Bookkeepers and accountants need to confirm entity type from the tax return, not the business name, then separate owner distributions from officer wages. S-corp officers must have a separate wage line on the W-2, and employer-paid benefits like health insurance and 401(k) contributions need payroll adjustments if not tracked all year.
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This week we're going to talk about streamlining your payroll processes for an efficient year-end. And how do you make the adjustments to make sure that, that payroll data is accurate? So as we approach the end of the year, it's crucial to ensure that the payroll processes are efficiently managed and they're accurately reflected on your client's books. Making year-end adjustments is just part of the, the workflow that we have to do. It's part of our due diligence in our record keeping. And if you do it now, it can save you time and effort really in the long run. You're not having to go backpedaling into a prior year to make any adjustments. If you've ever had to do that with your payroll program, you're gonna find that that is definitely one of the areas that's a little sticky. Very short turnaround on that. They lock down the system for reasons, obvious reasons. They lock it down because the year is complete. And they, you know, basically, you're what you're trying to do is to prevent potential discrepancies or errors. So where do we start? Well, we're going to start with entity types. So knowing your client's entity type is critical. Don't just go by the letters that go after the name of the business. So even if my company is the Proper Trust LLC, I may be a partnership, but I might have elected to be an S corp. So you need to know those details and the easiest way is to ask the client, but don't be surprised if they don't have an answer. I've had that happen where they really weren't sure. The best way is to go to their tax return. So ask the client for the tax return. You should be getting it anyway as part of your work to close down the prior year, lock it out, make any adjustments to book to tax. And once you have that in hand, you'll know that any money that came out on a check written to the owner, if they're an LLC, that's a straight-up LLC. Or a partnership, those are distributions. So any money taken out of the firm is a distribution. It's not a paycheck, it's not an owner's pay. It is not— it'll be wages if it was an S corp. So if it's an S corp and this person is the officer of the firm, then there's an S corp situation. So it could be an LLC electing to act as an S corp. So like I said, don't go by the letters, really look at the tax return. It's right on that front page. And then if they are the— The owner. S corp, then you're looking at a different situation. The owner is allowed to pay themselves a wage. Now the interesting part of this is you have to separate that wage from the wages that are on for everyone else in the firm. So the receptionist, the paralegal, anybody that they're paying a paycheck to, they're gonna be separated. Officer wages is a separate line item. And this is because when they process the tax return, if they are an S corp, it's a pass-through. To the owner and those wages are going to be booked in and they're not gonna be part of, there'll be an expense, there'll be wages on the books, but they're also gonna be put onto the tax return in a specific way. That owner, if he's paying, he or she is paying for benefits for themselves, those are a taxable event back to the owner. And another line item has to go on that W-2 for that specific item taxed back to the client. So when you look at it that way, if you haven't been tracking it that way, or if your client has been paying for their Blue Cross, for example, to Blue Cross and not part of the system that's built into QuickBooks Payroll, now you have to make an adjustment in the paycheck. So that's another thing. And then there's also, if they paid their 401(k), 401(k), say they're paying, I'm gonna use for an example Fidelity 'cause that's a popular one. And they log into Fidelity and they make the payments and they do the math and they pay their portion and the portion that's, from the company, the company expense, that also has to go on their W-2. So if it's not on their W-2 and you haven't been tracking it all year, maybe you've been tracking part of it, not all of it, that's all going to be part of your payroll reconciliation. You will be able to— well, let's put it this way, you can make an adjustment to the healthcare and put that on the check now with QuickBooks Online Payroll. You cannot do that with— QuickBooks Online. The 401(k) 401(k) just yet, hoping for maybe soon or next year that we're able to make those adjustments ourselves. But right now, as of today, we can't, and we have to make a payroll correction on a spreadsheet. It's a template for it. I'll provide the template in the article, and then you have to upload that to the payroll corrections team, and it— there's about a 30-day turnaround. So you probably want to be looking at this now to get this on the W-2 for this year. So 401(k), 401(k), health benefits, definitely, and health benefits are two of the areas that you might wanna make an adjustment on a paycheck. There's a lot of other ones, and I will go into that. We're actually having a free webinar, so we will go into that in the webinar. Some of the things that we do for year-end that I think are important to do. But the most important thing here to consider is to be proactive. So if you are that bookkeeper and you're looking at your client's books, Really know the entity type. That's my advice, is to get that tax return, align the books to tax. So pull that balance sheet up as of 12/31/22, as an example, and then the tax return for '22, and make sure the balances match. If they don't match, that means the, the tax person made an adjustment, and you can start digging through the papers to see that it's probably like a depreciation entry that you were never told about. And then you want to make those entries. You want to align the books so that the If somebody ever was auditing the records fully, they could look at the tax return and look at the— look at our books, and the numbers match perfectly. That's the perfect scenario, and that's what we're looking for— perfection. As we go into doing finalizing the current year, you want to really look at— look at the health insurance, look at the 401(k) 401(k) benefits for the owner. If they are an S corp or an LLC acting as an S corp, you want to make sure that they're stated that way on the chart of accounts. Really make sure that the entity type is also stated properly. If they're a sole proprietor, it should say like owner's this and owner's that. If they are a partnership, it should say partner contribution, partner distribution. If they are a shareholder because they're an S corp, shareholders distribution, shareholders contribution. I have another article all about different entity types and I'll link back to that as well in the article. So make sure you take time to read the article below. And I want you to all have a wonderful week. Let's get this going. Let's close out this year with a bang and really be in a good place for next year and hopefully fresh start and get moving to a happy, prosperous 2024. And we'll see you all next week. Don't forget to hit the subscribe button. Bye now. Bye.
