Payroll question

[DaveC49]

Rich, 
How you handle paying yourself may be dependant upon the business struture
you employ for your business which will depend on the business and taxation
legislation and regulations where you are located. The example in the guide
is generic but does not cover deductions from wages or taxation aspects. It
will depend very much on how separate a legal entity your business is from
yourself, i.e. whether the business pays tax on its income as distinct from
tax on your personal income.

As an example in Australia, a person trading under their own name (referred
to as a sole trader) or partners in a partnership are personally responsible
for the debts of the business, i.e. the business has no status as a separate
legal entity from its owners. In this case the owner(s) pay the tax on their
share of the business income in their own name. In this case drawings by the
owner from the business are usually recorded as a debit in an equity account
labelled as Owners Drawings (the names used may be different but the
intention will be similar) with a corresponding credit to the
Asset:Bank:Checking account. The owners drawings are then part of your
personal income and are taxed as such.

If the business is structured as a company (private and or public), it is a
separate legal entity from its owners and it is taxed in its own right. The
shareholders can then receive tax credits on their dividends for the tax
paid by the company. The recording in this case is more complex and will
depend very much on the mechanism of your tax system and the way tax is
paid. As tax is normally paid on profit one possible procedure is to close
the income and expense accounts to an equity account and use equity accounts
to record the tax and its payment.  

Alternatively, the tax liability could be accrued in a liability account
with a contra account recording payments of the tax against that liability.
You would credit the tax liability account and debit a tax expense account
(which would not normally be deductible from your income ti determine the
profit on which the tax is based ) to record the accrual of the tax. The
payment of tax would be reorded as a debit to the tax laibility contra
account and a credit to your bank account. The disadvantage here is you have
an expense account which is not deductible in determining your profit.

While the position in other jurisdictions is unlikely to be exactly the same
there are going to be similar business structures and some similar
provisions to avoid double taxation.

In either case using A/P is possibly not the best way of recording payments
to yourself (although it will work but your accountant will have to do more
work and will likely charge accordingly) as A/P is intended to record credit
extended to your business by other businesses.

As this area is fairly complex and very dependent upon tax/business
legislation details seeking professional advice is highly advisable unless
you are very familiar with your local legislation and regulations and local
accounting practice.

Hope this helps in giving you some conceptual ideas about how to handle 
your situation. That always helps when talking to your accountant.

David Cousens



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