If a company can't produce a paystub with a paycheck, I doubt that they are handling accounting and taxes properly.
Paystubs don't need to come from ADP. They can be typed up or even hand-written if you want. But they demonstrate, and record, that the company is fulfilling its legal obligations as an employer, and give the employee the information the employee needs to fulfill their legal obligations as a taxpayer.
I wonder how this will play out in April. I seriously doubt the company is properly withholding & paying the payroll taxes. I guess it's not even clear whether or not they'll be filing a W2 for her.
"Startup or not, you don't offload the risks of making payroll onto your employees."
What are you talking about?
Invoicing your startup for a payment is perfectly normal, and has nothing to do with 'offloading the risks of making payroll'.
Again - getting paid without a pay stub is utterly irrelevant to a new startup.
What matters is getting paid and hopefully it's done in an above the board manner, but the transfer of money is the primary indicator of risk - not the pay stub.
There is absolutely nothing wrong with not using payroll services for the first little while while a startup gets going, and it has nothing to do with the ability of an entity to pay you.
If you are getting paid consistently - through invoicing or whatever means, this is a good signal.
By the way - although the story is pretty scary (and hilarious) - the author is also a little bit naive. Everyone involved seems to be a little inexperienced.
The contract you sign is only as valid as the parties backing it up! Just because someone gives you a 'piece of paper' that may be legally binding, does not mean it has any integrity. The author should have done a basic bit of homework or point blank asked some very basic questions about funding status. He joined a company 'assuming' there was a round of funding, but that turned out to not be true. From my reading of the article, it doesn't seem as though the founder lied, but rather mislead the author. A few simple questions such as: "who has backed you, for how much" - or even a check on Crunchbase would have sufficed.
Again - a contract is only has the amount of real integrity as the people signing it. Your ability to enforce it is not just a matter of law - it's a matter of the reality of the entities ability to do so.
Anyhow, I'm glad it was written up so that people can learn form it.
"If you are getting paid consistently - through invoicing or whatever means, this is a good signal."
But that's not what happened, because they were late, enough so that people were filing their rent late. How about -- "Startup or not, don't take your employees for 'free credit'"?
Or, more brief: "Fake it till you make it, but don't break the flippin' law".
No, don't fake it. The reality is, investors know you are starting out. It's not a problem to write checks. All you need is a business account. Yes, make the pay stubs but they can be made on a typewriter.
Just don't fake it. Don't fake anything. Don't sell products that don't exist. Don't lie to your employees about your financial state (I see this happen a lot because people are ashamed to admit that the company is having troubles... this is a bad strategy). Don't lie about the state of the product (something that happens when people are naive enough to not realize how much testing is needed.)
OTOH, you can generate paystubs through literally any halfway-decent bookkeeping software. I get running a lean shop, but once you expand from one employee to two, one of your first investments should be in some sort of accounting system in order to make sure every last goddamn penny is tracked with as long and complete a paper trail as possible.
Any good entrepreneur knows that if you don't know where every cent of your VC money is going, you're going to get eaten alive at your next investor meeting or VC round. On the other hand, if you can pull out a spreadsheet that says "We spent exactly xx% of our previous round on payroll, xx% on rent and utilities, xx% on chinese food, etc." you're going to have a much easier time convincing investors that you're a business that knows what the hell they're doing.
Not having decent bookkeeping can't be chalked up to "fast-moving startup woes", it's just irresponsible, and there's no excuse for not being on top of it.
Wasn't one of the excuses the CEO had for missing pay dates that his money was tied up in IRS dealings? Maybe a copy of QuickBooks would've helped with that.
> You can invoice the company. It's not a big deal.
Nonononono. You're hired as an employee. There is a legal and ethical agreement for them to pay you at the intervals agreed upon in your contract. There are no ifs or buts about it, no invoicing them, no excuses for 'just started'. Payroll is NOT hard.
"Nonononono. You're hired as an employee. There is a legal and ethical agreement for them to pay you at the intervals agreed upon in your contract. There are no ifs or buts about it, no invoicing them, no excuses for 'just started'. Payroll is NOT hard."
No - you are completely wrong.
There is absolutely nothing wrong - or even remotely immoral - about paying using invoicing while a company gets going. It's common and normal.
And payroll is not easy - it's a huge mess - and it can be very complicated.
If a founder, with funding, told me: "Invoice us for the first two months until October when we are up with payroll" I would have no problem with that so long as I was getting paid.
Again - of all things, it's not the issue.
The non-payment, the lies about funding, the loans from staff, and all the rest were bad signals.
What's odd is how nobody seemed to have anything to say about the product itself ...
If my contract says I'll be paid monthly on the 15th, when do I send in the invoice? Are the payment terms net-10, net-30, or longer?
Do I need to break out sick or vacation days as its own line item? What about the deductions?
Who is responsible for figuring out and paying the payroll tax? Because it sounds like asking for an invoice is a way for the company to avoid paying unemployment tax, social security, etc. That in itself would be a red flag.
If the invoice is not paid, can I file it as a wage claim or do I use some other mechanism?
These are the obvious questions. If as you say it a common and normal practice, there must be some place which describes the basic details.
If payroll is hard for a company, why is it any easier for the employee to figure out these payroll details?
"Could you enlighten me as to the mechanics?
If my contract says I'll be paid monthly on the 15th, when do
I send in the invoice? Are the payment terms net-10, net-30, or longer?
Do I need to break out sick or vacation days as its own line item? What about the deductions?"
If you are having difficulty grasping this - you should not work for an early stage startup that is pre-funding. You are expecting very standard 'employeeship'.
If you are an 'employee' of the company - yes - you are required to be paid with W2's etc. - of course.
But if you're not obligated to be an employee of a company to accept equity - or other kinds of payment for services rendered.
