I Just Started My Small Business—Do I Need Payroll Software?

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.

1. You want to accurately calculate your pay, whether it’s a salary or owner’s draw

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:

Salary

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.

Owner’s draw

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.

This payment method differs from a salary in a few ways:

• It’s more flexible. You can pay yourself however much you want (as long as your business has the money), whenever you want. This makes it a great option if your cash flow is inconsistent and, for example, you need to keep more money in the business during the slow season.
• You’re not taxed right away. Owner draws aren’t taxed at the time they’re taken out. But keep in mind that you do have to pay taxes on them when you file your individual return.

2. You don’t want to deal with calculating and paying payroll taxes on your own

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.

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.

Why are payroll taxes such a headache? Let us count (some of) the ways:

• There are a bunch of agencies/authorities businesses need to pay
• Each of these agencies has different filing deadlines
• Payroll taxes need to be paid within a specific amount of time after your employees are paid
• There are ongoing changes to state, federal, and local regulations
• If you take an owner’s draw, your audit risk goes up

And that’s not to mention further complexities if you have employees in other states or if you need to pay bonuses or overtime.

Yes, payroll taxes still apply even if you’re the only employee

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.

3. You want to stay compliant as you bring on contractors (and eventually employees!)

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.

A payroll service can help out in a couple of ways:

• Sending new hire reports. When you hire a new employee, many states require you to send them information like your new hire’s name, address, Social Security number, and date of hire within 20 days (or sooner). Fortunately, many payroll software companies can automatically send new hire reports to the state for you.
• Collecting new hire paperwork. Forget file cabinets or desktop folders. Not only can some payroll software help your new hires complete mandated federal forms, such as I-9s, W-4s, W-2s, and 1099s, but it can also keep all those forms organized for easy access.

4. You don’t want to make payroll mistakes

Some mistakes, like typos on your site, are embarrassing but manageable. Other mistakes, like messing up payroll, have real-life implications.

In the 2017 fiscal year, the IRS levied over $5 billion in penalties for mistakes businesses made with their employment taxes. Plus, some payroll mistakes could even trigger a tax audit.

Instead of spending hours poring over numbers and forms, consider letting payroll software help you avoid mistakes like:

• Not staying current on payroll rules and regulations. One of the biggest advantages of using payroll software is that it helps you stay on top of changing state and federal requirements (like the 2017 tax reform, for instance). This means you can worry less about being penalized for not complying with the law.
• Not paying employees correctly. When you have employees, you need to make sure you’re paying them often enough and giving them the correct amount (which includes amounts for any accrued sick time or vacation, depending on where you are located). Otherwise, your employee(s) can sue and you could even lose your business license. Payroll software can help protect your business from wage complaints by automatically paying your employees and keeping records of each payment.
• Not keeping the right reports on file. As mentioned above, in addition to needing to fill out various forms whenever you hire someone new or run payroll, or to help figure out how much you owe in taxes, you’ll also need to keep them on hand for a certain amount of time. By using a centralized service, like payroll software, to fill out forms, you can keep them organized for whenever you need them.

What to look for in a good small business payroll service

Different payroll providers offer different things, but in general, many can help you with the following:

• Calculating and filing payroll taxes
• Filling out forms for new hires
• Determining payroll deductions
• Paying employees (including yourself!)
• Withholding taxes
• Filing end-of-year taxes
• Helping you avoid the most common payroll-related mistakes
• Sending you alerts when you have tax deadlines to meet
• Preparing W-2s and 1099s
• General management of your employee records

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.