Payroll - What it really is

In the 1987 classic movie, “The Princess Bride,” the character Vizzini becomes frustrated every time his plan goes awry. “Inconceivable!”, he says, repeatedly, even when the results of a situation are very much conceivable. Finally, after his enemy, Westley, survives a fall over a cliff, his henchman, Inigo Montoya, remarks, “You keep saying that word. I do not think it means what you think it means.” 

So, friends, today I’m going to talk to you about payroll, and I do not think it means what you think it means. 

What you think payroll means

In running a business, especially a small business, you have to pay people to help you. You have to purchase goods and services and pay people to deliver those goods or services to you. A lot of small business owners think this is payroll. These providers are, after all, on a roll (list) and you pay them. But that is not the way the IRS or accountants define payroll. 

What payroll really means

In the eyes of the IRS, you only have payroll when you hire employees. In order to officially hire an employee, you need to have them fill out paperwork such as Forms I-9 and W-4, provide checking account information for direct deposit, and possibly sign an employee handbook, among other things. You will then tell them what days to work, where to work, what to do while they are at work, and possibly even how to do their work. In January, you will send them a W-2 that shows their annual wages and federal and state income tax withholding. 

What payroll is not

Back to the people you purchase goods and services from. If they aren’t paid via payroll, how are they paid? And how do you tell them apart? People who provide goods and services to your business are known as vendors. They are usually other small businesses that have other clients in addition to you. They send you invoices with due dates that you pay on a biweekly, monthly, or other similar basis. They work on their own, with little supervision from you. In January, you will send them a 1099-NEC that shows the total amount you paid them during the past year. 

Vendors are also known as independent contractors. To truly understand who is a vendor and who is an employee, take a look at this blog. It gives more direction on how to determine who you are paying. 

If you need help in making this determination, send me an email. We can walk through the specifics of your situation and figure out the right way to record your payments to the people you pay.