as the entrepreneur’s personal income.

Implication:
If you are actively working in your own company, the tax law expects that you are compensated in a manner consistent with an employee-employer relationship.

2. The Arm’s Length Principle

A key issue arises under Section 31 of Act 896, which deals with the arm’s length principle.

This provision requires that transactions between related parties (e.g., you and your company) must be conducted as if they were between independent persons. In simple terms, your compensation should reflect what the company would pay someone else performing the same role.

Tax Risk:
If an entrepreneur performs executive functions but takes no salary, it may be argued that the company’s profit is overstated (since no salary expense is recorded), or the owner is indirectly extracting value in a non-transparent way.

3. Payroll Taxes and Withholding Obligations

When an entrepreneur is on payroll:

• The company must apply Pay-As-You-Earn (PAYE) under Section 114 of Act 896.
• The company becomes a withholding agent, responsible for deducting and remitting taxes on employment income.

Common Concern:
Entrepreneurs avoid payroll to escape PAYE obligations due to tight cash flow. However, failure to account for PAYE, will trigger tax risk in terms of interest and penalties.

4. Cash Flow vs. Compliance: A Practical Tension

Entrepreneurs are not wrong—cash flow is a real constraint. However:

• Not paying yourself may distort financial statements
• It may also affect:
  • Business valuation
  • Loan applications
  • Investor confidence

From a tax perspective, the issue is not just whether you pay yourself, but whether the structure reflects economic reality.

5. What Should Entrepreneurs Do?

A balanced and compliant approach is advisable:

a. Pay a Reasonable Salary

• Even if modest, it should reflect your role.
• Align with Section 31 (arm’s length principle).

b. Supplement with Dividends

• After tax profits can be distributed efficiently.

c. Maintain Proper Documentation

• Employment contracts
• Board resolutions for remuneration
• Payroll records

d. Plan for Tax Efficiency

• Engage a tax advisor to structure remuneration optimally within the law.

6. Final Thoughts

The decision not to put yourself on payroll may seem like a short-term survival strategy, but it carries long-term tax and compliance risks.

The Income Tax Act, 2015 (Act 896) clearly enforces:

• Separation of entity and owner
• Arm’s length dealings
• Proper taxation of employment income

Entrepreneurs must strike a balance between cash flow realities and statutory compliance.