Liability and Expense Accounts in the I/E Report

[Ronniejr]

I am using v. 11.5 with Windows 8.

When you post a payroll check, the taxes are applied to a liability account. However when you pay the taxes (write the check), do you pay out of the respective liability account or an expense account (then which one)?

The Problem:
If you debit out of the respective liability account and credit out of the bank account, it doesn't show up in the Income and Expense Report (because its not an expense). If you debit out of a "Payroll Taxes" expense category and credit the liability account, then the bank account is not reduced.

Does anyone have a solution?
1. Which account should I write the check from expense or liability?
2. I am desiring to show the taxes (state and federal) on the Income and Expense Report.

Thanks.

[VICRAMZ]

Okay . . . this is a little complicated, but . . . let's suppose you're paying your secretary.

Income taxes are a deduction from the secretary's salary. As such, when the secretary is paid, the gross salary is taken from the expense account entitled "Secretary Salary". The taxes to be withheld are diverted to the liability account. The remainder goes to the employee in his/her paycheck. This is what is meant by "after-tax" or "net" income.
This is true for state and for federal income taxes, and for the employee portion of Social Security and Medicare. You should have separate liability accounts for each of these tax types (Federal, state, Social Security, and Medicare.)

Now, regarding the employer portion of Social Security and Medicare, you should have pay items in payroll to reflect these "employer liabilities". When the paycheck is processed, the payroll module would, in addition to doing everything mentioned above, create an expense (debit) for an item entitled, say "Secretary FICA", and add the amounts (credit) to the liability accounts for Social Security and Medicare.

Now, if I've been clear, what you'll see is that, when the paycheck is generated and posted in Fund Accounting, all the expenses are accounted for.
The "Secretary Salary" line is the gross salary, which includes federal, state, and employee Social Security and Medicare deducted, yielding the net or after-tax wage that's reflected on the paycheck.
The "Secretary FICA" line is the corresponding employer portion of Social Security and Medicare.

So . . . when you send your tax payment to the government(s), you credit the checking account, and debit the liability accounts (Federal, Social Security, and Medicare for the federal government, State Tax for the state government, if you have a state income tax to deal with.)

The expenses, shown on the I/E report, have already been incurred when the paycheck was issued and posted.

Now, just a couple of other notes I've found helpful.

1. It's very important, in Payroll, to distinguish between Social Security and Medicare taxes, and send the money to separate liability accounts. The federal form 941 calculates those taxes separately, and you'll want to mimic that in your chart of accounts. It is not necessary, (though you can if you want to), to create two separate expense accounts for the employer portion of the Social Security and Medicare. You can have one expense account ("Secretary FICA") feeding both the Social Security and Medicare liability accounts, using different pay items in Payroll.

2. There's a federal limit on payroll taxes withheld that triggers the need to make monthly, electronic payments. If you have less than $2,500 in federal payroll taxes in a quarter, you can hold your taxes and file them quarterly, using Form 941.
But, if you have more than $2,500 per quarter, you'll need to file monthly using the electronic payment system, EFTPS (Electronic Federal Tax Payment System). Just Google EFTPS and it'll take you right to where you need to be.

Finally, don't forget that ministers are self-employed, and generally don't pay Social Security taxes, nor do they have income taxes withheld. B.J. Worth's Tax Guide for Ministers is the best reference I have found for all things taxable.

Hope this helps. Good luck.

Vic Ramsey
Moyock Baptist Church

[Ronniejr]

Vic,

Thanks. Great explanation.

I debit the liability account and credit the checking. This transaction shows in the Balance Sheet. But when I print a Income and Expense report for that month, that transaction is not seen even though the money has left the bank account.

Is there a way around this? I realize that a liability is not an income or expense so it won't show up on that report, but it would be nice to see it as part of the transactions for the period.

Ronnie

[NeilZ]

Vic,

Thanks. Great explanation.

I debit the liability account and credit the checking. This transaction shows in the Balance Sheet. But when I print a Income and Expense report for that month, that transaction is not seen even though the money has left the bank account.

Is there a way around this? I realize that a liability is not an income or expense so it won't show up on that report, but it would be nice to see it as part of the transactions for the period.

Ronnie

Ronnie,

there is no expense for Federal Withholding for the church. That money comes from the salary that IS an expense to the church when you post the payroll, it just doesn't leave the checking account until you send it to the IRS.

The only expense to the church as far as taxes are concerned are the employer's portion of the SS/Medicare taxes. Even then, the expense happens when you post the payroll, its transferred from the Expense account to show up in the liability account for SS/Medicare.

So you see, everything in the liability accounts will appear as an expense in the I/E report under Salary and Employer Taxes.

Don't try to equate what you see in the Balance Sheet to what is in the I/E report, they report two different areas.

[JohnDMeyers]

but it would be nice to see it as part of the transactions for the period.

Ronnie:

There are three important financial reports.
1) Balance Sheet
2) Income and Expense Statement
3) Cash Flow Statement

The only way to see payments to liabilities is on #3, the Cash Flow Statement.

PowerChurch does not provide a standard Cash Flow Statement, however.

I just thought I would post this so you won't be looking for information that isn't on either the Balance Sheet or the Income and Expense statement.

[wer61537]

So, what are the steps to generate a cash flow statement? Surely there must be some standard way to do this?

[JohnDMeyers]

It's kind of straight-forward, but you have to tweak it because there are many possible adds and subtracts.

To do a cash-flow statement,

1) Start with your Income over Expense (at the bottom of the Income and Expense Report)
2) Add your depreciation expense (it's a non-cash expense)
3) Subtract any mortgage principle (it's a non-expensed cash flow)

Then, there are optional things that may or may not apply in every case:

You may have other loans: (subtract off principle payments)

You may have unrealized market loss or gain on investments:
(add or subtract if they appear on the Income and Expense Report)

You may have realized market loss or gain on investments not added in or subtracted off:
(add a realized gain, or subtract a realized loss)

You may have received money in an asset account: (add that in)

In general, look for things on the Balance Sheet that were actually cash coming in or going out.

[wer61537]

Thank you and have a blessed day!