Setting up the Management Bonus

As the boss of the company, you have many options regarding how you can take remuneration from the company.

If you are not incorporated, you may draw whatever is available or nothing at all. It doesn't matter, because you will be taxed on the net income before maws.

If you are incorporated, however, you have to plan your remuneration more carefully. This section will discuss the accounting for the bonus accrual.

At the end of its fiscal year, the company may accrue a management bonus to the owner/manager for tax reasons. This bonus is not actually paid yet, but it is allowed as a deduction for the company's income taxes. The gross amount of the bonus gets set up as both an expense to the company and as an amount owing to the shareholder. The entry looks like this:

DR Management bonus expense

CR Management bonus payable

 

Some companies credit the shareholder loan account instead, but it is a good idea to segregate the bonus into a separate account so that you remember to deduct withholdings when the amount is actually paid out. Payroll taxes are not taken into consideration until the bonus is actually paid out to you, because payroll taxes are expenses for the period during which the bonus is paid.

For example, if a bonus of $25,000 is declared, the entry at the end of the fiscal year is ­

            DR Management bonus expense $25,000

            CR Management bonus payable                  $25,000

 

If, a month later, you want to pay $5,000 gross from this bonus, your entry would look something like this:

            DR Management bonus payable $5,000

            DR     Payroll tax expense              212

            CR Payroll tax liability                               $1,425

            CR Cash                                                    3,787

 

The debit to the payroll tax expense reflects the company's share of the payroll taxes that must be remitted. The credit to the payroll tax liability reflects both the company's payroll taxes and the employee's withholdings. This entry tells you that the company paid out $5,000 of the $25,000, and some of that went to you (the employee) and some went to the government.