Setting Up Payroll for Your Startup
When starting a company, one of the first things you need to do is figure out how you will pay yourself and your employees cash compensation.
Checklist for Setting Up Payroll
To set up payroll for your startup, you first need to complete the following:
- Form the corporate / legal entity that will be paying (see our Incorporation blog post)
- Raise sufficient money in order to pay cash wages (see our Fundraising blog post)
- Identify the software or vendor that you will use to manage your payroll process
This post assumes you have completed steps 1 and 2, as before you can begin to pay anyone, you need to be a legally recognized company and have funds with which to pay them.
Obtaining your Employer Identification Number (EIN)
However, one step you must complete after incorporating, but before running your first payroll, is obtaining your Employer Identification Number (EIN). The Internal Revenue Service (IRS) creates EINs for companies and they serve a similar purpose as Social Security Numbers do for employees. You can obtain your EIN instantly and online for free at the IRS website.
There are a number of other things you need to do before you run your first payroll, including selecting a pay period, gathering your and your team’s personal and financial information, and classifying you and your team either as employees or as contractors. Before you do any of this, you should select a payroll vendor. A good payroll vendor will help you complete these tasks and manage the information required.
How to Select a Payroll Vendor for your Startup
Every modern startup should use an online payroll provider. They are inexpensive, easy to use, scale with your growth and help manage compliance with employment and tax related regulations. Most startups begin with under five employees, and this post considers a company of around this size when evaluating payroll options.
As companies get larger, obtain more hourly workers, and manage workers across multiple jurisdictions, they often seek SaaS providers that are more comprehensive, but also more expensive and often less nimble / scalable.
Using Professional Employer Organizations (PEOs)
One early decision you must make for your startup is whether or not to outsource your payroll, benefits and HR function to a Professional Employer Organization (PEO). When a startup wants to outsource everything: payroll, benefits, HR, compliance, etc., a PEO is a good option as they will handle everything. It’s particularly useful if there is no one on the founding team with financial, HR or operational experience. The two most popular PEOs for startups are TriNet and Justworks.
There are two downsides to PEOs. One is that they tend to be expensive. Justworks, for example, starts at $99 per employee per month just for the HR and payroll service - benefits and workers’ compensation costs are separate. The other downside of PEOs is that their structure is a bit unusual. When you use a PEO, your workers technically are employed at the PEO, not your company - their paychecks will say the name of the PEO and not your company. While this has no meaningful implications for the success of your company or your relationship to your workers, it is something to consider.
Choosing a SaaS Payroll Provider
If you decide not to use a PEO, you are likely to pick between SaaS payroll providers that focus on startups. The review site G2 Crowd offers an overview of the SaaS payroll ecosystem as well as detailed user reviews. The three most popular providers for startups are Gusto, Rippling and Zenefits, and all are good options.
All three services provide the employee onboarding management, payroll and tax / compliance tools and workflows you need to successfully manage payroll at your startup. Each offers integrations with the core accounting and expense management software you are most likely to use. Furthermore, each offers core health, dental and vision benefits in addition to extra perks for your employees like commuter benefits and health savings account management.
Below shows a high-level overview of the pricing and relevant features to early stage startups:
Based on the above comparison, Gusto is the cheapest offering and has benefits administration included. Gusto is also very popular and has been successfully administering payroll for a number of years. It is a great option. The primary downsides of Gusto are that you can only use its benefits provider if you have over five employees. Many startups want to use one system to onboard employees as well as establish both payroll and benefits, so if you are currently a team smaller than five you won’t yet be able to use the Gusto platform for everything.
Rippling is a new entrant to the space. Launched in 2018, it takes an interesting approach by seeking to be the central IT and provisioning management hub for its startups. The Rippling platform includes software provisioning (adding licenses when a new employee is onboarded), password management, computer hardware management and it integrates with a wide variety of applications. Be aware you pay for these features though, as each bundle is priced a la carte.
Brex migrated payroll vendors two times in its first few years, which is not something we recommend. Brex started on Rippling (it was a fellow YC Winter’17 company) and then switched to Gusto because initially Rippling did not provide benefits. Our first hire wanted benefits and we wanted to be able to manage it in one system. At the time, our team was only four people and therefore not able to use Gusto’s benefits offering. We then had to hire a separate benefits insurance broker and managed benefits administration of our health, dental and vision plans outside of Gusto.
As we started to scale, we ultimately went back to Rippling for its added benefit of being easy to manage IT provisioning (every new employee gets automatically added to subscriptions like Dropbox, Slack, G-Suite and Office 365). Fortunately, Rippling allows you to use their new benefits offering or keep your original broker, but still manage benefits administration and onboarding in one software. The single largest driver for Brex to switch to Rippling was the integration with our hiring software, Lever. We wanted to seamlessly hire someone and then have our payroll system automatically update with that person’s start date and compensation details. This eliminates the issue of human error, which is common in manual payroll processes.
Brex did not use a PEO because it hired a CFO and General Counsel early on, who both had experience managing payroll and HR.