Even if you are the only employee for your business, I strongly recommend that you establish a payroll. Here are the answers to 4 questions which business owners usually ask in relation to payroll.
- Should I put myself on the payroll? – The answer I give everyone is YES! I strongly suggest committing to paying yourself a salary and treating yourself as an employee. It doesn’t have to be a large amount, but it forces you to be disciplined about making payments to yourself. You can always put the money back in the business if it is needed.
- Can I just pay myself from the profits? – I would recommend that you pay yourself a regular salary from which taxes are taken out. If you choose to take payment from profits, you might end up owing a lot in taxes at the end of the year. By taking a paycheck, you pay your taxes upfront and reduce the tax liability that you might owe on the back end. Also, by having taxes withheld from your paycheck, you are contributing to Social Security and Medicare, which you might need to have access to later on in life. You can always adjust your salary and figure out the optimal amount to take but I strongly recommend that a portion of the money you make from the business be in the form of a regular paycheck and not only distribution of profits.
- Can I hire someone as a contractor? – A lot of business owners try to avoid the employer portion of payroll taxes by hiring workers as contractors. Legally, you can really only do this if the person determines when they work, how they will work, and are truly independent from your business. If you hire someone as an employee, you must withhold taxes from their paycheck and remit it to the relevant agencies. You do not have to do this for contractors. The increased complexity of having employees makes it that much more unappealing, but you can end up in a lot of hot water legally if you don’t classify a worker in the right way.
- How often should I run payroll? – The most popular frequencies for payroll are weekly, biweekly, and bimonthly. Employees would obviously love to be paid weekly but that can be onerous for the business in terms of cash flow and the time needed to prepare the payroll. If the cash flows of the business can support it, my recommendation is bi-weekly. This frequency makes calculation of overtime very easy for hourly employees. Also, since a biweekly payroll occurs on the same day every two weeks, it makes it easier to plan as opposed to a bimonthly payroll which would fall on varied days depending on which days of the month are selected for the payroll.
- QuickBooks also has a payroll function that allows you to run payroll. It will also automatically calculate the amounts due and generate the forms needed to remit to the different agencies. Since I use QuickBooks for bookkeeping, I also use it for payroll. By using the payroll feature in QuickBooks, you can also have more control over when funds are remitted to the relevant agencies. If cash flow is an issue, this can be a life saver.
- ADP is a major player in the payroll service market. They will automatically deduct payroll taxes from your account, and so you won’t have the flexibility that QuickBooks provides. However, if you are a set-it-and-forget-it kind of person, this might work well.
Determining the best payroll setup for your business is critical for keeping you in compliance with taxes. It’s a headache that you want to make sure you avoid at all costs – trust me!