I understand that social security is calculated differently between countries and here is how it works where we live.
When you are self occupied(and own your own company), in the first year you perceive your earnings but pay zero social security. You are basically self-employed but employed by your own company.
On the second year, you sum all the earnings you received from year 1, divide this by 52 weeks and calculate a contribution of 15% to be paid every 4 months.
Right now, my wife is starting year 2 and her first social security contribution payment has been done.
Our accountant also told us that these contributions were not company expenses.
Based on this above, we tried to look into the payslip module but were not sure about a few things and decided to create a new account called “Director drawings”(set as an expense).
If this is not an expense for the company, and she pays today ie: 145 Euro of social security, what other possibilities we have as we now have 145 Euro missing from the account.
I believe that we should create a new account called “Social security Contributions” and on the first of each year calculate what we own from the previous year and then deduct from this account each future payment.
Would this make sense? As we cannot find an easy way to do this otherwise.
What I am a bit confused with is that liabilities are in fact “Future expenses”, therefore if I add this as a liability, would this not makes it an expense still?
This could well be true, in which case, @Joe91’s comments would not apply.
In some jurisdictions, depending on the legal form of ownership of the company, social security contributions or taxes like you describe are considered personal taxes, not business taxes. That is, they are taxed against the personal income of the owner, not against the business itself. If that is the case, the business should make no entry whatsoever in its accounting records about the remittance of social security.
Drawings by the owner from the company would, of course, be recorded against appropriate equity accounts, as determined by the structure of your chart of accounts. But social security would be left out, because the business is not being taxed or making contributions, the owner is as an individual.
If it helps to understand, this is the same way most jurisdictions tax income of a sole proprietor. The proprietor is taxed on income earned by the company. The company pays no tax on its profits. The proprietor is the taxable entity. Your accountant will be able to confirm this.
In our case, the company pays 35% tax on its profit.
The self-occupied person pays income tax on his salary. If the self occupied person employs, then the company will pay 10% and the employee 10% of the social security monthly.
Yes this is what the accountant told her, adding director drawings to an equity account.
But why equity? Why not an expense account? This is the part I am not understanding.
Let’s say we setup an equity account today for the first withdrawal, how would this works out? ie: You take 100 Euro out of the account, would this still be considered an expense or calculated completely differently? Trying to understand the difference between equity and expense when withdrawing money.
I looked up at the equity account and there is a control account tick box, does this needs to be ticked please?
For those who are legally employees of the business (not just treated as employees out of convenience), the employee’s portion of social security is a payslip deduction item. The company’s portion is a payslip contribution item. See https://www.manager.io/guides/9667, which @Joe91 linked to.
You have a couple of concepts mixed together here. Withdrawals, or drawings, by an owner come from an equity account. The reason is that the owner is removing investment from the business. Equity accounts represent investments in the business. The same may not be true for a director, who might be considered an employee. That is why I have emphasized the dependence on legal organization of the business.
As to why not an expense account: Expense accounts record expenses of the business as they are incurred. So a contribution to social security for an employee by the business will, indeed, show up in an expense account. Payment of a social security tax by the owner personally will not. And drawings from an equity account are not expenses, they are simply reductions in how much the individual has invested in the business. Again, form of legal organization is important.