Doing your last payroll for the year is an important time to make sure you have a tax plan in place. That payroll is often the last cash transaction for the year; your last chance for tax deductions. To properly do tax planning, the key is understanding the income of the business and understanding the income of the individuals.
Managing the business income so you take advantage of the tax rates is the most basic type of tax planning. If your business income is going to put you in the 35% tax bracket, the last payroll is a chance to reward the employees while also reducing your marginal tax rate. If you can knock down the tax rate to 25%, plus reward the employees, that’s a classic win-win.
For business owners that are also employees of their business, a bonus at year-end is a great way to make sure you have your withholding taken care of for the year. For example, a 100% owner of an S Corporation is going to have all the wages and all the business income taxed on their individual return. You won’t be able to reduce the business income by paying yourself a wage, but you can have that wage include lots of federal and state withholding. If it turns out you are behind on tax payments for the year, that year-end withholding is a great way to catch up since withholding is counted as paid evenly throughout the year.
Don’t forget about the new 0.9% Medicare surcharge that needs to be withheld on wages that exceed $200,000. The final calculation of that 0.9% on earned income gets sorted out on the individual return, but the company does need to withhold when wages exceed the $200,000 threshold.
3 comments on “Year-End Planning – Payroll”
Hi Chris, the article that you have posted is really good.
In many companies overpayment takes place as they calculate the payroll of an employee manually and never thought of using a payroll software or a HRMS Solution.
There are many HRMS Solutions in which one among them is HAPA (Human resources And People Appreciation), it does all the end-end activities like calculation of payroll, attendance, leaves, stores details of the employees along with the scanned copies of the employee etc. and is very cost effective specially for SMEs.
I think automating the HR process is a good idea. Companies have this misconception that its a cost to the business. But in reality it leads to a greater ROI and makes the major chunk of the business hassle free and error free.
Thank you so much to share your views and knowledge.
Thanks for posting a good article on payroll and accounting.
Hi Chris, Good points mentioned in this blog. It is important that the payroll manager fully understands the importance of getting payroll right. Today, you can choose from a complete outsourced payroll solution where staff and/or contractors are paid by the third party company, they make all the deductions and remit superannuation. You just pay one full amount to them for managing payroll.
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