Cash basis but not $$ to cover payroll

[ILLMAS]

Scenario 

Single owner corporate business is expected to receive a customer payment of $150K before the year ends.  Owner wants to start drawing a monthly salary starting this month and use up the $150 in payroll and taxes for themselves before the year ends.  There is enough money in the bank account to cover only the payroll taxes for Oct, Nov and Dec however not enough money to cover each month payroll checks.  
 

What potential problems do you use in the scenario above?

Scenario II

The money doesn’t arrive until 2021, corporate book balance is like negative > $150k

What problems do you see?

 

[Lee B]

Why would you draw any salary without the funds to cover it?

There is one simple answer, wait until the 150K payment arrives before drawing any salary.

[ILLMAS]

Agree 100% with you, just in this fictitious scenario the owner is adamant on going this route if the money arrives on time or not.

[Lee B]

29 minutes ago, ILLMAS said:

Agree 100% with you, just in this fictitious scenario the owner is adamant on going this route if the money arrives on time or not.

I don't get it, what's the point of this supposed fictitious scenario?

[ILLMAS]

1 hour ago, cbslee said:

I don't get it, what's the point of this supposed fictitious scenario?

Sometimes people want to remain anonymous now with social media. 

[Medlin Software, Dennis]

From the payroll side.

Draw could have more than one meaning.  Could be an advance against wages, would be withdrawal of (hopefully) profit by owner.

Assuming the intent/requirement is to be paid as an employee, then if there are funds available, employee(s) (owner or not) need to be paid at least minimum wage for all time worked.  Owner/employees need to meet the reasonable wage parameters.  Pay frequency must meet state regulations (if any), so monthly may or may not be an option.  If this is the first paycheck the business is to create, then there needs to be consideration to the other issues, such as making sure a UI account is in place, WC insurance, payroll posters in place, W4, I9, etc.  Given the knowledge funds will be short, I would suggest not holding any withheld taxes, and depositing with every payroll.  (Good advice for most businesses, since there is little to gain on the float, much to lose on not remitting on time, and reconciliation costs are less.)

<soapbox>Big miss for many owner/employees is remembering to treat the employee part of the process as if it was a stranger and comply with all regulations for any employee.  No "I want to withhold this", and instead, withhold based on the last valid W4 received.  No "pay themselves whenever and whatever they want, but collect time card information, pay as often as required via the posted pay cycle the business has, and for at least minimum wage - more if possible to meed reasonableness "tests".  None of the one big paycheck a quarter or year shenanigans - since there will likely be use of the money (withdrawals) during the entire year.  Interestingly, the owner/employee who does not do the above is usually not caught by a tax agency (assuming reasonable taxes are paid in some form), but are "caught" when they want or need to sell, or if they want or need to borrow against business or against income and struggle to quickly fudge up the books to show the proper results.</soapbox>

If the funds run out, then the business needs to obtain more funds, or lay off the employees.  (Owner/employees can sometimes claim UI.)

[Max W]

There are two solutions.  Get a short term loan from the bank, or better yet, factor the receivable.  Factoring companies work faster (24 hours) than banks and charge lower interest.  They will give an advance on the payment of up to 90%.