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I am a self-employed bookkeeper, but I don't do taxes or…

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I am a self-employed bookkeeper...
I am a self-employed bookkeeper, but I don't do taxes or know all of the ins and outs of business taxes. One of my clients has many commission-based employees and they are paid draws that are then deducted from their commissions. At the the end of the year, many of them have substantial draw balances that appear on the balance sheet as "other assets". My client has never mentioned this before, but now he wants me to offset these draws at the end of the year to commissions expense, because he believes he pays taxes on those draw balances. Would that be so? I was never aware of this fact, and he may be incorrect and/or confusing it with his Member Draws. By the way, they are an S-Corp and file on a cash basis. Before I respond to him, I would like to not look stupid :)
Submitted: 22 days ago.Category: Finance
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Answered in 1 hour by:
4/2/2018
Financial Professional: Kelly McGlynn, Certified Public Accountant (CPA) replied 22 days ago
Kelly McGlynn
Kelly McGlynn, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 30
Experience: President at Exceptional Bookkeeping Inc.
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Hello. Thank you for your question. I'm Kelly and am here to help you today. I am reviewing your question and will be with you shortly.

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Financial Professional: Kelly McGlynn, Certified Public Accountant (CPA) replied 22 days ago

I'm not sure that the term "offset" is correct. If I am understanding you correctly, The commissions amounts on the income statement are understated unless you add these "other assets" to those amounts. For example, if a "draw" is given to independent contractor for $500 and that amount is posted to an other assets account, then when you pay their commissions, let's say they earned $2,000, you would only pay them 1,500 due to the draw that they took. Therefore, you would need to add that $500 in draw to the commissions so that that individuals total commission would be correct for their 1099 and for the clients income statement as well.

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Customer reply replied 22 days ago
That is correct. But if an employee leaves the company before paying off their draw balance, it is reclassified as commission expense and included in their 1099-Misc. My client wants me to reclassify these draw balances to commissions at year end to remove them from the balance sheet.
Financial Professional: Kelly McGlynn, Certified Public Accountant (CPA) replied 21 days ago

Yes, they should be classified as commissions expenses rather than draw balances on the balance sheet. It should be commission expense whether the employee leaves or not.

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Customer reply replied 21 days ago
Hopefully I explained it correctly. They are recoverable draws, so the employee is "supposed" to pay them back. Some employees carry significant draw balances ($20K-$40K) and they have historically not been recovered when employees have left the company, though fortunately that is not often. When the employee does leave, any unrecovered draw balance is reclassified toward commissions for the year. Each year their 1099 reflects the amount the employee was actually paid that year, in either commissions or draws.
Financial Professional: Kelly McGlynn, Certified Public Accountant (CPA) replied 21 days ago

As long as the total actually paid, whether posted to draw or commission originally, is at some point classified as commissions expense on the income statement, you should good. I would just make sure that at some point it is all taken out of the balance sheet, otherwise it would not be expensed on the tax return and therefore not deducted.

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