This is a really common question, especially for startups, sole proprietorships, and LLCs that are new and might have zero employees yet. Except you, that is! Are you considered an employee by the IRS? Do you have to pay yourself as a sole proprietor or one person LLC?
Whether a company needs to run payroll depends on a variety of factors, including the type of business, the number of employees, and the laws and regulations that apply to the business.
Businesses that have employees are usually required to withhold and pay employment taxes, such as federal and state income tax, Social Security and Medicare tax, and unemployment insurance tax. These taxes are typically paid through a payroll system, which involves calculating and withholding the appropriate amount of tax from each employee’s pay and remitting the tax to the appropriate government agencies on a regular basis. There are lots of different payroll system options to choose from. It’s important to pick one that matches what you need now while having room to grow in the future with options like 401(k) plans, employee portals and more.
Technically it’s possible to run payroll yourself with an Excel spreadsheet and your online business bank account. The IRS has lots of helpful reading material! However, that’s definitely not something we’d recommend for most business owners! In many cases, a single mistake can cost more in penalties and fees than a year of payroll service and having a bookkeeper run it for you and check everything twice a month.
There are some exceptions to payroll requirements, however. For example, businesses that have only one owner and no employees (such as sole proprietorships) are generally not required to run payroll. Also, some types of businesses such as farmers and some household employers may be eligible for exemptions from certain payroll tax requirements.
It’s worth noting that even if a business is not required to run payroll, it may still be a good idea. That way you can accurately track and pay employee wages and benefits, and ensure compliance with relevant laws and regulations.