Founder payroll setup — getting paid (and paying others) without breaking things

W-2 (employee) vs 1099 (contractor): the most-litigated classification question in US labour law.

W-2 is correct when:

• You direct how, when, and where the work happens
• You provide tools and training
• The relationship is ongoing
• The worker doesn't have other clients

1099 is correct when:

• The worker controls how and when they do the work
• They have a real independent business with other clients
• The relationship is project- or outcome-based
• They invoice; you don't issue paystubs

Misclassifying a W-2 employee as a 1099 contractor (the most common founder mistake) exposes you to back-taxes, penalties, and personal liability for unpaid Social Security/Medicare contributions. California's AB5 is the strictest; most other states use the IRS's "common-law" test. Err toward W-2 when in doubt.

State payroll registration: every state where you have a W-2 employee requires separate registration (state withholding tax, unemployment insurance, sometimes paid family leave). This is the part founders skip. Tools like Gusto ($40/mo + $6/employee), Rippling, or a PEO like Justworks handle multi-state registration as part of the service.

Founder salary timing: US Delaware C-corp founders typically start drawing salary once revenue or funding lands. Below that, founder loans (advances) or simply not paying yourself is normal. Once on payroll, you're a regular W-2 employee.

PAYE setup: HMRC PAYE registration takes ~2 weeks. Your accountant or a payroll platform (Pento, Crunch, PaySalsa, Gusto-UK) registers you and runs monthly RTI (Real-Time Information) submissions.

Founder salary vs dividends — the actual numbers:

• Pay yourself salary up to the NIC primary threshold (~£12,570 in 2024-25). This salary is tax-free (within the personal allowance) and you don't pay employee or employer NIC.
• Above that, dividends are more tax-efficient than salary in most cases — taxed at 8.75% / 33.75% / 39.35% bands rather than income tax + NIC (combined often 28%+).
• BUT dividends require distributable profits — i.e., the company has to be profitable after corporation tax. Loss-making companies can only pay salary.

Your accountant runs the optimal mix for your specific tax bands annually. Don't try to optimise this yourself; the rules change.

IR35 — the contractor headache: if you engage a contractor in the UK who's working through their own limited company ("personal service company"), you have to determine whether they fall inside or outside IR35. Inside = you (the client) deduct PAYE and NIC as if they were an employee. Outside = they invoice and handle their own tax.

The HMRC CEST tool gives an indicative answer; in practice, most early-stage startups err on the side of "outside" for genuinely project-based contractors and use Deel / Remote / Oyster when they want zero IR35 risk (those platforms take on the classification liability).

Common patterns:

• UK founder of a US Delaware C-corp: Pay yourself via the UK company (set up a UK Ltd that subcontracts to the US C-corp), OR be a 1099 contractor to the US C-corp + handle your own UK tax. Most UK founders go with option 2 for simplicity.
• US founder of a UK Ltd: Be an employee of the UK Ltd (PAYE) + report worldwide income on your US tax return. Watch the totalisation agreement between US/UK so you don't pay Social Security twice.
• Founder + co-founder in different countries: Each founder runs their own payroll/tax setup in their resident country, billing the company appropriately. Use Deel or Remote to remove the admin entirely (~$50-100/contractor/mo).

Tooling recommendations:

• US payroll (1-30 employees): Gusto. Cheap, founder-friendly, handles multi-state.
• US payroll (30+ employees, complex): Rippling. More features, more admin.
• US PEO (avoiding multi-state setup): Justworks. Higher cost (~$100/employee/mo) but handles benefits + compliance.
• UK payroll: Pento (modern), Crunch (accountant + payroll bundle), or your accountant directly.
• Global hiring: Deel, Remote, or Oyster. EOR (employer of record) services that let you hire anyone, anywhere, without setting up a local entity. Cost: $400-700/employee/mo on top of salary.