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Posted by R. C. White on August 25, 2007, 10:37 am
Please log in for more thread options Hi, Andrew.
Looks like my 2x4 missed. :>( Or maybe my other post was so long that you
put off reading it for a while?
Anyhow...without trying to thread through all of your conversation with
Laura, I'll comment on just parts of it, with LOT of snipping...
>>> Huh? What is "Payroll Taxes Payable (payable)" supposed to mean?
>> Its a liablity account/category.
> Which is it? A liability account or a category?
The FIRST thing you have to decide is whether you are doing the bookkeeping
for "Andrew" or for "SCM, Inc.". As I said in my other post, the
corporation is not you, and you are not the corporation. You seem to think
that if you buy a horse, then you ARE a horse. But that's silly, isn't it?
By the same token, just because you OWN a corporation, that does not mean
that you ARE a corporation. If you buy a thousand - or a billion - shares
of Intuit, you do not become Intuit. You just own some or all of it.
If you, as President of your corporation, hired me to run it for you, I
would be your employee. When your corporation writes me a paycheck, I would
have to record than income in my Quicken file (RC.QDF). But then, as
manager of the corporation, I would also have to make an entry in the
corporation's books (SCM.QDF) recording the payment of Salary Expense.
In RC.QDF, I would need to debit Cash $900, credit Salary Income (category)
$1,000, and credit Social Security Tax Expense (category) $100.
In SCM.QDF, I would need to debit Salary Expense (category) $1,000, credit
Cash $900, and credit Payroll Taxes Withheld (Liability Account) $100.
OK so far? The two entries - on my books and on the company's books - are
almost mirror images of each other, but not quite. And trying to put BOTH
entries into ONE set of books would create a nightmare!
So far, I have $1,000 of salary income, but I can spend only $900 because
the company held out $100 - as required by law - and will send it to the
government to pay MY SHARE of my social security tax.
What many employees don't realize is that the BOSS - the employer - is
required by law to also pay social security tax on the employee's salary!
The rate is the same percentage paid by the employee. So, quarterly during
the year, the corporation will file a payroll tax report (Form 941) and send
taxes to the IRS. The amount paid will include both the social security tax
withheld (see above), plus the tax on the boss - an additional $100. So the
corporation manager must send the check and then record in SCM.QDF: debit
Payroll Tax Withheld (liability) $100, debit Payroll Tax Expense (expense
category) $100; credit Cash $200.
(In this oversimplified example, we've ignored the fact that the employer
must also withhold federal income tax from my paychecks and send that in
along with the social security taxes. The boss does not have to match this
tax, so it is simply a liability from the time it is withheld until it is
remitted to the IRS. Not just a liability, but a Trust Fund for the benefit
of the IRS, as I explained in my other post.)
At the end of the calendar year, your corporation must file the same kinds
of payroll tax reports as any other employer. Its Form 941 for the
October-December quarter will take care of the final social security taxes
and income tax withheld. It must also file Form 940 and pay the Federal
Unemployment Tax, which is levied on the boss, not the worker, for the whole
year. And, by the end of January, it must issue a Form W-2 to each employee
paid during the year. I'm sure you recall receiving such a form when you
were an employee; now you will see the work that the boss must do to prepare
that form. Even though you may be the President, Chairman, Janitor and
Bookkeeper - and the only employee - you still must see to it that the
corporation provides you with a W-2 - and send a copy to the IRS.
So, your question:
> Which is it? A liability account or a category?
Depends on whether we are working in RC.QDF or in SCM.QDF. In RC.QDF, there
is no payroll tax liability account because there is no liability; the tax
has already been paid to the employer, who will send it on the the IRS. In
RC.QDF, the social security tax is an expense, because it was payment of the
tax levied on the employee. In SCM.QDF, the amount withheld is a liability
until it is paid, when the payment reduces the liability to zero. The
boss's share of the tax is a corporate expense. (It is actually a liability
from payday until the end of the quarter, but we usually don't bother to
record it until we pay it, then charge it directly to the expense category,
bypassing the liability account.)
> I'm not at TT yet! I'm still in Quicken H&B remember? The word "payroll"
> does not appear in any tax item in Quicken.
Remember that you must now file TWO income tax returns each year, Andrew.
First, as manager of your corporation, you will file Form 1120-S, U.S.
