Payroll can get intimidating when you have to deal with many employees. A business owner usually handles the payroll process at some point in time, but when it does become challenging, they seek out a payroll company to help out.
Payroll services do cost money, but for entrepreneurs who want to manage their own payroll it is still possible, but you will have to learn how to do payroll correctly or you will end up with penalties.
Self-Employed Payroll Providers
When choosing payroll software, employers must consider their business needs. Some services are simpler if you’re only paying yourself, while others offer more value if you’re paying additional workers. The business’ structure, benefits you want to access, and available software integrations should all be considered when choosing a payroll provider. Cost is also a top factor, making it essential to analyze all the needs of a business before making a final decision.
While we’ve found that Gusto is the best overall option for self-employed payroll, we’ve also provided a few other great options in the table below that may be a better fit based on your employee payroll needs.
| Self-Employed Payroll Services | Best For |
|---|---|
| Gusto | LLCs with S-corp tax status that need to automate regular salary payments to owners |
| QuickBooks Payroll | Sole proprietorships that want to integrate payroll with existing QuickBooks accounting solutions |
| Square Payroll | Retail business owners needing to pay contractors in addition to themselves |
| Patriot Payroll | Nonprofit owners needing a cheap full-service payroll option that handles payroll taxes |
| SurePayroll | S-corp owners wanting the business to subsidize their health insurance through payroll |
If you don’t need software yet and just need to process payroll for yourself, follow these simple steps below:
How to Process Self-Employed Payroll in 6 Easy Steps
1. Choose Your Business Type
The primary payroll concern for many entrepreneurs is how much to pay themselves. However, before determining how much business income to distribute to yourself, it’s a good idea to spend time contemplating how to structure your business–if you haven’t already. Your business structure—sole proprietorship, partnership, corporation—should form the basis of all payroll decisions you make regarding how to pay yourself. You could save thousands of dollars in taxes and avoid IRS audits if you set your business up correctly.
And remember, if you’re running a sole proprietorship with no employees (and it’s not an S-corp), these steps will not apply to you—your income will flow directly to your personal income tax return, meaning you can use as much or as little of the profits for personal reasons as you’d like. Plus, you won’t need to file a separate tax return for your company or comply with business payroll laws.
If you or your accountant have already completed the paperwork to determine your business structure, take time to learn the different options and responsibilities you have in regard to processing your own payroll.
A sole proprietorship is a business that has a single owner. It requires little to no paperwork, and all taxes are passed down to the owners’ personal tax return. There is no personal liability protection, so customers could sue the owner if issues arise.
With a sole proprietorship, you can pay yourself a draw as often as you want. An owner’s draw doesn’t affect your taxes but merely reduces your capital investment in the company. The draws are, however, subject to a 15.3% self-employment tax along with business income taxes.
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Payment Types by Business Structure
| Business Structure | Owner’s Draw | Distribution | Salary | Dividend Distribution | Guaranteed Payments |
|---|---|---|---|---|---|
| Sole Proprietorship | ✔ | N/A | N/A | N/A | N/A |
| Partnership | N/A | ✔ | N/A | N/A | ✔ |
| LLC (not elected as a corporation for tax purposes) | ✔ Single-member | ✔ Multi-Member | N/A | N/A | N/A |
| S-Corp | N/A | ✔ | ✔ | N/A | N/A |
| C-Corp | N/A | N/A | ✔ | ✔ | N/A |
2. Determine How Much to Pay Yourself
Once you’ve evaluated the different business structures and how you can pay yourself with each, decide how much you’re worth to the business. If your business is a sole proprietorship or partnership, you can pay yourself any amount—$100 or $10,000 a month. If it’s an S-corp or C-corp, and you opt to classify yourself as an employee, the IRS requires your salary to be “reasonable.”
Pro Tip: If you will be providing substantial work to the company, it’s best to speak with a tax adviser before deciding whether or not to classify yourself as an employee. If you opt not to be an employee to avoid paying payroll taxes, the IRS can automatically reclassify you after an audit and subject you to back taxes and penalties.
In determining what a reasonable self-employed payroll salary is, consider the market rate for the services you’re providing to the company. Check popular job sites for job posts because they sometimes list pay rates or have salary comparison tools. Underpaying or misclassifying yourself as an employee or nonemployee can lead to an audit and additional taxes and fees.
In those cases for which you have more autonomy in determining how much to pay yourself, keep in mind that the pay should still be reasonable to allow your business to continue growing. You should avoid paying out all of the income in case of emergencies. Consider how much your contributions are worth to the company, the type of work you’re performing, and the total profits coming into the business.
