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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.
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.
Now let’s talk budgeting for those payroll taxes, because I get this question a lot. As a general rule:
So for an employee who is getting $100,000 of wages:
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).
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 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 email@example.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 firstname.lastname@example.org you have any questions. We help over 500+ startups in SF, Chicago, LA, and NYC.
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