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about e-ccounting
e-ccounting is a monthly
newsletter focusing on accounting tips and solutions.
Our mission is to educate our clients, students and
readers by offering these resources in response to
your ongoing questions.
It is our objective to
gather information and provide easy access for your
current and future needs.
Back-issues are
available on the accountrain website.
These tips are not complete answers to complex
questions. We therefore recommend, when in doubt,
contact the professionals or government
agency.
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Sandy's Question Corner
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environment. The topics:
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2. Accounting 101 - for new and small business
3. Year-end Prep & New Year Planning
- It's never too late to get organized
- Understand what's different including:
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prepaids
- How to choose accounting help
- Preparing for an audit, and how about avoiding an
audit!
- Learn to streamline your bookkeeping methods to
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2008 date: Nov 25th
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Business Scenario
- Paying yourself (as a business owner) |
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I've just started my own business, do I put myself on
payroll or just pay myself when there's extra money?
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| Answer |
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Both are OK, but the latter is more the norm with a
new business re the uncertainty of it all.
The best way to deal with paying yourself is the
following:
If you lent money to the business this is due back
to you tax free, so draw from that amount first.
If that isn't the case, or you've maxed that out, cut
yourself a cheque as per needed, apply it to your draw
(shareholder) account. At the end of the year, you will
want to transfer this to salary expense and pay taxes
(and CPP) at that time. This is popular because often
with start-ups, you may pay yourself, and then later
have to loan the company money again, so it's difficult
to know what the net affect will be by the end of the
year.
If that's not the case and you are able to pay
yourself consistently, whether from the beginning or
whenever you can, then this is the time to set yourself
up as an
employee, the same as everyone else on staff. This
will include removing deductions per pay, but
please NOTE as the owner of a business,
you will not be eligible to collect EI (if the
business were to end), and therefore you can't
contribute into it.
Once you are established and have excess money in
the company, there are additional options in paying
yourself, including bonuses and dividends.
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| Accounting Tip |
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Once you are on a regular payment schedule, you may
find there is extra money available to remove from the
company. The timing of these extra payments are
crucial, therefore ensure you discuss and understand
all your options and their implications with a
professional.
An example of this: You declare a bonus (to be paid at
a later date) and therefore record it in your books as
payable. For
the business the expense is recorded for that
year.
However, it is set up as a payable and you have up to
six months to cut a cheque. Depending on the year-
end of your company, you may defer receiving this until
the next calendar year. (difficult to explain, see
example below):
Company year-end is Oct (2008), therefore the
business declares a bonus to the owner, for $20,000
and expenses it right away to reduce the net
income "bottom line", hence reducing the taxes due.
In the meantime, this can stay on the books as a
payable for six months. So, let's say the owner only
takes the bonus in Feb (2009). This is when the
income is (personally) recognized on the T4 (in the
following year).
Again, this is tricky, so ensure you understand the
implications and get advise from the professionals.
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| Did You Know ? |
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For source deductions (definition below), the
employer has to match the CPP dollar for dollar.
Therefore, if the CPP calculation (for a pay) is $20, the
employer's expense is also $20, meaning at payment
time, you will pay $40.
And the amount the employer is responsible for re EI
is 1.4 times. Therefore, if the EI calculation is $10, the
employees' expense is $14, meaning at payment
time, you will pay $24.
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For more Did You Knows? |
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| Definition |
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Source Deductions
These are the deductions taken off a pay cheque by
the employer which are due to the Federal
government. They include CPP (Canada Pension
Plan), EI (Employment Insurance) and Tax (both
Federal and Provincial).
If you are using computer software to do your payroll,
the deductions will calculate automatically. If you are
doing your payroll manually, there is a free
book offered by the government to assist with your
calculations. For a copy call 1-800-959-2221.
Also note, the deductions change twice a year,
January 1st and July 1st.
Most companies owe on the 15th of the following
month. Therefore for payroll paid in August,
the "source deductions" are due on September
15th.
However, if you have a large payroll you may be
required to pay twice a month. For example for payroll
paid between August 1-15, the due date would be
August 25th. And, for August 16-31, the due date
would be September 10th.
The penalties for paying late are substantial, on
anything owing over $500.
As well, there is an annual personal maximum for
both the CPP and EI. For 2008, the CPP max is
$2,049.30 and the EI max is $711.03.
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For more definitions ... |
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| Sandy's Recommendations |
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Understand the rules! Never make
assumptions.
There are many rules in accounting with many
(payment) deadlines to the government. Know what
they are. When in doubt get advice and even a second
opinion.
True story:
Although this doesn't pertain to paying a business
owner, it is a very important lesson concerning
payroll.
One of the first things I was asked to review by one of
my clients was their payroll figures. It turned out the
previous bookkeeper did NOT calculate nor submit
the employer's portion of the CPP and EI for
several months.
This was a large company and by the time I was able
to intervene and do the "math", over $50,000 was
due.
The government allowed a payment plan, otherwise
the company would not have been able to catch-up,
and would have risked loosing everything (not to
mention all the penalties and interest that also had to
be paid).
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| Next Issue - Employee versus Consultant |
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It may be cheaper to hire a consultant, but when
should that consultant really be on the payroll?
Learn:
The four guidelines to differentiate the two
roles
What the employer is responsible for
What the consultant is responsible for, and
How to switch from one to the other
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