In this edition of the “Ask Ram” series a small business owner wants to know whether they need to run payroll for their business. This is a common question and it is important to know whether you need to prepare payroll and, if so, how often you should run it. How you handle your small business payroll services will vary depending mainly on the type of small business you have and how it is incorporated.
If you are incorporated as an S-Corp or C-Corp, the IRS requires you to run a payroll. The payroll you run for yourself should be a reasonable compensation, which can be defined as the compensation you would expect to earn if you worked elsewhere. The reasonable compensation will depend on each specific case, industry and position.
If you are incorporated as a Limited Liability Corporation (LLC) or a Partnership, you do not need to run a payroll. You can either take a guaranteed payment or you can take a regular draw. You will have to pay self-employment tax on a quarterly basis.
If you are running a sole-proprietorship, it would be handled the same as an LLC. You do not run a payroll if you are self-employed. Instead you pay self-employment tax on the net income, which can be done on a quarterly basis.
The second part of the question asks how often salary should be taken. Is it best to take the salary once a year or on a regular basis? If you are taking a salary or running a payroll for yourself, it is best to take it on a regular basis rather than running payroll at the end of the year or on a quarterly basis. You should act as if you were employed by someone else; if you were working for someone else you would expect payment on a regular basis, such as a monthly payment, or whatever is most frequent in your particular industry. That is how you should decide the frequency of the payroll for your small business also.
Every case is unique and how you run payroll for your small business will be determined by a variety of factors related to your specific business and industry. We recommend speaking with your accountant to be sure you are following best practices for your particular industry and business type, since filing or taking income improperly could affect your tax rates.