Mark Kohler presents a payroll matrix that matches your profit level to a safe payroll percentage: 50-60% at $50k profit, dropping to 20% at $400k profit. Staying within these ranges keeps you off the IRS radar and avoids audit triggers from disproportionate payroll.
I created a payroll matrix. Here's what it looks like generally. In this matrix, we're going to put down here at this axis how much money you're making. This is your profit that you're taking out of the business. Here we're going to talk about your payroll percentage. So your payroll percentage might be zero— you take no payroll— or you take 100% payroll. Here you might have zero money or you're making $500 grand. What's interesting is you make more money, your payroll actually goes down as a percentage of your profit. So here I might be at about $100 grand, and so I might take 40% in in payroll. Now, if I'm at $50,000, I might take 50% or 60% in payroll. If I'm at $400,000 in profit, I might take 20% in payroll. And you don't freak out the IRS computer system. You're in a reasonable area here. And accountants, you don't need software to do this. This is it. It's subjective, it's easy, it's simple. Go under the radar. The IRS is not going to chase you down. It's the client that wants to take $10,000 in payroll when they made $300,000. You know they're going to get audited, and they do. This is reasonable. It works. Never, ever, ever had a problem with this approach, this matrix. Now, this is a subjective approach to get started, we're right in this realm every time.
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