Paying off a PAYG Tax Liability

Can I please get some guidance about how to pay off a Liability and at the same time have the payment entered as an Expense in the P/L section.

I have successfully entered my first payslip in a test business and this produced the following summary…

I then went to the payslip and Paid this (spent money), which leaves the summary looking like this…

Now I want to pay the PAYG Tax Withheld amount AND have this shown as an expense in the Employee Wages section. So I added a new expense account called PAYG Tax. However, if I go to the Bank Account and Spend money to the expense account then the liability remains. If I spend money to the Liability account then the expense isn’t showing on the Summary page. What actions should I be taking to give me the desired effect ?
Thanks in advance

The PAYG tax should have appeared as an expense when it was recorded. You have not explained how that was done. If it was done as part of creating a payslip, it happened then. And it would have gone to whatever account you set up that payslip item to be posted to.

Spending money doesn’t add to an expense account because that should have already occurred. It credits the cash account and debits the PAYG liability account.

Hi there @Tut - I followed the steps in the Guide and set up the payslip items as follows…

and the actual payment details were…

Not sure where I’m going wrong

The PAYG tax is already there in expenses as part of the salaries - the 10920 includes the tax that was deducted To put it there a second time would double it up.

The PAYG Tax Withheld (Employee) balance is payable to the tax office.

Also, it appears that the Superannuation Payable balance (1037.40) has been paid, hopefully that was to the Superannuation Fund it self.

Please understand I’m not Australian and know next to nothing about your PAYG tax system. But I don’t think you did anything wrong. In fact, everything looks perfect to me. I think you’re just expecting the wrong result. Here’s why:

As I understand things, PAYG withholding is tax owed by the employee to the government. While the business deducts it from the employee’s payslip, it is not an expense of the business. In effect, the employee has given you part of his or her paycheck in trust to send to the government. You merely hold it until you make your period remissions to the tax office. While you hold it, it is a liability of the business, because you owe that money to someone else. In fact, the money was not yours once you entered it on the payslip as earnings of the employee.

Wages and super, on the other hand, are expenses of the business because they come out of your pocket, not the employee’s. The PAYG portion comes out of the wages; it is not in addition to the wages.

If I’ve got anything wrong, I’m sure some of our Australian friends will jump in and correct me. But that’s how it would work in most places.

The above PAYG Tax withheld (Employee) would be added to the BAS return and paid with the GST.

In addition that PAYG Instalment (Owner) account, which I am assuming relates to your personal quarterly tax Instalment notice, shouldn’t be there as it not a liability of the business. It is the liability of the individual against their individual earning.

To pay that instalment notice via the business bank account - Spend Money with the account Owner Equity.

Thank you both @Tut and @Brucanna for explaining exactly where I was going astray - Of course I was just expecting a slightly different view and as I didn’t get it I completely ignored the fact that the expense was already there as it was included in the 10920 ! Apologies.

I can also understand why you say the PAYG Instalment (Owner) should not be there (indeed my next question was going to ask how to create that Liability). However, as a Sole Trader this amount does get included in the quarterly BAS and I can’t help feeling that it should be shown somewhere in the books of the Sole Trader. For now, I can live without it being shown - and will revisit later when I hand all this to my accountant at year end.

The Super Payable Liability account is debited as part of the Payslip Payment process. The actual payment of 1037.40 is, of course, made from the business Bank account directly to the fund chosen by the employee. Here is the screenshot of the payslip Payment…

For the benefit of any other Sole Trader readers of this topic, the 10920 is included in the BAS on line W1, whilst the 1651 is entered in line W2.

Thanks once again for your time and patience.

If this is payment of tax on the sole trader’s income, it is a personal tax, not a business tax. Think of profit of the company as a source of income for the sole trader, just as though the trader were working for some company. But in this case, calculation of the taxable income takes an entire accounting system instead of a single form from the employer.

You don’t actually create that liability, as its not an expense of the business, but a “contribution” from your personal income, which may include other income such as rent, interest & dividends.

