Payroll – Who Needs It?

A confused womanWe sometimes get enquiries from people who are self employed, asking about setting up a payroll, but the truth is, most of them don’t need it.

Sometimes, individuals who are self employed think that they need to operate a payroll in order to pay themselves. This seems to make sense, as ‘self-employed’ literally means employed by one’s self. But that’s not how it works. You may think of a business and its owner as separate; but, for tax purposes, a self-employed business and its owner are one and the same thing.

Another term for a self-employed person is ‘sole trader’. The word ‘trader’ makes it clearer that the person and the trading are inseparable. It would be absurd for a sole trader to put himself on the payroll.

Simple, self-employed businesses don’t need payrolls. This is true, even for businesses which sub-contract work out to other self-employed people – provided that these subcontractors aren’t deemed to be employees for tax purposes. The majority of self-employed businesses have no employees and, therefore, have no need for payroll.

In fact, according to estimates from the Department for Business, Energy & Industrial Strategy, there were 3.4 million sole traders in the UK at the start of 2017: about 1 in 13 of these were employers who, therefore, needed to operate a payroll.

The situation is different for limited companies, which are separate legal entities. The directors are distinct from the company so it does make sense for the company to pay the directors through the payroll. In many small companies, the directors are also shareholders. They can receive a director’s salary through the payroll and also receive dividends which are paid to them as shareholders.

As we specialise in payroll, we can’t help self-employed people who don’t have employees. We also don’t deal with company dividends. However, we can help company directors who pay themselves a salary, and anyone who has employees.

Steven Tucker

By Steven Tucker - Co-founder

Steven is one of the founders of The Payroll Site. He writes about things affecting small businesses, especially those things connected with payroll. He's also a Maths graduate and a Chartered IT Professional and has a few views about technology, maths and the misuse of both.