As a sole proprietor, the IRS classifies you as self-employed. You will typically pay yourself via an owner’s draw rather than a traditional paycheck. Unlike employee payroll wages, an owner’s draw does not have payroll tax withholdings, so you’ll need to cover self-employment taxes when filing your personal income tax return. Additionally, you may be required to make estimated tax payments throughout the year to avoid penalties. If you do decide to hire employees, you will need to obtain an EIN and follow standard procedures for employment like withholding state and federal taxes.

To set up payroll for an LLC, start by determining your LLC’s tax classification. Single-member LLCs usually take an owner’s draw, while LLCs taxed as corporations must process payroll like a traditional employer. Obtain an EIN from the IRS and register with your state tax agencies for payroll tax withholding and unemployment tax. Once you hire employees, you’ll need to withhold income taxes, Social Security, and Medicare (FICA) from their wages and ensure timely payment of employer payroll taxes.

To set up payroll for an S-Corp, first obtain an EIN and register for state payroll taxes. You’ll then need to establish a reasonable salary for shareholder-employees to meet IRS requirements. For non-shareholder employees, follow standard payroll procedures, including withholding federal and state income taxes, Social Security, and Medicare (FICA) and paying employer payroll taxes.

To set up payroll for a C-Corp, the process is similar to an S-Corp. Start by obtaining an EIN and registering for state payroll taxes. Establish a reasonable salary for shareholder-employees to meet IRS requirements, and for non-shareholder employees, follow standard payroll procedures, including withholding federal and state income taxes, Social Security, and Medicare (FICA) and paying employer payroll taxes. The key difference with a C-Corp is double taxation—profits are taxed at the corporate level and again when distributed as dividends to shareholders, unlike S-Corps, where income passes through directly to shareholders.

To set up payroll for a nonprofit, start by obtaining an EIN and registering for state payroll taxes. After properly classifying workers as W-2 employees or 1099 contractors, follow standard payroll procedures, including withholding federal and state income taxes, Social Security, and Medicare (FICA), and paying employer payroll taxes. While some nonprofits may be exempt from federal unemployment taxes (FUTA), they should still comply with state unemployment tax laws. It's also recommended to keep payroll records for at least five years, especially if the organization receives grants, to ensure compliance and proper financial tracking.

To set up payroll for a nanny or caregiver, start by obtaining an Employer Identification Number (EIN) from the IRS, and registering for any applicable state payroll taxes. In most cases it’s proper to classify the worker as a household employee (W-2) rather than an independent contractor (1099). You’ll need to withhold federal income tax, Social Security, and Medicare (FICA) from their wages, and also pay the employer's share of FICA taxes. Some states will also require you to pay state unemployment insurance as well. You’ll also need to file Form W-2 annually and Form 941 quarterly for federal payroll taxes. It's important to note that nannies and caregivers may be eligible for certain tax credits, like the Dependent Care Tax Credit, so be sure to check for any available benefits.

To set up payroll for a church or clergy, start by obtaining an EIN from the IRS and registering for state payroll taxes. Clergy are typically exempt from FICA taxes on housing allowances but may need to withhold federal income tax, Social Security, and Medicare (FICA) for salaried positions. The church must also pay the employer's share of FICA if applicable. For non-clergy employees, follow standard payroll procedures. 

How you pay yourself depends on your business structure. For example, if you’re a sole proprietor or single-member LLC, you typically take an owner’s draw from the business profits, and pay self-employment taxes on the draw amount. In a multi-member LLC, owners take distributions and pay self-employment tax on their share. If you have an S-Corp, you must pay yourself a reasonable salary as a W-2 employee, and any additional profits can be taken as distributions (not subject to payroll taxes). For a C-Corp, you must pay yourself a salary, but you can also take dividends, which are subject to double taxation. The way you pay yourself affects your taxes, so it’s important to choose the right method for tax savings and compliance and talk to your accounting advisor for planning.

