Many entrepreneurs running small businesses do not want to take the time to pay themselves via payroll. Most of the time, their focus is on growing the company and not getting bogged down with paperwork. This is an easy (and valid) excuse, but not using payroll to pay yourself can lead to long-term problems.
Paying yourself via payroll when you are self-employed, especially if your business is structured as an S-Corp or C-Corp will offer strong “paper trail” advantages that support compliance, documentation and financial clarity.
Here are the Top 5 Reasons to do so:
1. IRS Compliance and Reasonable Compensation Documentation
Paying yourself via payroll helps document that you are receiving “reasonable compensation” for services rendered, which is required by the IRS, especially for S-Corps. Having this paper trail can protect you in the event of an audit, showing a clear separation between your wages (subject to payroll taxes) and business distributions (not subject to self-employment tax).
2. Clear Proof of Income for Loans, Mortgages, or Credit
When deciding if you qualify for most loans, lenders and financial institutions prefer W-2 income because it is standardized and easily verified. Paying yourself via payroll creates W-2 forms and pay stubs, making it far easier to submit proof of income to qualify for:
- Mortgages
- Car loans
- Personal credit lines
3. Improved Retirement Planning and Contributions
Payroll documentation allows you to contribute to retirement accounts like a Solo 401(k) or SEP IRA based on earned income. With W-2 wages, it’s far easier to calculate and document:
- Elective deferrals
- Employer contributions
- IRS contribution limits
- Medicare and Social Security for benefits later in life when you decide to retire. (Paying into Medicare and Social Security is important, and many business owners do not think about this when they decide to forgo paying themselves while they grow their business).
4. Streamlined Tax Withholding and Estimated Tax Compliance
Payroll systems withhold federal income tax, FICA, state withholding (if applicable) and local withholding taxes (if applicable) automatically, eliminating the need to manually estimate and pay quarterly taxes. This reduces the risk of:
- Underpayment penalties
- Poor documentation of tax liability
5. Business Legitimacy and Separation of Finances
Using payroll to pay yourself shows a clear distinction between your business’s funds and your personal compensation, reinforcing the business’s separate legal identity. This helps maintain:
- Corporate veil protection (for LLCs or corporations)
- Cleaner books for accounting and audits
Corporate Payroll Services is your partner in helping S-Corps, C-Corps or LLCs to run more efficiently via our payroll and payroll tax services. Do not get caught up in running your business without taking care of yourself and setting up your income and finances for maximum success down the line.
We have been helping small businesses and entrepreneurs like you for over 30 years. Join over 7,000 companies who run a tighter ship by partnering with Corporate Payroll Services. Our priority on personalized customer service means you have easy, direct access to your payroll processor instead of having to call an 800 number and spend extended periods of time on hold – just to talk to someone different each time. Let us help relieve you of mundane administrative tasks so you can focus on what is important: growing your business.
