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Payroll taxes for startups?

Vanessa Kruze, CPA, is a leading expert in startup taxes and tax compliance. Her team at Kruze Consulting has filed thousands of tax returns for companies that have raised billions in VC funding, and her work has been diligenced by leading VCs, attorneys, and M&A teams at the largest technology companies.
Vanessa Kruze, a highly-experienced CPA, brings valuable tax expertise to startups, drawing from her rich background at Deloitte Tax and as a financial controller for a $20 million startup. As the leader of Kruze Consulting, recognized multiple times in the Inc 5000 list, she specializes in navigating the complex tax landscape for startups. Her firm is known for delivering precise and strategic tax solutions, delivering tax credits utilizing advanced tools to ensure compliance and optimize tax benefits for startups throughout the United States.

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Two Quick Points:

  • There’s no way out of payroll taxes. There’s no escaping it. Failure to pay taxes can result in serious legal problems. One of the finance leaders here at Kruze said that his business law professor at his MBA program said that the majority of his students who were in jail were in jail due to failure to pay payroll taxes. So don’t mess it up, you have to pay them. 

  • Outsource your payroll processing. Don’t even think about doing it yourself. If you do it incorrectly you can incur serious penalties, and even the best people and accountants make mistakes. Payroll processing companies will handle the payroll taxes, and also make sure your employees get paid. The software out there has become so robust and efficient that no human fingers can keep up! Using a payroll processor will save you time and money. I’ve used just about every system out there, and my team reviews the best payroll software for startups here

How to start paying payroll taxes

Paying these taxes manually is difficult and error prone - sign up for a system. These systems can be as low as $50 per month, and save valuable time. We have an entire write up on how to set up your payroll system, which includes how to start paying your payroll taxes.

How to budget for payroll taxes

Now let’s talk budgeting for those payroll taxes, because I get this question a lot. As a general rule:

  • The tax rate for employees is usually ~30%.
  • The company then gets taxed ~10% on the gross payroll.

So for an employee who is getting $100,000 of wages:

  • $70,000 goes to the employees bank account
  • $30,000 goes to taxes, from employees
  • $10,000 goes to taxes, from company

And those two bank debits you see after using a payroll processor? Using this example, the first debit will be $70K going to your employees bank accounts. The second bank debit will be $40K going to tax payments (which is the sum of both employee and employer taxes).

How to model it

Our team has a lot of financial modeling experience - it’s best practice for startups to carefully model/budget out their expenses. And, wages are the number one expense for most startups, so this is an important component to get right. We recommend starting with the employees’ wages- so if you are paying someone $150,000, star with that. Then add in an additional line at 10% of their salary for taxes.

Of course, those aren’t the only extra expenses you’ll have as a startup founder related to wages. In general, we’ve found that 25% to 30% gross up (the additional line we just mentioned) is the right amount to estimate a new startup’s benefits and payroll tax expense.

Understanding compensation - and it’s hidden costs - is part of successful startup leadership and budgeting

Understanding financial obligations is a critical aspect of steering a successful startup. It’s not just about getting going or building product, but also about smartly managing your outflows, a significant portion of which, inevitably, is associated with compensating your team. Pick a system that does this for you so that you can focus on running your business, no cutting checks to employees and the government!
Hope this helps, but feel free to reach out to me at vanessa@kruzeconsulting.com if you have any questions. We help over 800+ startups with their accounting, fintech system setup, books, taxes and more.

Hope this helps, but feel free to reach out to me at vanessa@kruzeconsulting.comif you have any questions. We help over 500+ startups in SF, Chicago, LA, and NYC.


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