Payroll for Startups: 11 Payroll Management Tips for Founders

Venture capital-backed startups tend to hire large numbers of employees quickly. Setting up payroll for startups is a complex task, but once you have a system in place, compliant and efficient hyper-growth becomes easier.

Payroll systems like Deel can help streamline the payroll process, ensure employees are paid accurately and on time, and handle paperwork, regulations, and tax compliance.

In this article, we explore the best practices for setting up payroll for startups with tips from experts at Kruze Consulting.

Disclaimer: This article is for informational purposes only and is not intended as legal or tax advice. Though this content focuses on US payroll, Deel enables companies worldwide to hire, pay, and manage their global teams.

Set founder salary expectations early

How you hire and pay yourself as a founder will depend on your business’s entity type and legal structure. It’s best to talk with a tax and accounting expert to determine the correct course of action.

Generally, there are three main ways to get paid as a founder:

• You receive a salary like any employee
• You draw money from the company when the company has the funds
• You get paid through bonuses, dividend payments, or selling equity

Sometimes, it’s a combination of the first and third options.

How much should a startup founder get paid? 

According to the Kruze team, the average CEO salary at startups has slightly decreased from $150,000 USD in 2022 to $148,000 in 2023.

Use this Startup CEO Salary Calculator to estimate your salary as a founder and communicate salary expectations to investors as part of your budget and financial plan. Ensure you and your cofounders have discussed how and what you will be compensated after the company raises funding and starts payroll and document the agreement.

Use a centralized global payroll system

Doing payroll manually, issuing paper checks, or sending pay through a digital wallet like Venmo takes time you don’t have. And navigating employee pay compliance is complex, as you have to follow federal, state, and local regulations when paying employees. Instead, use a centralized global payroll system that keeps all employee information in one place.

Make sure you can onboard new employees easily

First impressions are important, and research has indicated that a strong onboarding process improves new hire retention by 82%. Onboarding an employee requires a lot of work, so your system should allow you to easily and quickly add employees to your team. 

Hiring employees or contractors in other countries adds additional layers of complexity to the onboarding process, so if you plan any overseas hires, ensure your accounting software can handle those new employees.

Classify workers correctly

It sounds simple, but new employers often misclassify workers, which can have significant tax implications. Employees are either exempt or non-exempt under federal and state laws and are either an employee or independent contractor. 

International employees and contractors must comply with local laws and regulations regarding paid time off (PTO), minimum wage, social security, health insurance, workers’ compensation, pay periods, and more. If you plan to employ people in other countries, seek out a payroll provider to simplify that process. 

Deel’s employment software allows Deel to function as the employer of record through local legal entities to streamline international employment. The employee works for your startup like other team members, but Deel handles compliance, payroll, and human resources support.

Don’t forget payroll taxes

“One of the biggest mistakes we see at Kruze is a startup just writing employees a check and not taking out withholding taxes,” says the Kruze team.

If the IRS hasn’t gotten your payroll taxes at quarter-end, you’ll have a significant problem with penalty notices, back taxes, paperwork, and more. This overview of tax filing deadlines for startup C-corporations can help keep you on track with federal and state taxes.

International employees increase complexity, as you need to follow the laws of the countries, regional governments, and cities where employees live. Again, a payroll software system like Deel can help your startup ensure you don’t violate those rules.

Choose a pay schedule carefully

Small businesses with fewer workers may be able to pay employees weekly, but as your startup scales upward and you employ more people, that may become too cumbersome. You may choose weekly, bi-weekly, semi-monthly, or monthly depending on your needs.

• Weekly: Employees are paid on a specific day of the week, every week, throughout the year
• Bi-weekly: Employees on the same day of the week every two weeks
• Semi-monthly: Employees are paid twice a month, totaling 24 paychecks a year
• Monthly: Employees are paid once a month, usually on the last day of the month

Some states have specific payday schedule requirements and regulations on how workers can be paid (such as direct deposits to bank accounts, checks, or crypto payroll). When setting a pay schedule, consider applicable laws, your available time, and employees’ needs. Learn more about how to choose a payroll schedule.

Run payroll on time

Late payroll can violate federal and state laws, but the immediate effect is on employee morale and productivity. 

A survey from The Workforce Institute found that 24% of American workers will start a new job search after one paycheck error, and another 25% said they’d start looking for a new job after two errors. Not only will your startup lose experienced employees, but turnover will cost money. This is an area where an automated system helps out.

Don’t backdate payroll

“Sometimes we see startup founders who don’t take paychecks until they obtain funding and then want to pay themselves for the three or six months they’ve spent raising money,” says the Kruze team.

Retroactive paychecks create tax penalties and paperwork to re-file payroll taxes. If you expect this situation to arise, you should negotiate a bonus payment in your contract that you can collect when you raise capital. And of course, run that bonus payment through payroll to account for taxes correctly.

