Discussion:Entries for Unpaid Salary

This company isn’t generating any income yet and is operating at a loss.

We are accruing payroll for one of the partners, for which he hasn’t been paid for. It could be a while before this company makes enough money to actually pay him. What is the journal entry for this transaction? The first part seems easy enough, a credit to a liability account (note payable) called Greg's Unpaid Salary. I don't want the other side to hit an expense account because it will mess up my taxes. I don't want to show an expense until we actually pay it.

Any Ideas?

If the LLC is treated as a corporation and is using the accrual method of accounting, you cannot deduct payroll owed to a > 50% cash method member until the company actually makes the payments and the corresponding amount is includible in the related person's gross income. If the member is less than 50% owner, then you may deduct the payments when accrued.

I have one idea, but I"m not sure if it is okay to do. It seems to me that the company’s equity is diminished by the fact that they owe this money. Perhaps there could be an equity account in addition to each partner's equity account called Unpaid Management Fees. The entry would look something like this: credit Greg's Unpaid Salary (note payable) debit Unpaid Management Fees (equity account)

This way I could show that there is an amount due, but I won't expense it until it's actually paid, and the partner won't show it as income until it's actually paid.

Credit Greg's Unpaid Salary (note payable) Debit Unpaid Management Fees (equity account)

And if they are receiving guaranteed payments, there are SE tax implications as well.

Tom

You might want to read Pub. 541 http://www.irs.gov/pub/irs-pdf/p541.pdf

This brings me back to my original question, except now perhaps it's a guaranteed payment.

One partner is accruing an amount due to him. It could be a while (years) before the LLC can pay him. What should my journal entry be? Can I use an equity account in the following way?

credit Greg's Unpaid Management fee (note payable) debit Unpaid Management Fees (equity account)

Thank you for your help in this matter.

You would basically be debiting a liability and crediting owner's equity effectively creating a wash transaction.

Here's a definition for you:

"General partners who work in the business are paid a management fee called a "guaranteed payment". This fee is a legitimate business expense and therefore acts to lower the net profit of the business. This fee is similar to a salary paid to a working stockholder in a corporation, except, according to U.S. tax law, a fee paid to a working partner cannot be run through payroll. It is treated as a draw, subject to self-employment taxes. Both the general partner’s guaranteed payment and share of the profits are taxable and subject to self-employment taxes."

So, since it's unpaid, it's an accrual. Therefore, your entry would be:

Guaranteed Payment Expense Debit

         Guaranteed Payment Payable Credit

As Kevinh5 points out, you've created a problem for him, if it's deducting the guaranteed payment. It's income to him and he pays SE tax on it.

If your your books are on the cash basis of accounting, well that's a different problem.

Tom

I had this same situation with a client. Her partner hired another accountant (a CPA) who insisted that each LLC member be on the payroll. I told her it was wrong. She told her partner that the LLC shouldn't be paying wages to the members. Her partner said too bad that's the way it was. I was asked to call the other CPA to "discuss" the matter. I did. I explained to him what the problem was and why it was wrong. This professional told me I was an idiot and hung up on me.

No offense Riverplace, but you should really get a professional to help you. You've got a huge mess on your hands and it needs to be fixed.

Tom

http://www.irs.gov/businesses/small/article/0,,id=98214,00.html

Tom

PS: Fill out your profile, please.

Thank you Tom, for also giving me the correct journal entries for my situation. Bookkeepers sometimes need a CPA looking over their shoulder when entering day to day transactions.