Is it okay to leave fixed periodic salary unpaid?
Corporate business owners: My company's cash flow has worsened, so I want to leave my salary unpaid for the time being. Is there any tax issue with this?
I will answer this question.
Contents of this article
・Is it a tax problem to process fixed periodic salary as unpaid?
・How should withholding income tax be handled?
I, Mitsuzane, a certified public accountant and tax accountant, will explain.
In conclusion, there is no tax issue with processing fixed periodic salary as unpaid.
Is it a tax problem to process fixed periodic salary as unpaid?
First of all, regarding what fixed periodic salary is, executive compensation is generally not recognized as a tax-deductible expense unless it is the same amount every month.
This is because allowing revisions to executive compensation without a special reason would be the same as allowing profit manipulation.
Therefore, simply put, fixed periodic salary is paying a fixed salary to executives every month.
Even if you record fixed periodic salary as unpaid due to reasons such as worsening cash flow, if you have processed the fixed amount as an expense in accounting, it will also be recognized as an expense for tax purposes.
Fixed periodic salary does not require notification to the tax office.
In addition to this, there are also things called pre-determined notification salary and performance-linked salary, where executive bonuses can be recognized as expenses by submitting a notification to the tax office in advance.
How should withholding income tax be handled?
Regarding the question of what happens to withholding income tax if fixed periodic salary is left unpaid, in principle, withholding income tax is not recognized while it remains unpaid.
Withholding income tax is recognized at the time of payment.
The following are examples of journal entries for the standard case.
Standard Journal Entry Example
(Salary payment date)
Director's Compensation 1,000,000 / Accounts Payable 1,000,000
(When actually paid)
Accounts Payable 1,000,000 / Cash and Deposits 900,000
/ Deposits Received 100,000
In principle, withholding income tax is recognized when payment is actually made, but because this process can be cumbersome, in practice, it is often recognized on the salary payment date.
The following is an example of a journal entry used in practice.
Practical Journal Entry Example
(Salary payment date)
Director's Compensation 1,000,000 / Accounts Payable 900,000
/ Deposits Received 100,000
(When actually paid)
Accounts Payable 900,000 / Cash and Deposits 900,000
It is also possible to reduce the fixed periodic compensation itself during the fiscal year.
If the reason is a significant deterioration in business conditions, a mid-term reduction revision of fixed periodic compensation is permitted.
This is not permitted for reasons such as a corporation's temporary cash flow convenience.
If you are looking to review your ongoing cash flow due to a significant deterioration in business rather than temporary cash flow issues, I think it is worth considering.
Summary
As the name suggests, fixed periodic salary must be the same amount, so there are some inconveniences.
However, depending on the company's situation, recording it as unpaid or reducing the amount is permitted, so I think it is best to use these options appropriately according to your cash flow situation.