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How should co-founders of a C-Corp get paid at an early stage startup with a small angel round?

Chris Barsness, startup, finance, law, and tech nerd

One thing you don't want to do is just start cutting checks to pay yourself without thinking.  One of the worst situations to be in is to have to go back to clean up the books and calculate the payroll taxes that were supposed to be withheld.  Depending upon the state you are located in, there are different rules for payroll and there are sometimes ways to avoid withholding.  A C-corp is not a typical pass through tax entity, so you have to look at your own personal taxes and then the company.  In California, if you are an executive, officer, director etc., you can be held personally liable for failure to withhold payroll taxes, even if the corporation goes out of business.

There are some payroll services that are pretty minimal in terms of expenses, but most of the time when I have setup payroll, I have had a bad experience with typical banks.  Go to a payroll processing company or use the online QuickBooks/Intuit payroll service.  Very low costs and pretty effective.  It is usually better to just have them withhold and send in the taxes; otherwise, it is too tempting to hold off on paying in withholding in a startup low on cash.  

You can tell them to defer salary or put a hold on payroll processing if the cash gets low and usually incur only a minimal fee or just cancel the service.  

Realize that just because you call yourself a consultant and don't withhold payroll taxes, the IRS and others have their own definitions and you can get stuck holding the bag, so accrue a deferred salary if you can and then pay yourself when you have the cash or do the salary through a payroll company.

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