Quick question please…
I used to run a company years ago with a partner, at the time, our wages were registered in Manager as “expenses” which were deducted from the profit of the company(showing as expense in the profit and loss statement).
Now, I still have a company but alone, therefore I had to register as “self employed”. Based on what the tax dept told me, the net profit of the company now becomes my wage. It sounds great but I cannot work out how to register a wage monthly that does not deduct itself from the net Profit in the profit and loss statement in Manager.
I have created an account called “wage”, but each time I withdraw money out and register it as “wage”, it becomes an expense and minus itself to the yearly profit which is not ideal because the net profit always becomes 0.
What is the best way for me to pull a wage but have the profit and loss not showing it?
Sole owners/proprietors/traders should not pay themselves as employees, because they are not. You should instead take drawings from a capital or owner’s equity account (depending on the structure of your chart of accounts). The amounts you take out of the company are not wages; thus, they are not expenses of the business. They are distributions of profit.
Thank you so much for the reply. This is what I realized when looking at the profit and loss statement.
In fact, wages would only become an expense if the self employed person employs someone else.
I am trying to work out a name for the capital or equity account, what would you call it if it was you please, “Director Drawings”?
What would be the major difference between Capital and Equity, is capital not a sub account of Equity?
You could go about this in two ways. 1) Simply rename the “Retained Earnings” account to “Owner’s Equity” or “Owner’s Capital”. Or 2) Enable the “Capital Accounts” tab and make drawings to your capital account there (through “Receipts & Payments”… “New Payment”… then select “Capital Accounts” > “[your account]” > “Drawings” on the payment line).
So based on that, I have created a Director Drawing account and set it up as “equity”. I see a “control account”, do this need to be ticked or unticked please? I kept it unticked for now, passed a transactions of 100 Euro and from what I see, the bank account has decreased but in the profit and loss statement, nothing has changed(no decrease). Would this be correct?
The problem with only creating a Drawings account is that you have no place to record contributions of capital. And undistributed profits will languish in Retained earnings until transferred elsewhere. That terminology is generally reserved for corporate entities with shareholders.
This is not what you originally said, so procedures and accounts involved could be different. I recommend you consult your accountant/auditor again. Explain the way Manager includes a Drawings sub account under a capital account and ask whether that satisfies local requirements for your form of legal organization. If it does, follow the procedures in the links of the first bullet above.
@benoit, you need to be aware that “self-employed” (as you wrote in your first post) and “self-employed with a Limited company” (as you wrote later) may be treated entirely differently in various tax and regulatory jurisdictions. In some jurisdictions, such forms of organization are considered identical for tax and accounting purposes. The business may not file tax returns separately from the owner. In others, the latter is treated more like a corporate entity and the owner more like an employee. These are not questions to be resolved on the Manager forum.
If you are responsible or own a Limited liability company you set your self up as an employee of the company and process that way and pay tax etc with every paysheet. In my view it is much better to simply draw director fees. The tax rules are in our case for director fees are favourable and you pay less tax. You will need to check on this in your country or engage your accountant. Should you go down the director fee path I would suggest in your chart of accounts after “Operating Profit (loss)” add and setup a group LESS “Director Fees” then add a new account… say “Director Fees - XYZ” which will be assigned to the group “Director Fees”.
Now when you make a payment to pay yourself from the company bank account in Manager choose the account “Director Fees - XYZ”.
Very important - Make certain you have setup a separate personal bank account (where your director fees get paid into) with your bank for personal use. It must be separate from the company accounts.
Before the end of the company financial year make certain you have made provision for income tax (Provisional tax in our case) which will be calculated from your Director Fees - XYZ" total drawn in that financial year.
Your Director fees will reduce your company surplus before Tax which will in turn reduce your company tax liability as well. Hope this helps but am sure one of the accountant type people subscribed here will know more.