Accruals and tax

sackgesicht

Wondering if the following is normal and legal or ... "naughty".

Along with a couple of others, I'm a director of a small startup - we've been going a couple of years now. We all agreed a basic salary, not huge, that we would pay ourselves. But money's pretty tight and we've been paying ourselves less. We've kepy track of the difference, and recorded this in the books as accruals, i.e. money the company owes us. At the end of the year, if there is a little bit of money left in the kitty, the accruals mean that we're recording a loss and so we've not paid any corporation tax. The intent is that, if and when there's any money there, we'll pay out the accruals, subject of course to PAYE.

This all sounds natural and common sensical to me, but was talking to a friend and she said that sounded wrong. We should pay out the salary (even if we don't have it!), subject to PAYE, and loan it back. But surely then we'd be paying income tax on money we don't really have, and no guarantee of ever getting it!?

Anyway, I'd much appreciate any tips or advice on how to handle accruals, and whether what we've been doing is right or wrong. We're all keen to "play it by the book".

Ta

Bren1609

The way you're doing it is fine. You can't take money out of the company if it doesnt have any cash. Maybe you should pay yourself less this year and increase it next year, save a few bob on Prsi this year.

kluivert

I agreed this is correct treatment.

The difference between what is paid and what should be paid to the directors will end up in the Directors Current Accounts as money owned to them.

Newaglish

Isn't the PAYE due in the period the income is earned and not the period in which it is paid?

In which case, accruing for wages due would still incure a PAYE liability.

Er, i'm not a tax professional so that may be wrong. I could be thinking of it from an income tax point of view.

Having said that, what your friend suggests doesn't seem to make a whole lot of sense at all. There's nothing wrong with having a wage accrual in the accounts that would be mitigated by her plan.

sackgesicht

Thanks.

Nice tip about the PRSI

"Directors Current Account" - is that a formal concept? Sounds like exactly what we're looking for.

JoeTurner

Newaglish wrote:

Isn't the PAYE due in the period the income is earned and not the period in which it is paid?

That's what I was thinking....

Joe

eggie

If you are supposed to get paid x amount per month and accept only x-500 you will still be liable to income tax on the x amount. the 500 is basically a personal loan back to the company.

You would be best to lower your wages on the books and then pay yourselfs a performance related bonus (which will be still taxed) if you get that extra you need. This way you will not incur income tax liabilities on monies not yet received.

MartMax

at this minute i can't recall it with absolute but here is what I think. if you are declaring (or accruing) wages or salaries to any employees (including directors) and to get deduction for tax purposes, the company must pay relevant PAYE and PRSI within 9 months after the year end date. the net pay should not be an issue as that can always be left in directors account until the company can repay the directors. if the company foresees that it can't afford to oblige to pay the PAYE and PRSI as said above, the accruals should be an addback to corporation tax. of course, once paid the wages can be claimed as deduction in corporation tax as normal pays.

marty