Accounting & Finance
Paying Your Employees As A Start Up Business
During the start-up stage of a business, when money is tight, every single expense must be put under scrutiny, especially when it comes to hiring and paying staff. Plus, when your business is in a position to take on employees, you need to know you’ve got enough funds to pay them and how to meet your business obligations.
What are the tax and legal obligations of business with employees?
In this article, we cover the five basics of paying employees, how to incentivize and reward your staff and what boxes you need to tick for tax and legal purposes. Let’s start with a quote that sums up the challenges of small businesses and their staff.
Small businesses often struggle with designing a compensation strategy that is comprehensive and competitive enough to attract top talent
Alice Chin, founder, and CEO of Your Other Half, a human resources and operations firm that helps small businesses.
The catch-22 for new companies is how to reward and retain staff when the business is just getting started, and the cash flow from sales is not entirely where it should be so the business is sustainable.
Can you pay your staff less now with a promise of a generous remuneration later on? It’s a risky strategy.
Pay Employees What They Are Worth
Ongoing tenure will only come from paying employees the industry standard for their experience and expertise.
You need your staff to be productive, and they need to know they’re valued by you and your company. Implementing transparent start-up compensation packages, which keep everyone on the same page and avoid misunderstandings, is the way to move forward with your employees.
However, the bottom line is that you will need to pay your employees whatever they’d get on the open market with your competitors or elsewhere. Therefore, promises of rewards to come won’t appease them as they are not as attractive as having cash in their bank accounts.
Know Your Tax Liabilities
Tax on your employee salaries depends on the legal structure of your business as well as the legal address of your business, i.e., what state it’s registered in. Each state and jurisdiction has varying tax rules.
Given such nitty-gritty details, it is highly advisable to utilise the knowledge of a local accountant, who will know how to navigate the tax landscape in your area. A payroll service can also assist with W-2s, W-4s, withholdings, and other matters.
Choose The Right State
States compete for new businesses and they do it with tax incentives, funding opportunities and a graduate talent pool of quality colleges.
Do your research; if you can set up a location that offers tax rebates and other rewards, work through the numbers and add them to your business plan. Remember your business plan is a working document that presents how your business is doing and where it’s planning on going, i.e., upwards.
Offer Employees Bonuses, Commission and Benefits
Even though employers with fewer than 50 full-time employees are not required to provide health insurance benefits, start-ups should look at other ways in which they can reward employees.
Consider structures that promote additional work towards company objectives like bonuses and commissions, which can reduce fixed salary costs but still meet prospective employees’ needs. Younger employees tend to value things like culture, perks, and work-life balance, while more experienced workers care more about traditional benefits, like 401(k).
Be Careful About Equity
Equity is a relatively straightforward way to round out a start-up salary structure. But you should think carefully about sharing equity and whether it would suit your company culture.
Not every employee needs or wants to become an owner, and owners may not like every employee as a co-owner
J. Bryan Wood practices employment law on behalf of employees and small businesses.
Hire Interns, Contractors and Part-time Employees
Seeing as the future of start-up businesses is never certain, it often makes more sense to hire interns, contractors, and part-time employees.
Research has shown that using freelancers is a successful and cost-efficient strategy to grow a business, while highly talented stay-at-home parents can provide seasoned professionalism on a budget.
However, unpaid interns will only work for you if they are getting the opportunities they need to advance their careers If you simply give them tedious busy work with little guidance, they are likely to quit.
UpCounsel’s Alex Liu.
Pay your staff what they’re worth. If you can not afford to do so, avoid the commitment and instead take on freelancers until your business is viable. A flexible workforce is the now and the future, and you’re more likely to secure the talent you need when you need it with freelancers.