Budgeting TIps

When you have a full-time job, you probably notice that the government takes out taxes for all sorts of things, including Social Security and Medicare. Your employer matches those contributions, sometimes referred to as FICA deductions, to complete your contribution.

When you are self-employed, you are responsible for those payroll taxes. But when your business reaches a certain income level, you have some options to limit those “self-employment taxes.” If you pay yourself a regular paycheck, you only have to pay the employee and employer portions of FICA taxes on your paycheck. Any income you earn above your paycheck is taxed at your regular income tax level. If you want to do this, can you do it on your own or are you best off hiring a payroll service? Let’s take a look and find out.

When should you consider paying yourself a paycheck?

There is no magic rule that says when you should consider having your LLC taxed as an S-Corp or convert to an S-Corp, but my old accountant advised me that point was “around $40,000 per year.”

I spent about five years side hustling before I reached the $40,000 per year income in my online business in 2015. I took my side hustle full-time in 2016, which is when I decided it was the right time to become an S-Corp (I was moving to a new state anyway) and start paying myself a regular paycheck.

According to IRS rules, you have to pay yourself a reasonable paycheck for the job you do. As a first-year full-time writer, that reasonable salary looked to be around $35,000 to $40,000 per year, which correlated to what my old accountant told me about when to consider S-Corp taxation. I decided to set my paycheck at that level, but figuring out how to get paid was a whole new complicated story.

Payroll regulations are complicated

Once you start drawing a regular paycheck, you have new employer rules and regulations to follow. Even if you are the only employee, you have to follow the law, do correct deductions, and send a payment to the IRS at least every quarter, and likely a state tax authority as well.

I am a former treasurer of a non-profit with a staff person, and I used Quickbooks Desktop version for Windows to do payroll. With that version, I was able to automatically update tax tables and quickly print checks for the quarterly payments.

Because Intuit, the maker of Quickbooks, cares more about gouging us for a few bucks than product continuity and features for its users, these features are not available in the Mac version. As a Mac user today, I was disappointed to find my low-cost do-it-yourself version no longer available. After moving to the online version, I tried Quickbooks online payroll and was disappointed by the experience.

Taxes are no laughing matter and I don’t want to end up with fines or penalties from doing it wrong, so I decided it was time to hire a payroll service to handle it for me. You don’t have to do this, but there are not many options that offer a tested, trusted, semi-automated payroll tax program, let alone at the low monthly cost I had after buying Quickbooks Desktop in the past, free.

Evaluating payroll providers

My next step was evaluating possible payroll options to handle my new payroll for one employee. I looked at several options and found they were lumped into a few main categories:

  • Traditional payroll providers – Traditional payroll providers include companies like industry giant ADP. These companies handle payroll, accounting, and tax reporting for small businesses all the way up to companies with tens of thousands of employees.
  • Startup payroll providers – Startups like Justworks and Gusto are newer providers looking to make payroll easier and more user friendly. They also have some options to add benefits and other payments.
  • Accounting and payroll providers – Local independent and franchised accountants offer payroll services to local businesses.

Each of these families of providers has its own benefits and drawbacks. The traditional providers offer a great service that is trustworthy and reliable, but it is not cheap and small businesses like me are like tiny fish in a massive pond. I work online, so I wasn’t excited about going to a brick-and-mortar accountant and payroll service, particularly as I do my own books every year. This left the most exciting option to me, the startup providers.

Working with a startup payroll company

Because I expected them to have the best grasp on my needs and values, going with a startup provider was a relatively easy choice. I’m also in the startup community myself with my own startup, Money Mola, and work for other startups, so this is a space I know well and enjoy.

As a Cloudpeep, I used Justworks to get paid. As a blogger, I used their old free service to pay two freelancers who helped me out and contributed to my blog. But when they got rid of the free version, I moved on. I had some issues with Justworks being complicated to use, so I wasn’t excited to go back for my own payroll. A more recent client paid me with Gusto, and I found their system much easier to use.

I ended up going with Gusto for my own payroll for one. The service works great and does almost everything I need. I can’t do a fixed rate monthly reimbursement for my health insurance, but I can do everything else my business needs, including paying my virtual assistant her monthly fee.

Setup was fairly painless and I turned on “payroll autopilot” to pay myself a fixed paycheck each week. Gusto does payroll tax calculations, deductions, and payments for me. All I have to do is have enough money in the bank to pay my paycheck, the taxes, and Gusto’s monthly fee. They handle the rest.

Doing payroll for one is expensive, and the options are not amazing

The biggest problem I have with Gusto is the cost. Prices have increased since I started using Gusto. The current rate is $39 per month per company plus $6 per month per employee. For large companies, this is a bargain price. For a single employee company like mine, however, it is a big fee.

I pay $45 per month to pay myself at Gusto. On months I pay contractors, that is an additional $15 per contractor monthly fee. That makes my regular Gusto cost over $50 per month, which is a big cost for a tiny company.

The problem is, I have not found anything better to pay one employee at a lower cost with a better service. If I had 10 employees, that $39 per month base cost wouldn’t be a big deal. But for one, it is a big hurdle to justify. And for $15 per contractor, that is another cost that makes me think about moving elsewhere, if I had a better option I liked more.

I’m thinking of moving to lower cost Payable for my contractors, but that doesn’t fix the big cost of paying myself. So for now, I’m going to stick with Gusto for my own payroll needs. It isn’t cheap, but it works and it’s way easier that doing it myself. And with my time proving valuable these days, the cost is still worthwhile.

Eric Rosenberg

Eric Rosenberg is a finance, travel, and technology writer originally from Denver, Colorado living in Ventura, California. When away from the keyboard, Eric he enjoys exploring the world, flying small airplanes, discovering new craft beers, and spending time with his wife and baby girl. You can connect with him at his own finance blog Personal Profitability.

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