3. Set Your Pay Frequency
Typically, you can pay yourself as often as you’d like, but it’s a good idea to set a consistent pay frequency to keep the process organized. If you’re taking owner draws or distributions, you may want to pay yourself less often until you have enough experience with the flow of business income—seasonality can cause low cash flow during certain periods.
If you classify yourself as an employee of your business, you should pay yourself more often to align with the practices of other employers. Guaranteed payments for partnerships should be structured according to the original agreement between the partners—for instance, monthly minimum payments should be settled by the end of the month.
4. Set Up a Payroll System
After determining how often to pay yourself, you’ll be ready to set up a payroll system to help with automation and compliance. You can use online payroll templates to give you access to automated calculations. Setting yourself up in the system shouldn’t require much time; you’ll enter your name, Social Security number, and so on. If you want direct deposit, you’ll submit bank account information.
If you choose to run payroll with software like Gusto, you can set your self-employed payroll to run on autopilot.
By default, Gusto’s Payroll by AutoPilot feature is disabled; most employers enable it once they’ve set their regular payment amount or rate.
Gusto will run payroll for you automatically two days before your payroll deadline. If you decide to classify and pay yourself as an employee, Gusto will withhold and remit your employee and employer payroll taxes—without any required action from you. Visit the website for a free demo.
5. Enter & Review Hours Worked or Salaried Wages
Regardless of which payroll system you use, you’ll need to either track hours worked or salary due per period in addition to work performed. If you’re receiving payment as an employee, you should have a solid foundation on which to form your wage calculations.
Annual salaries are based on what the market is paying and how much work you do; divide the total salary by the number of pay cycles in the year to calculate how much you should receive each period.
An owner’s draw, distribution, and dividend payment don’t require as much justification as a salary payment. Neither does a guaranteed payment for a partnership, although you can deduct it from taxable business income. You’re not required to perform any valuable services on behalf of the business to be entitled to any of these funds; you can withdraw funds simply because you’re the owner. However, it’s still a good idea to enter and review all payment amounts before distributing to avoid paying the wrong amount.
6. Approve & Process Payroll
Once you’ve documented and reviewed what you’re planning to pay yourself, you can approve and process it using the tools available to you. Online payroll systems typically have a page that allows you to click “approve” or submit before funds are disbursed.
Keep in mind that gross pay should be the same as net pay for any non-salary payments on your self-employed payroll, meaning there won’t be any tax payments withheld. As for paying a salary, you should see the appropriate amounts withheld for self-employment taxes and benefits (like for a solo 401(k)), if applicable.
Most payroll payments are made via check or direct deposit. If you’re not yet using payroll software, you can print payroll checks free online. All you need is a magnetic ink cartridge, printer, and payroll check stock. Of course, direct deposit is the most convenient option since money is deposited in your bank account within two to four business days. Pay cards are another option.
Important: You should consult with a tax adviser before finalizing any major changes in how you will be processing your self-employed payroll. Numerous tax consequences can result, and it’s best to have a professional on hand to answer any questions you may have.
Payroll: Keep it In-House or Outsource?
Payroll is more than just cutting employees a check. There are taxes to withhold, deductions for specific benefits and even wage garnishments. And for independent contractors, the process gets more complicated.
Larger companies may have the resources to hire a dedicated in-house payroll administrator. But for small to medium-sized businesses (SMBs), payroll duties may fall to accounting, human resources (HR) or even the business owners.
Businesses may decide to outsource the payroll function entirely to a third-party provider, especially if the company is small and doesn’t want to handle complex tax codes and employment laws internally.
However, outsourcing payroll has its own challenges: Services can cost more than payroll software, mistakes can happen with an employee’s paycheck and businesses can’t be sure if their employees’ personal info is secure.
Payroll software vendors have responded by rolling out hybrid solutions that combine payroll software and payroll outsourcing. This option generally means companies handle payroll internally throughout the year, except when an accountant reviews and files taxes.
This option can benefit companies that want control over payroll data, but not the headaches of running the entire payroll process. Both Patriot Software and Quickbooks (listed below) offer monthly software packages that outsource tax filing to third-party professionals.
Payroll Software vs. Payroll Module
Payroll is often included as a module within accounting software, human resources management systems (HRMS) and enterprise resource planning (ERP) solutions.
Payroll modules generally have fewer features than dedicated payroll solutions, but better integration with other business processes. For companies that already have comprehensive accounting, HRMS or ERP software, purchasing separate payroll software adds extra costs.
In either case, if a company needs advanced payroll functionality, it may want to consider a specialized payroll solution.
Conclusion
Your business is on its way to greatness. You’ve come a long way, and you’re on your way to becoming your own boss. But before you embark on this journey, it’s important to figure out if you need a payroll service or not. The more employees that you have on staff, the more complicated a payroll service can be. It can come with a hefty price tag, but it’s going to be worth the cost in the end.