Question:
How are businesses using Tiller categorizing employee taxes withheld? These are liabilities and not business expenses, but since there isn’t a “liability” type (only expense, income or transfer) I’m curious what best practices are.
Background:
My wife and I are self-employed. We use two separate spreadsheets to track business vs. personal. Historically, any IRS payments we’ve made I categorize as “taxes paid: federal”. However, as I understand it, this is not accurate for a few reasons.
A portion of that money is an expense of the business, but the larger portion is not. They are “withholdings” for the employee that are considered a liability, not an expense.
The “withholdings” portion should not show up on a P&L. Categorizing it as an expense will do that.
As I see it, I have two options, but am curious what others are doing.
Categorize the employee portion as an expense but hide it from reports. This would ensure it doesn’t show up on the P&L. However, it means it also won’t show up in other reports I may use like a cashflow report.
Categorize it as a transfer. I’m not sure nor have I tested enough to see how this might impact reporting across my various sheets.
Hi @vilibara - It’s an interesting question. I’m no accountant or accounting expert and I don’t currently handle this direct example in my own business, but my thought is that if you have a P&L report that is flexible enough, you can manage it with either of the two approaches that you outlined. What I mean is that the P&L report should be able to show or hide transfers, and it should be able to show or hide any income or expense items of your choosing. I’m referring to local report-specific selection of categories, regardless of how the category is identified in the Categories sheet (the global Hide status). I developed a P&L Analyzer and P&L Reporter with this localized configuration capability at the website in my profile. You may still have to consider the impact of your approach on other templates that you regularly use, but it seems like a case could be made for either option. Perhaps it depends on your interest in seeing individual paycheck accruals versus quarterly payouts from a cash flow perspective. Sorry I don’t have the direct experience accounting for these employee taxes, but I am curious also if anyone else has any experience within the Tiller structure.
Hi vilibara,
I believe you’re both right and wrong regarding:
A portion of that money is an expense of the business, but the larger portion is not.
At the business level are you tracking the employee salary at a gross or net? because if at gross you should reduce the salary by the tax amount and continue to categorize taxes paid: federal; which get you to the net.
That might be a bit confusing so let me break it down below:
For the business side
Assume salary (I’m assuming since you’re withholding for the employee) of $$$$ Gross
you’ll code xxx to salary expense
yyy to self employment taxes + fica + ss etc
zzz to Salary federal taxes paid
and that totals to $$$$. because at the end of the day the employee expense is $$$$, it’s just the buckets or bank accounts you’re allocating to.
another way to think about it is that the withholdings you’ve remitted is still the employee salary you’ve just remitted it the IRS for them
on the personal tiller side, you’ll code
xxx to salary gross income (net pay + taxes withheld)
zzz to taxes remitted.