Payroll for Small Business

Do I need a payroll service?

As the owner of a small business, whether individually or with business partners, you should seriously consider having a formal payroll process. Many small businesses begin by simply taking draws from the business’ income as their “salary”. This can lead to an imbalance in draws and cause conflict among the partners.  Additionally, having a formal payroll system in place is necessary to take advantage of certain tax reduction strategies.

As of 2018, sole proprietorships, partnerships, LLCs, and S corporations may deduct a certain percentage of their pass-through business income from their personal income taxes. There are requirements to be met and certain business income limitations do apply, but a great majority of small businesses can take full advantage of this tax reduction vehicle. Using a payroll service is a requirement for you to earn the maximum business income deduction allowed by the 2018 Tax Cuts and Jobs Act.

What role does payroll play in tax reduction?

If you decide to make an S-Corp election with the IRS, you will need to have a payroll system in place to pay wages to employees (employees includes yourself and any business partners).

What is an S-Corp election?

The Election by a Small Business Corporation to become an S-Corp is a tax status.  It allows a business to avoid ‘double taxation’.  Double taxation refers to paying self-employment taxes on 100% of your business income plus personal income taxes on your share of that income which is reported on Schedule K-1 for your personal 1040 Individual Tax Return.

What if I have an employee?

Regardless of the size of your business or business structure, if you have an employee or wish to pay yourself as an employee, you will need to subscribe to a payroll service. At minimum, a good payroll service will ensure your business:

  1. Stays in compliance with your state’s employment regulations.
  2. Keeps payroll on schedule through timely notifications.
  3. Streamlines employee payment method (typically via Direct Deposit).
  4. Properly calculates employee deductions including Federal & State Income Tax withholding, Social Security, Medicare, and State Unemployment insurance Tax.
  5. Makes timely tax deposits to the appropriate payroll tax agencies.
  6. Reports new hires to the state properly and timely.
  7. Timely files quarterly and year-end payroll tax returns.
  8. Provides timely W2 and 1099s at the beginning of the following year.

There are many compliance factors that only a payroll service with good customer support can ensure are met.  A good payroll service runs smoothly, is accurate and pain free and most of all keeps your business in compliance.

Our team of Next Step Tax, Next Step Bookkeeping, and Next Step Payroll can help you structure your business, organize your books and set you up with a payroll service to work towards your goal of achieving the lowest possible tax bill. Call us at (512) 222-3204 or email [email protected] to discuss your business’ next step to becoming more profitable.