However, if a specific amount is being listed on the BAS and you want to create a “reminder” in the accounts then you could take it up via a Journal - Debit Owners Equity and Credit that Liability Acct. Then that would be included in the BAS Spend Money. If you don’t do the reminder, then you would still include it in the BAS Spend Money but post that amount directly to the Owners Equity Account.

How can this be. The salary gets paid to you. The Super gets paid to the Superannuation Fund.
Isn’t this two separate payments from your bank account, if yes, then it also needs to be two separate payments in Manager - otherwise the entries in the cash account won’t match up with the entries in the bank account.

Your posts have highlighted a possible conflict of process but I’ll address that via Private Message later on today as its not a Manager Forum issue.

Hi @Tut - I have thought long and hard about your reply. I have days when I can see your point and days when I cannot :frowning:

I do appreciate the time you have taken to explain things to me, but I’ve decided that I must show the PAYG Instalment owing to the Tax Office as a Liability in my accounts. To not show this would be painting the wrong picture as I would only ever be looking at a Pre-Tax position. I only pay GST and personal tax - both on a quarterly basis (there is no business tax) so I will have to enter it as liability and clear it our quarterly.

Hi @Brucanna - I will go with your idea of the “Reminder” and clear out the liability on the BAS dates. Cheers

You need to distinguish between business tax liabilities and personal tax liabilities. GST you have collected from customers is a business liability, because the business holds it in trust for the government until making the quarterly payment.

But if, in your jurisdiction, sole traders are taxed personally on the profits of the business (as I believe to be the case), income tax is not an expense of the company. It is a personal expense, so it cannot be shown on the company’s balance sheet as a liability before payment, nor on the P&L statement as an expense when paid. This is a fundamental difference between sole traders and corporations (or stock companies, or whatever they may be called where you are). Corporations pay income taxes (in most jurisdictions). Sole trader businesses do not. Their profits are taxed as income of the owner.

Maybe in an absolute sense yes, but when the business is a profession under contract, then the business tax is the personal tax. A Doctor is employed under a contract, rather then a salary.

They aren’t running a business as in sales and expenses. The business is the person, so the personal tax is an expense (liability) of that contract income.

As I said - I can see you point and it may be correct from a purist perspective, but respectfully I disagree.
I cannot ignore what is by far my largest outgoing (call it a liability, expense, whatever). If my Cash Account in Manager says I have $10,000 and I then spend that and forget I have a $20,000 tax bill to pay the next week then I will surely be bankrupt very soon.
I absolutely must have a record somewhere in Manager that tells me I have to pay my personal income tax instalment, which is calculated by the Australian Tax Office based on my previous income purely from the very same sole trader business!

We will have to agree to disagree :slight_smile:

I understand your concerns, @clive. Under the circumstances I described, however, you would not pay your personal tax liability on income earned from the business from a business cash account. You would pay it from your personal account.

But I can only offer advice.

Your advice is highly valued and this discussion has been invaluable - thanks again.

For what it’s worth, when I operated as a sole trader, I set myself up as an employee - completely, even to lodging the TFD with the ATO.

Quarterly BAS and reporting was easy - as was knowing my financial status with regards to PAYG and Super liabilities etc,

At tax return time, my accountant finalised the accounts for submission to the ATO. The final PAYG tax was calculated and paid, and the balance was journalled into an Owners Equitty account, which I could draw at any time. (The PAYG tax being already paid on this at the Tax Return).

I agree, paying your income tax via an employee salary like structure is an excellent management model for sole proprietors especially if you are taking fixed regular drawings (wages).

Just because your entity isn’t a corporation doesn’t prevent you from managing your affairs in a corporate fashion.

EG: For 365 days of the year the various business accounts are recorded based on a management model, then after the close of business on the 365th day, adjustments are made so they reflect the requirements of the tax returns. Thought out the year the accounts aren’t necessarily recorded as if everyday was a tax return preparation day.

While what you say is valid from an accounting perspective, it can be illegal in some tax jurisdictions, where a sole proprietor cannot be treated as an employee of the company. But that’s a regulatory matter, not an accounting one.

I did say - an employee salary “like” structure - not deeming themselves as employees.