Payroll Strategy: Don't Get Audited

Why It Matters

This approach gives small-business owners and accountants a practical, defensible guideline for setting payroll vs. profit to reduce audit risk and potential tax reclassification. Keeping compensation within these norms can materially lower exposure to IRS scrutiny and related liabilities.

Summary

The presenter outlines a simple payroll matrix that maps business profit to an appropriate payroll percentage to minimize audit risk. The rule of thumb: as profit rises, payroll should fall as a percentage—examples given include roughly 40% payroll at $100k profit, 50–60% at $50k, and about 20% at $400k. The method is subjective, manual, and intended to keep compensation in a “reasonable” range so the IRS computer flags aren’t triggered. The speaker warns that extreme mismatches—such as taking $10k payroll on $300k profit—invite audits.

Original Description

This video introduces a "payroll in excel" matrix designed to help small businesses understand their "business finance". We illustrate how your payroll percentage relates to your profit, demonstrating scenarios from taking 100% payroll to operating at a $50,000 profit level. This system, including a "salary calculation formula", is highly effective for "cash flow management" and will be accepted by the IRS.

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