The accounting aspect of employers’ personal income

In accordance with the Rules on the Chart of Accounts for Companies, Cooperatives and Entrepreneurs, account 723 – Employer’s Personal Income is used to record payments that the employer (as a member or founder) receives during the year within the company.

These payments represent temporary withdrawals of profit, which are booked during the accounting period. However, if at the end of the year it is determined that the profit made is not sufficient to cover all the payments made, the difference – i.e. the uncovered part – is transferred to the debit of account 724 – Transfer of profit or loss. In this way, compliance with the financial statement and accounting rules is ensured.

Account 723 is used to record various types of payments that the owner or entrepreneur withdraws during the year, before the final distribution of profits. In practice, the following transactions can be recorded on this account:

– Interim dividend payment – temporary distribution of profit before the adoption of the final accounts;

– Withdrawing assets for personal use – when the owner uses company funds or assets for purposes other than business purposes;

– Paying personal expenses from a business account – such as housing, travel, or private bills.

Interim Dividend

If a company has no undistributed profits from previous years, an interim dividend can still be paid – but under certain conditions. It is necessary for the company to generate a surplus of income over expenses in a specific period, which is proven by internal, periodic business calculations. This calculation is kept for decision-making purposes, but is not submitted to the competent authorities.

However, the law clearly sets limits: a company may not make payments to shareholders if this would undermine its financial stability. More precisely, according to the latest annual financial statements, the company’s net assets may not be less – nor may they become less as a result of the payment – than the amount of paid-in share capital, increased by the legal and statutory reserves that the company is required to maintain. The only exception is in the case when the share capital is previously officially reduced.

The total amount that can be paid out to shareholders in the form of profit for a business year is strictly limited by law. It may not exceed the total profit at the end of that year, increased by undistributed profit from previous periods and reserves intended for distribution. At the same time, this amount must be reduced by any losses carried forward and mandatory reserves that the company must retain in accordance with the law or the articles of association.

On the other hand, when the owners of a company make payments to themselves during the year – either as an interim dividend or through other withdrawals – these payments are treated as capital income for tax purposes. According to the provisions of the Personal Income Tax Act, this category also includes dividends and profit participation, regardless of whether the payments are made from officially distributed profits or during the year, as advances.

This means that both interim dividends and withdrawals of profits before formal distribution are subject to taxation at the rate applicable to capital income, and that they need to be properly reported and included in the tax balance.

The taxpayer of capital income tax is a natural person who earns such income. Taxable capital income is income paid (distributed) to the taxpayer. The tax rate on capital income in the form of dividends and profit participation is 15%, and it is calculated on a tax base of 100% of gross income.

Taking from the company’s property for the owner’s private needs

According to the Personal Income Tax Law, the taking of property from a company and the use of its services for private purposes by the company owner is treated as capital income. This tax base, which is calculated as 100% of the gross value of the income, is subject to a tax rate of 15%.

The legal framework does not provide for the possibility for owners to use company assets for their personal needs or the needs of related parties, except in very limited and exceptional situations. The assets of a business company are considered separate from the personal assets of the owners, and are not allowed to be disposed of as private property.

Although this use of property is formally prohibited, in practice it often happens that owners of companies occasionally make payments from their business accounts for personal expenses. In such cases, there is an obligation to calculate and pay capital income tax, thereby fulfilling tax obligations and reducing the risk of sanctions.

Taking from the business assets of an entrepreneur

According to the Personal Income Tax Law, the takings made by an entrepreneur from business property for their private needs are considered business income for the purposes of tax regulations. When the taking is not in monetary form, its value is estimated according to the comparable market value, on a going concern basis.

It is important to emphasize that such taking does not constitute a basis for recording as income in the business books of the entrepreneur. In other words, expenses that are not incurred for the purpose of carrying out the activity cannot be recorded as business expenses. Only expenses that are incurred in carrying out the activity, and for which there is appropriate documentation, can be recorded as business expenses.

Therefore, any withdrawals from the entrepreneur’s business assets for personal use — whether it be taking goods, money, using services, or paying private expenses through a business account — cannot be considered business expenses. Instead, such payments are recorded as personal expenses, made from the entrepreneur’s realized or future profits.

Regardless of the method of recording the withdrawal from business assets for personal needs, the entrepreneur is not obligated to calculate and pay tax at the time of withdrawal. The tax liability arises when determining the overall business results through the tax balance sheet, which is prepared at the end of the tax period.

In other words, whether an entrepreneur makes withdrawals from assets or withdraws advances of net income during the year, the accounting is done in the same way – through account 723. From an accounting and tax perspective, these two categories are treated as identical.

If an entrepreneur incorrectly records the acquisition of property as an expense in the income statement, it is mandatory to subsequently increase the amount of that expense in the tax statement, thereby increasing taxable profit by that amount. This is important in order to ensure that tax treatment is in line with legal requirements and to avoid potential tax irregularities.