Income Tax Return for an S Corporation. On this form, you will report SCM's
income and expenses. Among the corporation's expenses will be salary
expense and payroll tax expenses. The employee's share of payroll taxes
will be hidden in the salary expense amount and not separately stated. The
employer's share of the social security tax (and other payroll taxes, which
we haven't discussed) will be included in the company's payroll tax expense
category.
A part of this Form 1120-S is Schedule K-1, which allocates the
corporation's net income for the year among its stockholders. Since you are
the sole shareholder, all of the income will be allocated to you. (If there
were multiple shareholders, the company would issue a separate K-1 for each
of them.)
Second, after filing the Form 1120-S, you will prepare your Form 1040, U.S.
Individual Income Tax Return, just as you always have. On Line 7, you will
report your salary, as reported on that W-2 that you, as manager of your
corporation, just gave to your individual employee self.
And then you will turn to Form 1040 (Schedule E) Supplement Income and Loss.
On this form, you will find a place to enter your share of the S
Corporation's income, as reported on the Schedule K-1 that you, as manager
of the corporation, issued to your individual stockholder self.
Both your salary income and your shareholder income will find their way into
your total Adjusted Gross Income, and both will be subject to your
individual income tax. (Thank you, Andrew, American taxpayer!) You also
will have paid your share of the social security tax (as employee, via
withholding, and as employer, by corporate check to the IRS) and the federal
unemployment tax (as well as any state and local taxes, which we've omitted
here).
There are plenty more facets to all this, Andrew, but I'll bet your eyes are
glazed over already, so I'll quit here for now.
Whenever one of my clients decided to go into business for himself, I always
told him, "Congratulations! You have just volunteered to become a tax
collector for the government." And when he decided to incorporate his
business, he volunteered to create a new taxpayer and tax collector - and to
file all those new batches of forms.
RC
--
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(Currently running Vista Ultimate x64)
> Laura wrote:
>>> Laura wrote:
>>>> Here's how I would manually book it in QuickBooks. Hopefully you can
>>>> map the categories to your Quicken setup without too much difficulty:
>>>>
>>>> Your paycheck:
>>>> Payroll Gross (expense) $1000 (db)
>>>> Payroll Taxes Payable (payable) $100 (cr)
>>>> Cash $900 (cr)
>>> Huh? What is "Payroll Taxes Payable (payable)" supposed to mean? Is it a
>>> category? If so what is it's tax line item? That's the heart of my
>>> question to begin with. I assume the above would be a split transaction
>>> that I would enter into my personal checking account, right?
>> Its a liablity account/category.
> Which is it? A liability account or a category?
>> There is NO tax line item that I know of. The year end numbers will
>> show up on your W-2 form as SS/FICA/SDI/SUI/FUTA/etc withheld from
>> your paycheck.
>>
>>>> EmployER taxes:
>>>> Payroll Tax Expense (expense) $100 (db)
>>>> Payroll Taxes Payable (payable) $100 (cr)
>>> Ditto "Payroll Tax Expense (expense)". Also, where would this
>>> "transaction" happen? My business checking account?
>> Yes. In your business checking account. ALL of these transactins are
>> business related and should be recorded in that checking account. You
>> will need to record the NET cash deposited into your personal checking
>> account in a similar fashion if you feel the need to track the tax
>> withholdings on a personal level.
>>
>> The Payroll tax expense is an expense category. This is a true
>> business expense. Just like your gross wages are.
> So I enter a split transaction for $0 that contains a line categorized
> as "Payroll Tax Expense" for -$100 and another line categorized as a
> "Payroll Tax Payable" (an income?) for +$100? Or is it a transfer to a
> liability account for Payroll Tax Payable? Put this into Quicken terms
> (if possible). A real, full example would do wonders!
>>>> When you pay the taxes due each quarter:
>>>> Payroll Taxes Payable (payable) $200 (db)
>>>> cash $200 (cr)
>>
>>> Actually *I* don't pay my taxes and I don't pay each quarter anymore
>>> either. Or at least that's what I'm being told to do. You see I have
>>> Wells Fargo doing my payroll. Thus *they* pay my taxes on my
>>> corporation's behalf. I'm just trying to properly account for what they
>>> are doing with my money. And taxes aren't paid each quarter either (at
>>> least I don't think they are) rather they are being paid for each month
>>> when WF cuts me a paycheck.