As an employer, you are responsible for collecting and paying several employment related taxes. You must withhold federal income tax, Social Security tax (6.2% from wages, plus a matching employer contribution), and Medicare tax (1.45%, also matched by the employer). You also pay federal unemployment tax (FUTA) on employee wages, but don’t withhold it from employees. Additionally, depending on your state, you may need to withhold state income tax and pay state unemployment tax (SUTA). Some localities may also require local taxes. It’s important to stay on top of these tax requirements to ensure compliance and avoid penalties.

When hiring a new employee, you must collect Form W-4 (for federal income tax withholding) and Form I-9 (to verify work eligibility). Your state may also require a state W-4 and a New Hire Report filed timely. Keeping your small business payroll compliant involves properly withholding payroll taxes, issuing Form W-2 annually, and maintaining employee records for at least four years. Using payroll software also helps automate tax filings and payments. Our team can help you get all this up and running very quickly.Employers must also register for federal and state payroll tax accounts, report new hires to the state, and provide workers' compensation insurance if required. 

The amount you should pay your employees depends on factors like your industry, location, job duties, and the financial health of your business. Start by researching the average pay for similar positions in your field to stay competitive, and make sure you're meeting or exceeding minimum wage laws in your state. You might also want to offer additional benefits, such as health insurance, paid time off (PTO), or retirement plans, to make your business more attractive to potential employees. Be sure to consider the experience and skills required for each role, as more experienced workers typically deserve higher pay. Ultimately, the goal is to offer fair wages while ensuring your business can maintain strong cash flow.

Deciding between weekly or biweekly payroll depends on your business needs and what works best for your employees. Weekly payroll gives employees faster access to their money, which many prefer, but requires more frequent payroll processing. Biweekly payroll is often easier to manage and can reduce payroll costs, though employees wait longer between paychecks. If your team relies on steady cash flow, weekly payroll may be better. If you want to simplify payroll, biweekly payroll is the way to go.

Deciding between hourly and salary pay depends on the employee’s role and business needs. Hourly pay suits flexible schedules, part-time work, and roles with varying hours, but it requires tracking time and paying overtime. Salary pay offers stable, predictable wages making it ideal for full-time positions, though it may require exempt/non-exempt classification under labor laws. If flexibility and cost control are priorities, hourly pay is best. For stability and long-term commitment, salary is often the better choice.

To set up direct deposit for employees, first choose a payroll provider that offers it, which many do. Have employees complete a Direct Deposit Authorization Form with their bank details, and then enter the information into your payroll system. Ensure your business bank account has enough funds, and when possible, run a small test deposit. It is best to schedule payroll payments a few days before payday to allow processing to go smoothly. It is also good practice to inform your employees when to expect their first deposit and how to access their pay stubs.

When adding an employee with an ITIN to payroll, you should treat them as you would any other W-2 employee, ensuring proper tax withholdings and filings. While ITIN holders are not eligible for an SSN, they still need to have federal, state, and local taxes withheld, including FICA taxes (unless exempt). At the end of the year, issue a W-2 with their ITIN in place of an SSN and file the appropriate payroll taxes. It’s important to check for state-specific regulations and consult with a tax professional to ensure compliance with all relevant tax laws.

When hiring a 1099 independent contractor, you need to have them fill out Form W-9, which collects vital information like their name, address, and taxpayer identification number. You don’t file this form with the IRS, but you  should keep it on record. At the end of the year, if you paid the contractor more than $600, you must send them Form 1099-NEC to report their earnings and also file it with the IRS. Unlike employees, you do not withhold payroll taxes for 1099 contractors—the contractor is ultimately responsible for their own income taxes.

The best payroll service for your business depends on various factors like team size, budget, and required software features. At a minimum, your payroll solution should handle payroll processing, tax calculations, and filings, with options for additional features like employee benefits, time tracking, and HR tools. It’s important to choose a payroll service that integrates with your other software tools, and offers strong customer service support. Send us a note, and we’ll help you find the best solution and get you started. You can also check out this blog post.