It sounds harsh, but in the early days of setting up your business, paying yourself shouldn't be a priority. You need to get your business to a place where it's financially stable and, ideally, profitable before you carve off a chunk for yourself. That said, when you do get to that stage, setting up payroll can be a useful way to not only make sure that you and your employees are getting paid accurately, but also to ensure that the government entities you have tax obligations to get theirs. So let's dig a little deeper into setting up payroll for a small business.
What is Payroll?
Depending on the way in which your business is formed, how you pay yourself—and your employees—will vary. But for the sake of this post, we're going to focus on traditional payroll. Payroll "is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time." (source)
Business owners and accounting or bookkeeping professionals often use the phrase "run payroll." This basically translates into the process in which the business pays its employees and meets payroll tax obligations. If you've ever been an employee of a company, you recognize this process from the "payee" perspective. At a (usually) pre-determined time, you would receive a paycheck. Usually this is happens bi-monthly or monthly. Say your gross pay for a given period is $1,000.00. But from that $1,000.00, money gets chipped away to federal, state/province, and/or local tax departments and other government entities (think Social Security). After the dust settles, you're left with your net pay. Payroll—or a payroll service—is what takes care of all of the deductions in addition to putting money in your pocket.
Do You Need Payroll?
This is a thoroughly appropriate question! As mentioned, when you're first starting out, you might not need payroll because you might not have anything to pay yourself or the employees who are making a bet on the future success of the business. But if you are serious about the business and have plans for future growth and expansion and employees, the sooner you get set up with a payroll service provider, the better. (You're accountant will thank you for knowing exactly when you turned payroll on and the insight that everybody's getting paid the same way.)
Now remember: a payroll service is going to take the headache out of trying to figure out and remit all the deductions that come with running payroll, but there's a cost associated! Luckily, something like "payroll expense" (aka, the amount you pay to the payroll company to run the payroll) is tax deductible.
Info You'll Need for Setting Up Payroll
Here's where having a payroll service provider is going to immediately come in handy. They'll tell you every piece of information you need to get set up. But in the spirit of being prepared, here are a few things to have at the ready when you're setting up payroll:
- The business' federal identification number (EIN in the U.S.)
- The business' state or provincial revenue department account number
- If appropriate, the business' local (city, county, township, etc.) revenue department account number.
- The business' financial institution information (aka, the account employees will be paid from)
- Payee account information (for direct deposit)
Setting up payroll takes a thoughtful approach. You need to always be sure that there's enough money to cover. You also need to consider the costs of running payroll. That said, most payroll providing companies are more than happy to have a consultation conversation. with you. Two of our favorites are Paychex and Payment Evolution.
As always, nothing in this post should be considered business, financial, tax or legal advice!