[Question] Shareholder/Director Salary not paid but owed.

[Meganika]

If a Director/Shareholder decide not to take his/her salary for a period of time but still performs his/her duties during that period and let the Company owe the money to him/her; how do you correctly put this in the books? The time sheet submitted state the hours worked, but he/she does not claim it. What is the tax implications on the money that the Company owe to him/her? Do you put it against a loan account or does it form part of his/her Share Capital?

[EAB]

Hi Meganika,

The salary needs to be put against the loan account and not share capital

[Meganika]

Hi Werner_E, thank you for your input, much appreciated. Do you know if there are any tax implications while in the loan account?

[dellatjie]

Yes, it is still taxable.

[EAB]

It should be taxed before it goes to the loan account.

Normally you would pay out the net salary to an employee, Credit Bank and debit the Salary Control account. In this case the only leg that is missing is the Bank. Thus you will debit the Salary Control account and credit the Director's Loan account with the net salary.

So the balance in the Director loan account is an after tax amount.

[IanF]

I would suggest run this as a memo account (not in the books) then you keep a record of salary owed in that account and only process it when the business is making a profit and can deduct the expense.

[EAB]

The memo account might work. Just keep the following in mind:

1. You are not accounting for the expense in the period when in was incurred
2. Personal income tax. Calculations needs to be done on how it will affect the individual income tax - accounting for a couple of "small" monthly amounts vs one "big" amount. Remember that as per SARS an individual must declare income received/accrued to him in that specific period. In this case the income is due to the director, thus accrued in that financial period.
3. Even if the salary is causing the company to create a loss that loss can be carried forward to when there is a profit, so you will not lose the expense for the company
4. Additional admin work. If you credit the loan account, it is over and done with, what is in the books are owed to the director. If you keep a memo account you need to keep that one up to date as well.
5. This ties in with point 2. Should you be unlucky and SARS wants to do an audit of the company and they need supporting documents for the suddenly high director salary, they might argue that the expense is not for the current year and do reassessments. Rather safe than sorry