As a startup business, we would not recommend initially paying yourself a salary. Why? A new business needs to conserve cash, so funding your payroll along with the payroll taxes would not be the best use of funds. Payroll taxes can range from 8% to 15%. This is based on federal tax obligations such as Social Security, Medicare, and unemployment insurance.
Prior to funding your payroll, you will be required to register with your respective state’s Department of Labor and the Department of Revenue, for states that impose state income tax. You will also be required to register with the Internal Revenue Service Center Electronic Federal Tax Payment System (EFTPS). Your state’s Department of Labor is responsible for collecting unemployment insurance tax, referred to as SUTA. SUTA is strictly an expense incurred by your company on behalf of employees. Your respective state’s Department of Revenue is responsible for collecting withholding tax, a tax solely imposed on the employee and not the employer.
Once these state identification numbers are issued to your company, you will be required to file payroll tax reports even if the returns are zero or even if you do not have activity for that period. This may place an undue pressure on a new business owner focused on client acquisition and generating profits. Failure to file these returns on time will result in late filing penalties, which will create another financial burden on the newly formed business. Because of this, we discourage funding payroll in the first year of operations unless the business achieves its financial operation goals in the first year. These financial goals include a business that is generating profits from the product or service it sells.
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Instead of funding payroll, businesses that are established as a sole proprietor (single member Limited Liability Company, our recommended option for start-ups) should take distributions. Distributions are not deductible expenses of the businesses. They are simply a manner in which a business owner can recover their investment using company generated profits.
However, a business that is generating profits should make estimated tax payments if they plan to owe $1,000 or more in taxes quarterly.
A new business owner should not burden its operations initially by focusing on the owners’ salary. If the individual does hire employees, then they must fund the workers compensation as either an employee or a contractor. But as an owner of the business, it is not mandatory that you pay yourself a salary depending on how your business is structured.
About the Author: Riolene Ibok, CPA is the President of Accounting & Tax Advisory Group PC. She is a licensed CPA in the State of Georgia and holds a MBA from Georgia State University. Riolene specializes in tax, accounting, consulting and audit services for individuals and small businesses. You can contact Riolene at firstname.lastname@example.org.