How to pay yourself! Payroll 101 by an Accountant in Tampa.
Updated: Aug 8
Starting payroll can be confusing but it doesn’t have to be! Learn payroll 101 from an Accountant in Tampa.
Payroll can be very confusing, which is why you should consult an Accountant in Tampa before starting!
The 3 core things to know about starting payroll are:
Choosing the right entity structure
Choosing the right salary
Choosing the right payroll provider
#1 - Choosing the right LLC Entity Structure
This is arguably one of the most important things you can review because the difference between leaving your LLC as a sole proprietorship and converting to an S-Corporation can mean thousands and thousands of dollars in taxes. For simplicity, below are a few figures based on net earnings, and the taxes paid by both types of entities so you can see when it's optimal to convert.
Net Earnings of $25,000: LLC pays $4,300, S-Corp pays $900 ($4k difference)
Net Earnings of $50,000: LLC pays $10k, S-Corp pays $3k ($7k difference)
Net Earnings of $100,000: LLC pays $24k, S-Corp pays $11k ($13k difference)
As you can see, the more you make, the higher the difference in taxes paid vs taxes saved if you remain a sole proprietorship. This is because of 2 things: (1) The IRS incentivizes becoming an S-Corporation so that shareholders get on a reasonable/formal salary (think W2), (2) Second, sole-proprietorships were more designed for hobby income vs trades and businesses.
Important note: A sole proprietorship/single-member LLC doesn’t have formal payroll, as you pay self-employment taxes on your 1040 based on your net income. Similarly, Partnerships don’t have formal payroll (for it’s partners), because they’re paid via guaranteed payments and again pay self-employment taxes on their 1040.
So only S-Corporations and C-Corporations have to worry about officer salaries. We will focus on S-Corporations for simplicity, as they’re the most common entity type. It’s also important to note that S-Corporations have 3 years from their election date to start a “reasonable salary” for their officer(s).
#2 - Choosing a ‘reasonable salary’ for your LLC
The general rule is that a reasonable salary is the amount that a similar company would pay for the same or similar service/output that you provide, to another person. Example: if you are a self-employed attorney and make $300,000 gross income and $200,0000 net income, it’d be reasonable to assume that any other legal firm would pay a similar person in your role +/- a $100,000 salary to perform the same or similar services. Use discretion and do research on both your industry and your tax situation holistically before finalizing a salary figure.
What a salary is:
Formal Payroll (i.e. biweekly)
After Tax (i.e. SS, Medicare, and Fed. Tax are withheld)
Subject to payroll tax filings (RT6 and 941 if you’re in FL)
Subject to State Unemployment Taxes
What a salary is not:
A distribution (likewise, a distribution is NOT a salary because distributions have no taxes withheld)
Exempt from taxes (you pay FICA taxes on a salary)
Contact our Accountants in Tampa today to help you figure out what a reasonable salary means to you and your new LLC! A Tampa Accountant can help look at your business profits in conjunction with the rest of your tax portfolio to get a bird's eye view of the best salary for you to maximize earnings and taxes!
#3 - Choosing the right self-employed Payroll Provider
There are a ton of online payroll providers like ADP, Paychex, QuickBooks, Stripe, Gusto, PEO Companies, etc. The list is really endless.
QuickBooks and Gusto are your best bet if you’re a small company that likes the ease of use over all the bells and whistles. They’re the most user-friendly and easiest to set up. They’re easy to set up for (1) autopayment of payroll taxes (Federal and State) and (2) autofiling of payroll tax returns (Federal and State).
ADP, Paychex, and PEO Companies are better for mid-sized companies (i.e. 50+ employees) who need more bandwidth on managing employee benefit plans for things like retirement, reimbursements, insurance, garnishments, etc. They also provide autopayments and auto filing, but they require more manual reviews due to the extensive data you’re running through their systems.
We highly suggest you consult a Tampa Accountant before choosing software so that you don’t waste time or money!
Once you have your entity optimized, your salary selected, and your payroll provider set up, you’re ready for payroll!
Why Work With Taxes Tampa?
For over a decade, Taxes Tampa has sought to be a communication-focused Tampa Accounting firm. We don’t operate on a volume-based business model which allows us to check in with our clients more than the average accountant in Tampa and offer our clients a more hands-on and advisory tax experience. We want to ensure you understand the ABCs of LLCs, Taxes, and everything in between. Contact us today for a free tax consultation with one of our Tampa Tax Accountants!
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Frequently Asked Questions:
What are the three ways a business owner can pay themselves?
The three ways are a salary, a draw, or a combination of both. A salary withholds FICA taxes and is a tax deductible owner payment, while a draw withholds no taxes and does not lower taxable income.
How can I determine a reasonable salary to pay myself?
By researching factors such as industry, role and location, you can narrow down what a reasonable salary would be for someone in your position. i.e. if you're an Attorney in Miami, researching similar roles and salaries on Glassdoor will help you find an average salary. Additionally, you may need to consider factors such as the business' cash flow when determining a reasonable salary, as cash flow may not be able to support a higher salary initially.
What types of retirement accounts can I set up for myself?
Now that you're self employed, you have plenty of retirement options to choose from! Examples include: Traditional 401K's, Roth IRA's, Traditional IRA's, SEP IRA's, SIMPLE IRA's, Self Directed IRA's, and more. If you're looking for the one with the highest contribution limits, look into a SEP IRA.