When you’re self-employed, learning the ropes can be intimidating – especially if you’re doing it on your own.
You know that many businesses run payroll, but you’re just getting started, and you’re a one-man operation. How do you know if you need to have payroll?
At CSI Accounting & Payroll, we’ve worked with small business finances for over 50 years. That means we’ve gotten a lot of questions from prospective clients about being self-employed and running payroll, including:
- Do I need payroll for myself?
- How do I set up and run payroll when I’m self-employed?
- Is it better to be self-employed or on payroll?
Do I Need Payroll for Myself?
Let’s start with the simple answer; sole proprietors and independent contractors don’t need payroll, provided they don’t have employees. This is true for two reasons; they don’t need to pay themselves, and their taxes are handled outside of payroll.
There’s no need to pay themselves because the business owner is the business, so the revenue that the business produces is their money.
They don’t need to run payroll to pay their FICA taxes because they pay Self-Employment (SE) tax, which covers both the employer and employee sides of FICA taxes.
Side note: There is an exception to the rule. If your business is organized (like an LLC) and you’ve elected to be taxed as an S-Corporation, you do need to run payroll. Some self-employed people find this to be tax-advantageous because it allows them to take distributions without paying FICA tax.
How Do I Do Self-Employed Payroll?
To address this question, we first need to clarify a couple of things.
First, there may be a misconception of what self-employed might mean. Be sure that you fit the descriptions above.
Second, there may be a misconception of what payroll is. Payroll is more than just writing a check; you also need to take all of the necessary steps to stay in compliance.
So, when prospective clients ask us how to set up or run payroll when they’re self-employed, the most common answer we give is that they don’t need to have payroll unless they elect to be taxed as an S-Corporation.
Instead, we advise them to have two separate bank accounts – one for them, and one for the business. Keeping bank accounts separate makes tax filing easier since it keeps expenses separate and only the business income is used to calculate your SE tax.
Is It Better to Be Self-Employed or on Payroll?
Since most self-employed individuals don’t need to be on payroll, they wonder if it would be better to change how their business is taxed so they can be on payroll.
The best example of this is electing to be taxed as an S-Corporation, which we’ve touched on in the sections above. Doing this can be tax-advantageous because, in some cases, it allows you to take distributions without paying FICA tax. In this instance, you may want to consider working with a payroll service to help navigate the complexities that a change like this can bring. Make sure you talk to a tax professional first to make sure that you have basis to take distributions.
However, if you’re not making much money yet and don’t plan to hire employees in the near future, it may be simpler to remain a sole proprietor or independent contractor. It’s easier to just track revenue, handle taxes, and not run payroll, especially if you’re not working with a professional.
Know When to Hire a Payroll Service!
Many self-employed individuals don’t need to work with a payroll service since they don’t need payroll. However, once you start changing how you’re taxed or grow your business by hiring an employee, we highly recommend a payroll service to help you stay in compliance.
When the time comes, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
Not ready to talk? That’s okay! First, learn more about how much a payroll service costs.