>>
>> You still need to record the ER payroll expense as well as the
>> withdrawal from your business bank account each payday when WF takes
>> the money for the payroll taxes. The transactions are still the same
>> as I posted earlier. It MAY only be for $100 (employER side only). You
>> will need to look at the payroll reports as well as what $$ hit your
>> business account.
> BTW I'm also trying to set this up so that it works as automated as
> possible. As such transactions are gonna be downloaded into Quicken from
> my business accounts at Wells Fargo. I'd like it to match up so I just
> accept transactions not so that I have to totally reenter all the
> information, etc. I realize that I might have to do that to some extent
> as they will not know how to say enter splits, etc.
>
> So in my simplified set of numbers I get two transactions downloaded
> from WF: One for $900 and one for $200. The $900 represents a paycheck
> delivered to... me! As the employee I enter this paycheck in Quicken and
> use the Paycheck wizard, recording that I got paid $1000 gross and paid
> a $100 deductible for Social Security. The corporation however incurred
> an expense of $100 - $900 in salary to the employee, $100 EE SS expense
> and $100 ER SS expense. This $1100 is represented by the two downloaded
> transactions of $900 and $200.
>
> I record this in Quicken Home & Business in my business checking account
> as one transaction of $900 categorized as <what?>. Just a category such
> as "Payroll expense". Should it be associated with any tax line item or
> not?
>
> How do I record the other $200 transaction? Is it just a transfer to a
> liability account for Social Security taxes that are drawn from on the
> quarter to pay taxes?
>>>> I only have Q basic and I am not sure how to record step 2. Hopefully
>>>> H&B allows journal entry type of transactions to allow you to book
>>>> transactions that don't touch a bank account.
>>
>>> AFAICT it doesn't. You can enter split transactions that have such
>>> offsetting categories so that the amounts can be properly categorized.
>>
>> I realised that after I had enough coffee this morning. Steps 1 & 2
>> would be one transaction.
>>
>>> But that's not really my issue. My issue is how to categorize shared
>>> taxes (e.g. SS) so that everything flows properly at tax time. In a non
>>> corporate environment the employee just receives a check, enters a
>>> paycheck transaction - which is just the gross amount followed by a
>>> series of negative (i.e. deductions) amounts for the various taxes.
>>> These deductions must be properly categorized to categories that have
>>> associated with them a "tax line item". This tax line item (e.g. (W2,
>>> SS) tells Quicken what this is WRT a tax item thus making Quicken's Tax
>>> center know how much you got paid and how much taxes you have paid. I
>>> want that to continue to work correctly. The category/tax line item is
>>> also used when information is exported to other tax programs like
>>> TurboTax. I want that to work properly too. So I don't think I want both
>>> $100 categorized to the *same* category/tax line item because that would
>>> double the reported SS taxes paid and set everything off, no?
>>
>> You can use the same liability account for both EE and ER payables.
>> The tax lines that you need in TT are the payroll gross and payroll
>> tax expense.
> I'm not at TT yet! I'm still in Quicken H&B remember? The word "payroll"
> does not appear in any tax item in Quicken.
>> You don't report the liabilities on your business tax return so it
>> does not matter if they use the same category.
>>
>> I think you need to read RC's comments. Quickbooks would be much
>> better for your needs than Q.
> Again, I'm looking to avoid the added expense and, more importantly, the
> added learning curve and hassle of Quickbooks if I can. Shelling out
> several hundred dollars on software has never been something I easily
> do. I guess that's because I'm in the computer business.
>> I also suggest you find a tutorial on basic payroll.
> And where might they be?
>> Using a payroll service helps some but there are good ones and bad
>> ones out there. The company is still responsible for the taxes so
>> knowing what to expect is critical. Checking their calculations
>> against something like PaycheckCity is also a good idea to make sure
>> they are withholding the correct amounts from your personal checks.
>> You will need to know your companies SUI/SDI rate (if any) as this
>> maybe company specific. Read your state's Department of revenue page
>> to find out the correct rate. It is YOUR responsibility to notify the
>> payroll company of the correct rate to use.
> I would think that a large bank like WF would be relatively accurate
> otherwise they'd probably be flushed out long ago. And is being off
> slightly that much of a problem? I mean people are "off" with their
> taxes all the time and that's resolved when a tax return is filed right?
> --
> Andrew DeFaria <http://defaria.com>
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