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.
This article was originally published by TaxConnections
Chris Wittich is a tax supervisor with Boyum & Barenscheer in Minneapolis, MN. He blogs as the ravenous tax tiger for the firm website at boybarcpa.com/blog
Published: November 15, 2013