Payroll for the Self-Employed
Payroll for the self-employed can be complex. It is important to understand how it works. It can greatly reduce your tax burden. In this article, you will learn how payroll for the self-employed works and how you can implement it.
If you make more than $400 through your business, you will be subject to self-employment tax. This tax is 15.3% of your income. It includes both the employer and employee contributions for Medicare and Social Security.
Do You Need to Run Payroll?
Whether or not you need to run payroll will depend on a few factors. The first is how you have categorized your business with the IRS. If you have a sole proprietorship or partnership, you are not eligible to run payroll. You can draw from your income, but it is not tax deductible. Any business income you report on your tax return will be subject to the 15.3% self-employment tax.
If you have an LLC and elect to be an S-Corporation with the IRS by filing a Form 2553. With this type of business set up your payroll is a tax-deductible business expense. It also prevents you from needing to pay the 15.3% self-employment income on all business profits.
The second factor you should take into consideration is the amount of profit your business is reporting at the end of the year. For most small business owners, it is not sustainable to run payroll if you are reporting a profit of less than $40,000. If your profit is more than $40,000, payroll will most likely help you save on taxes.
Preparing to Run Payroll
If you decide payroll is the right choice for you, there are a few steps you will need to take to get started.
- Determine how much you should pay yourself. You should base your salary on your cash flow and projected profit. It needs to be low enough to be sustainable, but high enough to help reduce your taxes.
- Choose a pay frequency. You will need to decide if you want to run your payroll weekly, bi-weekly, semi-monthly, and monthly.
- Method. Payroll can be done by hand, a DIY software, or by hiring a company to process it for you. Which method you choose will depend on the amount of free time you have and how well you understand the payroll process. Software or payroll processing companies can help you save time and reduce the stress of payroll.
- Calculate Taxes. The amount of taxes you pay will have a large effect on your tax return at the end of the year. If you are not sure how much you should withhold a payroll company can help you to calculate what you should do.
- Pay Taxes. When you run payroll, the withheld taxes also need to be paid to the correct government institutions. If you run payroll yourself, you will need to pay these taxes online or through the mail. Payroll processing companies will take care of this for you.
Setting Up Payroll
If payroll seems like the right fit for you, but you are not sure where to start, meet with a payroll processing company to learn more and get the process started.
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