Jenna Lee has been writing about business finance for over seven years. Her work has been featured on Gusto, U.S. News and World Report, The Huffington Post, Credit Karma, and more.
7 min. read
Updated October 25, 2023
Payday is typically a moment people look forward to. But for many small businesses and startups that are just getting started, it’s a huge source of stress and frustration.
Why? Because payday means payroll—and payroll is complicated and takes time. Twenty percent of small business owners reported spending more than six hours a month handling payroll taxes. And some said they spend more than 10 hours a month, or the equivalent of three work weeks a year, just dealing with payroll.
Luckily, automating payroll makes things a whole lot easier—especially when you’re a new business owner. Here are four reasons why you might want to consider getting payroll software right as you’re first setting up shop.
You’d think that paying yourself would be as easy as writing a check and depositing it (or, even better, simply direct-depositing money into your account). But there are actually different ways to pay yourself, depending on factors like your entity type, business plan, and years in operation.
As you’re thinking about how you want to pay yourself for the first time, here are the main types of owner payments you should know about:
A salary is a set, recurring payment to your employee(s)—which can also be you. If you own an S or C corporation and are involved in the day-to-day business operations, you’ll want to give yourself a salary.
S and C corp owners need to make sure they’re paying themselves a reasonable compensation as an employee. Of course, “reasonable” is objective, but it generally means you should pay yourself what you’d make if you had the same role at a different company.
When you start paying yourself a salary, payroll taxes kick in—and a payroll service will help you make sure you’re taking the correct amount out.
An owner’s draw is for LLCs, sole proprietorships, and partnerships. It’s exactly what it sounds like: a way for owners to withdraw money from their business for their own personal use.
When people gripe about taxes, they tend to think about the financial aspect of it. However, for small business owners, figuring out all the tax responsibilities is often the worst part. Fortunately, many payroll services can make life easier by taking out the correct amount of taxes and filing them automatically.
Brought to you by
Build a strategy
According to the National Small Business Association (NSBA) 2018 Small Business Taxation Survey, payroll taxes were easily the second-most burdensome tax—both in terms of administration and cost.
And that’s not to mention further complexities if you have employees in other states or if you need to pay bonuses or overtime.
Unfortunately, you’re not off the hook if you’re the only employee. The IRS doesn’t make special exemptions for “solopreneurs” or sole proprietors. Once you start paying yourself a regular salary, you’ll need to deduct the correct amount and send payments to the IRS (and usually a state tax authority) at least every quarter.
If you’re paying yourself through an owner’s draw, remember that you’ll pay taxes on the amount through your individual tax return.
Hiring people to help your business can make your life both harder and easier. On one hand, extra help can give you more time to work on your business. On the other, there are a ton of rules you need to follow when bringing on contractors and employees.
Some mistakes, like typos on your site, are embarrassing but manageable. Other mistakes, like messing up payroll, have real-life implications.
Different payroll providers offer different things, but in general, many can help you with the following:
When looking for a payroll provider, keep in mind that there are many options out there. You no longer have to go with a pricey payroll service that’s meant for businesses with hundreds of employees. Today there are a number of providers that are geared toward small businesses—their main goal is to make payroll easier at a price point that won’t bankrupt your business.
However, time is money, and payroll software can help you save valuable hours you need to grow your company. But more importantly, it can bring back the joy you used to feel whenever payday came around.