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e-ccounting
August 2008

in this issue

Business Scenario
- Paying yourself (as a business owner)

Answer

Accounting Tip

Did You Know ?

Definition

Sandy's Recommendations

Next Issue - Employee versus Consultant


 

about e-ccounting

e-ccounting is a monthly newsletter focusing on accounting tips and solutions. Our mission is to educate our clients, students and readers by offering these resources in response to your ongoing questions.

It is our objective to gather information and provide easy access for your current and future needs.
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These tips are not complete answers to complex questions. We therefore recommend, when in doubt, contact the professionals or government agency.

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Sandy's Question Corner

Do you have an accounting question? Send it to us at accountrain



Workshops:

accountrain is now offering a series of three workshops. Take one, two or all three and save as you learn. The informative and interactive format guarantees a comfortable and fun learning environment. The topics:

1. Understanding How to Read Financial Statements

  • Who's interested in your reports and why
  • Why there's more to the Income Statement than just the "bottom line"
  • What's so important about the Balance Sheet, and
  • Key accounts, definitions, ratios and samples to review.

    2008 dates: Sept 26th, Nov 13th


2. Accounting 101 - for new and small business
  • Review of common questions, including GST, incorporating and many more
  • Choices for maintaining bookkeeping
  • Understanding government requirements
  • Shortcuts, tips and organizing all that paper!

    2008 dates: Oct 6th, Nov. 13th


3. Year-end Prep & New Year Planning
  • It's never too late to get organized
  • Understand what's different including: depreciation, accruals, deferred revenue and prepaids
  • How to choose accounting help
  • Preparing for an audit, and how about avoiding an audit!
  • Learn to streamline your bookkeeping methods to save time and money.

    2008 date: Nov 25th


For more information or to register, email accountrain


  • Business Scenario
    - Paying yourself (as a business owner)
  • I've just started my own business, do I put myself on payroll or just pay myself when there's extra money?

  • Answer
  • Both are OK, but the latter is more the norm with a new business re the uncertainty of it all.

    The best way to deal with paying yourself is the following:

  • If you lent money to the business this is due back to you tax free, so draw from that amount first.

  • If that isn't the case, or you've maxed that out, cut yourself a cheque as per needed, apply it to your draw (shareholder) account. At the end of the year, you will want to transfer this to salary expense and pay taxes (and CPP) at that time. This is popular because often with start-ups, you may pay yourself, and then later have to loan the company money again, so it's difficult to know what the net affect will be by the end of the year.

  • If that's not the case and you are able to pay yourself consistently, whether from the beginning or whenever you can, then this is the time to set yourself up as an employee, the same as everyone else on staff. This will include removing deductions per pay, but please NOTE as the owner of a business, you will not be eligible to collect EI (if the business were to end), and therefore you can't contribute into it.
  • Once you are established and have excess money in the company, there are additional options in paying yourself, including bonuses and dividends.

  • Accounting Tip
  • Once you are on a regular payment schedule, you may find there is extra money available to remove from the company. The timing of these extra payments are crucial, therefore ensure you discuss and understand all your options and their implications with a professional.

    An example of this: You declare a bonus (to be paid at a later date) and therefore record it in your books as payable. For the business the expense is recorded for that year.

    However, it is set up as a payable and you have up to six months to cut a cheque. Depending on the year- end of your company, you may defer receiving this until the next calendar year. (difficult to explain, see example below):

    Company year-end is Oct (2008), therefore the business declares a bonus to the owner, for $20,000 and expenses it right away to reduce the net income "bottom line", hence reducing the taxes due. In the meantime, this can stay on the books as a payable for six months. So, let's say the owner only takes the bonus in Feb (2009). This is when the income is (personally) recognized on the T4 (in the following year).

    Again, this is tricky, so ensure you understand the implications and get advise from the professionals.

  • Did You Know ?
  • For source deductions (definition below), the employer has to match the CPP dollar for dollar. Therefore, if the CPP calculation (for a pay) is $20, the employer's expense is also $20, meaning at payment time, you will pay $40.

    And the amount the employer is responsible for re EI is 1.4 times. Therefore, if the EI calculation is $10, the employees' expense is $14, meaning at payment time, you will pay $24.

    For more Did You Knows?
  • Definition
  • Source Deductions

    These are the deductions taken off a pay cheque by the employer which are due to the Federal government. They include CPP (Canada Pension Plan), EI (Employment Insurance) and Tax (both Federal and Provincial).

    If you are using computer software to do your payroll, the deductions will calculate automatically. If you are doing your payroll manually, there is a free book offered by the government to assist with your calculations. For a copy call 1-800-959-2221.

    Also note, the deductions change twice a year, January 1st and July 1st.

    Most companies owe on the 15th of the following month. Therefore for payroll paid in August, the "source deductions" are due on September 15th.

    However, if you have a large payroll you may be required to pay twice a month. For example for payroll paid between August 1-15, the due date would be August 25th. And, for August 16-31, the due date would be September 10th.

    The penalties for paying late are substantial, on anything owing over $500.

    As well, there is an annual personal maximum for both the CPP and EI. For 2008, the CPP max is $2,049.30 and the EI max is $711.03.


    For more definitions ...
  • Sandy's Recommendations
  • Understand the rules! Never make assumptions.

    There are many rules in accounting with many (payment) deadlines to the government. Know what they are. When in doubt get advice and even a second opinion.

    True story:

    Although this doesn't pertain to paying a business owner, it is a very important lesson concerning payroll.

    One of the first things I was asked to review by one of my clients was their payroll figures. It turned out the previous bookkeeper did NOT calculate nor submit the employer's portion of the CPP and EI for several months.

    This was a large company and by the time I was able to intervene and do the "math", over $50,000 was due.

    The government allowed a payment plan, otherwise the company would not have been able to catch-up, and would have risked loosing everything (not to mention all the penalties and interest that also had to be paid).

  • Next Issue - Employee versus Consultant
  • It may be cheaper to hire a consultant, but when should that consultant really be on the payroll?

    Learn:

  • The four guidelines to differentiate the two roles
  • What the employer is responsible for
  • What the consultant is responsible for, and
  • How to switch from one to the other
  • 613-789-2623



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