P.A.Y.E. - am I being thick?!

[Director]

I have, for the first time, had to deduct tax from one of my employees (happens to be a director). Using the HMRC Basic PAYE tool, I was instructed to dock my employee £198. So, when paying the employee from the QuickFile company bank account I showed a payment to the employee equal to gross pay minus £198, and a separate payment to HMRC for the £198.

In the Bank Account view, I tagged the employee payment to Net Wages (Director), as I have done every other month up to now. I tagged the HMRC payment to Tax Payment, PAYE liability.

I note that, unlike previous months (where there was no question of income tax or NI), the Bank Account view shows a little “Cloud” icon next to the employee payment entry - on further investigation, I find that a Journal has been created automatically which seems to move the payment from 1200 Current Account, to 2220 Net Wages and then from 2220 Net Wages to 7001 Directors Salary. This has never happened before!

In the Bank Account I can see the balance has correctly has dropped by the employee net pay + the £198 payment to HMRC.

In the P&L I can see the NET amount paid to the employee under 7001 Directors Salaries.

In the Balance sheet I can see an ASSET of the £198 sitting on 2210 PAYE alongside the Bank Account’s correct balance (after net pay + hmrc payment).

I do not understand why the £198 shows as an asset in the Balance Sheet; surely, the money having left the company’s bank account, it is not an asset which I can “trade”…?

Meanwhile shouldn’t the £198 liability (and the £198 payment to HMRC) show in the Tax Summary?

I’m sure the system is working - I just don’t understand the answer!

Help!

[QFMathew]

Hi @Director

First of all, I’m not an accountant, but I’ll certainly try to help

Alongside the £198 employee NI, there’s likely to have been an employer’s NI element too.

With payroll, there’s a journal (as you’ve discovered) which moves the balances around on the account to reflect the current position. Until you actually pay HMRC the money, it’s considered a liability. If you pay it before accounting for it, it’ll be an asset.

There’s a guide in our knowledge base which gives you an example of the journal, but this does include quite a few possible options:

Recording payroll

Introduction A common query that comes up on our forums are in regards to recording payroll. How you record it does depend on your setup, but we'll look at both options below. The 2 ways that payroll can be handled within QuickFile are: With a payroll journal Without a payroll journal 1. With a payroll journal The advantage of a payroll journal is that it allows you to record it prior to paying your employees, and it would show as a Liability on your balance sheet report. If you run your o…

I hope that helps, but please let me know if we can help further. We do have some accountants who use this forum who may be more useful than me

[Director]

Thanks for your reply but I’m not sure it helps…

The £198 I mentioned was PAYE INCOME TAX; not NI. So there isn’t an Employer’s NI element in play.

With regards to “until you actually pay HMRC…”, it does happen that I made the payments from the bank account both to the employee and to HMRC on the same day.

Finally, the automatic journaling has never happened before…why should it have started all of a sudden?

[QFMathew]

Apologies for the mix up with NI / PAYE in my previous post.

Referring to the “Recording payroll” post I linked to above, there’s a setting in Advanced Settings labelled “Post Net Wages to Balance Sheet only”. If this is Off, it will lead to the journal being created. If It’s On, then no journal will be created and you can do it manually.

Because it sounds like this is switched off, on your account, you can simply amend the journal in this case. In my example, I’m paying my employee £900.00, with £100.00 PAYE (£1000 gross pay). Therefore, with the option switched off, I have this journal created for me:

So you can just amend this one to something along the following lines, by:

• adding a row for PAYE
• amending the value of Director’s Salaries (Debit)

Just to explain this - the bottom 3 rows splits the pay into PAYE and net wages; the top 2 rows show’s it’s paid (and not on the balance sheet). Instead of having these top 2 rows, you should switch the option mentioned above to on for future journals and payments.

This in turn adds this to my P&L:

No pay (the £900) is on my balance sheet, as this journal also creates the bank transaction to say it’s been paid.

When you mark the PAYE as paid from the bank account, then 2210 will disappear from your balance sheet as it’s no longer owed, and therefore no longer a liability.

As I mentioned, I’m not an accountant so I would double check that what you’ve done is correct.

@Director

the automatic journaling has never happened before…why should it have started all of a sudden?

This was a recent change. There was a reason behind this, which I addressed this in another post.

I hope that explains it a bit better!

[ian_roberts]

@QFMathew

Therefore, with the option switched on, I have this journal created for me:

Wouldn’t that be with the option off rather than on? On means posting to the balance sheet only (i.e. just 2220) without an automatic journal to P&L. At least that’s how it works for me.

[QFMathew]

I stand corrected! Post updated.

[Director]

Thank you all; now sussed!