Make sure you can handle research and development (R&D) tax credits

According to Kruze, their clients save millions each year by taking advantage of the R&D tax credit.

Those clients need to be able to handle the process of studying tax forms, properly documenting the research claim, sending the payroll information to the IRS, and ideally stopping withholding immediately to get the benefits of the credit. That’s extremely difficult if you’re using a manual system. 

Improper claims for the R&D tax credit regularly appear on the IRS’s “Dirty Dozen” tax scam list that triggers IRS audits. You should work with a qualified CPA firm for this task and use a payroll vendor to adjust payroll based on the credits you’ve earned.

Regularly review employee information for accuracy

Entering correct employee information will save time on the back end when running payroll. And in today’s world of remote workers, employees can often move and don’t always mention it. 

If an employee changes states or even local tax jurisdictions, that can create a tax nexus, and you’ll need to comply with those tax requirements, including possible sales taxes. Review employee information and pay stubs regularly to ensure accuracy.

Plan for payroll disruptions

Silicon Valley Bank (SVB), with a banking relationship with nearly half of all US venture-backed tech and life science companies, was recently shut down by regulators. Thousands of customers could not access their accounts, run payroll, or pay bills. What should you do if that happens to you?

Transfer remaining funds once available

Contact your bank to find out what options are available to you. You may be able to access funds through another branch or online banking. If not, ask about wire transfer options or check-writing services.

Find alternative funding sources

You can consider multiple strategies to raise cash quickly for basic payroll operations, including bridge loans, inside rounds, equity loans, and emergency credit.

Prioritize employee payments

Ensure your team is taken care of and can continue to work to keep the business running. Failing to pay wages on time is illegal in most states and can result in penalties, fines, lawsuits, audits, liens, and garnishments. Failing to pay wages can also damage your reputation as an employer and affect your ability to attract and retain talent.

Communicate with employees 

Keep employees informed of the situation and provide updates on when they can expect their paychecks. Be transparent about the steps you’re taking to resolve the issue and assure them that you’re doing everything possible to make payroll.

Frequently asked questions about startup payroll

Read our FAQ to learn more about how entrepreneurs should set up, manage, and process payroll.

Can I do small business payroll myself?

Yes, you can set up and manage payroll for startups yourself. But even small, domestic companies can run into payroll issues when they rely on manual payroll management. 

Manual payroll increases the risk of human error, and it only takes two errors for 49% of workers to start looking for a new job. Outsourcing payroll saves time and money and ensures correct and compliant payroll. If you are running payroll for an international team, follow our global payroll template to understand the scope of day-to-day tasks and best practices.

How do I start a payroll system from scratch?

To set up payroll as a small business owner from scratch in the US, you must:

1. Obtain an Employer Identification Number (EIN) and business ID
2. Register for the Electronic Federal Tax Payment System (EFTPS)
3. Determine each worker’s employment status
4. Account for statutory employee benefits and wage garnishments
5. Collect IRS FORM W-4 and I-9s from employees, and Form W-9s from contractors
6. Determine a payroll schedule
7. Deduct payroll taxes
8. Document the payroll process

About I-9 Forms: On the Deel platform, employees can complete I-9 Forms digitally and assign a representative to verify the I-9 Form physically. You can track who has completed I-9 Forms and who has not, approve or reject I-9 submissions, and send automated email reminders and general notifications to keep employees informed.

Read our guide to small business payroll management for more information.

What is the best payroll software for startups?

The best payroll service for startups is a scalable one. Look for a service that can grow with you, whether you hire full-time or part-time direct employees, international independent contractors, or EOR employees.

While Gusto and Rippling are common options, Deel is one of the first and only companies to unify contractor payments, EOR services, and payroll management in one platform.

When comparing Deel vs. competitors, we rise above with more scalability, global coverage, automations, and experience. With Deel, clients have access to 10+ funding methods, 8 withdrawal options for contractors, predictable pricing, and comprehensive security.

Use Deel to pay your growing team quickly and compliantly

Payroll software keeps information organized, simplifies domestic and international tax compliance, helps eliminate errors and delays, and saves founders time and money.

An all-in-one payroll software like Deel positions your startup for growth and success:

• Global coverage with entities in 150 countries
• In-house payroll experts that handle tax laws, compliance, and other time-consuming tasks for you
• Full-service payroll—we take care of onboarding, time off, local benefits, tax filing, offboarding, and additional HR support
• Intuitive, cloud-based platform with self-service for a user-friendly employee experience
• 24/7 customer support from our expert team

Deel has earned a 4.8/5 rating on Trustpilot with over 2,400 reviews. Clients cite our team’s excellent customer support, lightning-fast fund delivery, and easy-to-use platform as some of the many reasons they continue to trust Deel with their payroll, HR, and compliance needs.

Learn more about Deel’s Global Payroll solution or book a 30-minute product demo with an expert today.