Payroll Plan Review
Posted Tuesday, December 5, 2023
This explains how to review your Payroll Plan. A spreadsheet is mostly meaningful to the spreadsheet designer, so please use the link provided in an email to retrieve your Payroll Plan. We base your Payroll Plan on 3 possible scenarios-
PY Wages / W-2
This means we are basing your Payroll Plan on the prior wages or your W-2. In other words, we using the prior year as your proxy for the current year. We will update this once your Tax Plan is prepared during May, June or July.
Payroll Launch Matrix
This means we are basing your Payroll Plan on a table to help calculate your federal and state, if applicable, income tax withholdings. This is designed to get out of the gate or off the blocks as they say for the first handful of months. We will update this once your Tax Plan is prepared during May, June or July.
This is Payroll Plan nirvana. We prepare a Tax Plan given your household and business incomes, and then adjust your Payroll Plan and specifically your income tax withholdings accordingly to land on tax neutrality for April.
Moving on to the meat of the spreadsheet-
Lines 1 and 2 show your salary, and how it might be split between states.
Line 7 show employee deferrals into another 401k plan. If you have a second 401k plan (for example, another W-2 job), your 401k employee deferral might be limited (your combined employee deferral cannot exceed $23,000 + $7,500 catch-up for the 2024 tax year).
Lines 8 and 9 show your 401k owner (employee) deferral deduction (including any catch up amounts). You will need to send these amounts directly to the 401k plan administrator from your business checking account.
Lines 11, 12 and 13 show your income tax withholdings. If necessary, we will adjust these once a Tax Plan is prepared or updated.
Line 16 is an approximate net check that will be direct-deposited into your personal checking account after payroll is processed. Line 15 is an advanced deduction which lowers the cash needs to process payroll (see below for how this works).
Line 21 is the total cash needed to process payroll but does not include your 401k employee deferral payment.
Line 22 is the total cash needed for 401k employee deferrals (see lines 8 and 9 above).
Line 23 is our recommended minimum cash balance in the business checking account for payroll drafts and 401k payments.
The pink column is what 2024 will look like if we use annual 2023 amounts, and spread the amounts over the full year. If your business and / or household income will change dramatically in 2024, we will need to adjust these amounts next year.
Please read our Payroll Welcome Kit which has a ton of wonderful information about payroll processing and answers to questions like “Where’d the cash go?” See the button below. We’ve also included a Sample Payroll Plan as well.
Math and Money Conundrums
Your income tax withholdings above have been grossed up to plan for both your annual salary / W-2 income and your K-1 income from your business. If you want more or less income taxes withheld, please let us know.
Total Cash Needs might exceed the monthly salary amount, and this is due to the employer’s portion of Social Security and Medicare taxes, plus Unemployment Insurance.
Total Cash Needs might also be significantly lower than the monthly salary amount, and the primary reason for this is 401k employee deferral deductions. Your paycheck will show a 401k deduction, but the payroll processor does not draft this deduction from your business checking account; these payments must be made directly to your 401k plan administrator by your business.
Also, we strongly recommend you make the monthly 401k contribution shown on your paystub each month. Besides dollar cost averaging with your investments, monthly contributions will also help with end of year cash management. As mentioned above, the payroll processor does not make 401k contributions directly and therefore Cash Needs amounts above do not include your 401k contributions. Please transfer these contributions directly to your 401k plan from your business checking account.
Taking Money Out
Payroll rarely covers your living expenses as a business owner. As a shareholder of an S Corp, you are entitled to take distributions as a return on your investment in the business. Being mindful of upcoming expenses, business funds above the “safety floor” (see Line 23 above) can be safely taken out as a shareholder distribution.
Performing a shareholder distribution is as simple as transferring money from your business checking account to your personal checking account. This is also called an owner draw, but with an S Corp it is technically called a shareholder distribution.
Auto Pilot Processing
We will be proceeding on an auto-pilot type system with the above cash needs and you will not receive these types of emails in the future unless there is a change. If you are not able to process a monthly payroll, please let us know two weeks in advance of the previous pay date so we can process a minimum payroll for you.
A 2024 Tax Plan and 2024 Payroll Plan update will be prepared in May, June or July (planning season), and we will adjust remaining salaries at that time. A November update will be provided if you have more than a 10% change in business net income, or have a significant event (property sale, large purchase).
We typically recommend minimum payroll when future business income projections are challenging or unclear until later in the year.
Minimum payroll is $500 per month in salary, and this has been determined to be the minimum amount to ensure your payroll accounts remain open with the taxing agencies. Skipping payroll or processing a $0 salary can inadvertently close payroll accounts. Minimum payroll requires about $120 in cash to process monthly payroll, and it is all for payroll taxes (social security, medicare, etc.).
Urgent! We must prepare an updated tax plan and payroll plan by October 1, 2024 to ensure that by the end of the year we land on the correct salaries, income tax withholdings, 401k deductions, etc. We have created an internal task as a reminder, but we encourage you to mark your calendar as well.
Frequently Asked Questions
Here are some frequently asked questions and answers (you can skip if you have better things to do)-
Will I receive a check?
Yes via direct-deposit into your personal checking account.
How did you compute the income tax withholdings?
Our income tax withholding calculations are based on your projected tax liability. Our goal is to keep you in a tax neutral position. This is a goal of a $1,000 federal refund and a $500 refund to each State. Initially, we will use a Payroll Launch Matrix or prior year information, and then later we update withholdings once a Tax Plan is prepared.
When are employees’ 401k deferrals due?
If you and / or your employees have 401k deferrals where a portion of their pay checks are being deferred into a 401k plan, this must be sent within 30 days of the pay check date.
Can I get copies of paystubs, reports and journal entries?
Yes, of course! Use your payroll login information we provided to you to login and pull this information; the paystub is typically available five days after the end of the month. If you need journal entries, please let us know since we do not automatically provide those.
WCG CPAs & Advisors is a full service consultation and tax preparation firm, and we look forward to working with you!