What is the proper and correct way of logging a directors salary? I have been tagging salary entries to director salary and then HMRC payments to PAYE. When my accountant (via QF) did my corp tax he has said that the way I’ve been doing it is incorrect and I should be creating journal entries for the salary, NI and PAYE. I’m confused - why is the journal entry necessary if everything is tagged?
I’m guessing what your accountant means is, you create a journal entry for the salary, ni, tax liabilities. Which would show as owed on the balance sheet. Then when the payments are made and you tag them, it reverses the journal entries.
The reason for this is you may have a paye liability at year end. Only tagging payments made wouldn’t show the liability. Nor would it add the expense to the p and l in the correct tax year.
Ok, nope I don’t understand. So, I created a journal for my June salary. I’m the only employee and am the company director. This months salary has no deductions, according to the HMRC PAYE tools calculation. Deductions only happen for the last few months of the tax year.
Anyhow, I created a journal yesterday with a credit in code 7001 and a debt in 2220.
This morning I’ve tagged the payment via the bank transaction entry.
Following this tagging, I see that a new journal has been automatically created from the bank transaction with a credit in 1200; debt in 2220; credit in 2220; debt in 7001.
What’s this all about and have I done something wrong? It looks like a single entry is now entered in triplicate?
Nothing relating to this transaction shows up in my P&L. The balance sheet is just confusing as don’t understand some of the figures showing up there…
If you go to Account Settings >> Advanced Features, is “Post Net Wages to Balance Sheet only” on or off?
If you are creating your own journal, you should switch this to On
Thanks. It’s off. I don’t want to create my own journal…I’m only doing it because I’ve been told I’m entering my salary incorrectly. I still don’t really see the point in doing the journal, but I do want to make sure that I’m working in QF correctly.
If you’re creating your own journal, that setting needs to be “On”. If you want QuickFile to just tag the entry, you can leave it as “Off”.
With it set to off, we still create a journal for you, as often there are still deductions of some sort. This makes it easier to slot these in at a later date.
So first of all, your original journal is the wrong way round. You need to debit director’s salary in the P&L (code 7001) and credit net wages in the balance sheet (code 2220). This represents the fact that there is an expense in the amount of your gross salary (the debit in the P&L), and it shows up as a creditor in the balance sheet because you haven’t yet paid it to yourself.
If there are deductions, you would debit 7001 with the gross amount, and then credit the deductions to 2210/2211 and the net pay to 2220. This then reflects the fact that at the end of the month/year you are likely to have a creditor for the amounts owed to HMRC (given these are paid after the month-end).
When you pay yourself, you then tag the payment as salaries, and assuming the above setting is set to “On” Quckfile will then tag it against the creditor in 2220, reducing the balance to nil.
Similarly, when you pay HMRC the PAYE/NIC due, you tag it as Tax Payment to HMRC and select PAYE liability. Quickfile will then tag it to the correct liability code in the balance sheet. This won’t usually clear down completely, as if you pay quarterly, you will always have a balance owing to HMRC.
The reason you do it this way is, as a limited company you have to operate what is called accruals accounting. This means that you always recognise the liability when it arises. By only tagging the payments when they are made, you are operating cash accounting. This is fine for a sole trader but is not allowed for limited companies.
I hope this clarifies it for you, but if not feel free to ask.
So I’m revisiting this as I now have an employee. I’ve created a combined journal exactly as you describe here for myself and the employee. I’ve paid us, and paid HMRC for the total PAYE and NIC owed. I’ve tagged the HMRC payment for PAYE (2210 journal) and NIC (2211 journal) to “PAYE Liability”.
Now, when I go to my Balance Sheet, the NIC amount is still shown as owed. How does one correct this please? Quickfile doesn’t seem to be connecting the PAYE liability tagging to the 2211 NIC journal entry.
I wouldn’t bother putting the liabilities on separate balance sheet codes in your journals - both income tax and NI are part of pay-as-you-earn so put them both on 2210 as a lump sum.
My last few replies on this thread from a few days ago lay it all out in more detail:
Thanks Ian. Someone needs to set the QF recording payroll instructions right.
@QFSupport would you be open to revising the KB article? In the current one the two halves are inconsistent - the journal section splits the PAYE liability out into separate nominals on the balance sheet, but then the instruction to tag the PAYE payment as “tax payment to HMRC” only works if the whole PAYE liability (tax+NI+student loan) is grouped under the single PAYE code.
It would make more sense to post all the liabilities to one code in the journal, and flag that the NI balance sheet code is only needed for non-PAYE liabilities like class 1A.