Expert: Shirley McAllister, CPP, PHR - 8/7/2008

Question
QUESTION: I am going to be serving as the controller for two small companies that are financed through husband & wife investors. My salary is going to be paid by the companies themselves, not by the investors, but I have to determine how accounting for the payroll will happen. The two companies virtually have no relationship except common investor (they do not consolidate) Can I have Company 1 pay me for both salaries and have Company 2 reimburse Company 1 for their portion of the payroll expense and associated taxes? I was thinking this might be the best option so that excess Social Security withheld wont need to be reimbursed at the end of the year and so they don't both have to pay unemployment tax on me, but I don't want to be doing anything illegal or unethical. Is there any guidance I can read on this issue?

ANSWER: What you would be doing is legal. You would be working as a concurrent employee for the two companies. Basically you would work for one company and the other company is using you as a consultant and paying the company for which you are working for your time.

Corporations use a common paymaster to do this chore, but small companies do not. They simply pay the wages from one company and the other company reimburse's the company that pays the wages for their part of the wages as consultant or contract labor fees. The paying company may even bill the other company for your services.

Shirley

---------- FOLLOW-UP ----------

QUESTION: Thank you so much for getting back to me so quickly! It seems to me that I wouldn't want to have this done through a billing process as I wouldn't want to have a revenue on the main company, do you agree? I would think the entries would look like this (at a very basic level and excluding tax liabilities etc)
Co 1
Dr. Payroll expense 100
  Cr. Cash          (100)

Dr. Cash          50
  Cr. Payroll Expense  (50)

Co 2
Dr. Payroll Expense 50
  Cr. Cash          (50)

Answer
Those would be correct Journel entries. The invoice would be audit support. It is not income if it is also an expene.

It would be a contract labor invoice and than expensed by company two as a contact labor expense.

You do not have to do it at all, but if you do audits at the end of the year and have to explain the amounts on the P&L you generally need some backup.

Shirley