As far as 'invoicing' - either you're being sarcastic or you've never done such a thing. You send an invoice, and you get paid. You have to claim it yourself in terms of taxation. As far as 'terms' - I'm hoping you are kidding. Either you get paid or you don't.
The company in this article I think was well past the time wherein they should have had had payroll set up - no doubt about it.
At the same time - it's absurd how confused many of you seem to be about the simple mechanics of getting paid.
You do not need a payroll system (i.e. W2s) while you are in the most early stages of a company.
Everyone is downvoting you because the conversation is about an employee relationship. Quoting atria, "You don't understand the difference between a statutory employee and independent contractor."
There is no special exception for startups where employee salaries are exempt from payroll taxes. It is also illegal for a company to pay you as a contractor when you are really an employee. What you propose sounds exactly like breaking the law.
Also, a company which proposes this arrangement takes on the liability that the 1099 contractor could come back in the future and sue for the taxes and benefits that a W2 employee would have received. That happened to Microsoft a few years ago.
I was giving you a chance to demonstrate that this practice is common and that you know what you are talking about.
However, given your posting history I should have expected continued blustering where you demean others for lack of knowledge. Why, just the other day you said that I, spouse of an Army vet who did two tours in Iraq, didn't have exposure to family members in the military. Now you say that I, employee of two startups and founder of two more, have no startup experience.
No one in this thread says a startup company needs a payroll system. The question is about paystubs for employees, which the employer can even do by hand.
Actually it seems you're confused. You don't need a payroll system but you do need payroll done correctly by the company. There is no such thing as a "standard employeeship" - either you are an employee or you're not. Laws do not discriminate between a serious business or a sloppy startup that doesn't have it together.
You should really talk to an HR/tax attorney before you continue to spread misinformation.
Just wow. This is terrible. You don't understand the difference between a statutory employee and independant contractor.
If you are an employee, the company is required by law to withhold taxes and pay you regularly. Every state in the U.S. has an agency that will take and prosecute wage claims. People have gone to jail for messing with witholding taxes.
If you just invoice, you are effectively an independant contract, they might not pay you, and you are on the hook for paying your taxes. A big difference.
You also are unable to avail yourself of worker's compensation if you get hurt and unemployment compensation when you are laid off.
It astonishes me that anyone could be so ignorant as to say there is nothing wrong with making people invoice you. As you've correctly stated, it's a completely different relationship. Even the liability is different.
If you're a contractor and the guy who signs your checks says "nice ass! Now shut up and do your work" He's pretty much just pissed you off and as a self-employed contractor, you're free to decline and move on to another "client". If that same person is your employer, he's broken several civil laws and in most jurisdictions, committed an actual crime.
We could both go on for hours on the differences which is why this whole thing amazes me.
You are spreading very bad MIS-information, and it doesn't matter why -- stop it.
The fact, for a number of different states in which I've employed people (including MA, CA, NH...) is that there are very specific requirements for hiring people, and
NO, YOU CANNOT SIMPLY "pay using invoicing while a company gets going".
Federal and state laws specify that all employees are W2 status, and you are REQUIRED to withhold taxes. Management is even personally on the hook for these tax liabilities.
There are exceptions under certain limited criteria in which you can hire people as outside contractors -- commonly referred to as "1099s" -- the Federal laws are quite tight (the famous '20 questions'), and state laws are even tighter. E.g., in MA you cannot hire any person who performs core functions of your company as a 1099, so if your company writes software you cannot hire anyone to work on that software as a 1099 (but you could hire someone to, say, customize your office accounting package as long as you are only using it). Yes, it is that tight.
Just because some founders decide to break the law, and you would be happy to go along with them, does not make it legal.
Employees cannot invoice their earnings, they must be paid according to the law and the employment agreement you signed with them.
Yes payroll is complex but this is exactly why it needs to be done correctly and timely. The earnings, taxes, insurance, and other liabilities must match up along with all the reporting requirements. There is no way around this. You cannot just skip the complexity by telling them to invoice you.
"The actual exchange of money is 100x a stronger indicator of health than the presence of a stub."
Real companies with people running them who want to do things on the up and up and who know how to run a successful company want to keep a paper trail of every dollar going in or out the door. This includes having a pay sub with every single paycheck or invoice paid that shows what was paid, how much was paid, why it was paid, and when it was paid. That's How to Business 101.
"Real companies with people running them who want to do things on the up and up and who know how to run a successful company want to keep a paper trail of every dollar going in or out the door."
Most of you it seems have never run a business, have never consulted, have never invoiced for anything.
--> You don't need a W2 to pay someone legally
--> You don't need a 'pay stub' to have perfectly organized and legal books.
> When a company has just started, they may have not set this up.
The correct (and only non-criminal) order of operations is (1) figure this out, (2) start hiring employees.
If you can't calculate withholdings and all those other things that get listed on a paystub correctly (which is the only thing that would stop you from generating a paystub), you are breaking the law (civilly and perhaps criminally under federal and state tax and other laws, that require the withholdings, deductions, etc.)
If you don't (in California, where this occurred) have posted paydays with at least the legally specified frequency, or don't pay employees on those paydays, you are breaking the law (criminally, under state employment laws, as well as possibly civilly.)
So, if you haven't figured this out, you have no business hiring employees.
"When a company has just started, they may have not set this up. The correct (and only non-criminal) order of operations is (1) figure this out, (2) start hiring employees."
This is false.
For any of you interested - here is the actual law in California:
It's perfectly normal and very common to submit invoices for services rendered that you claim on your 1099.
There's no way you could have run a business without grasping how common paying people via invoicing is.
Some major companies - such as Wordpress - tend not to hire people for a while. For the first little while, they have you work on 'projects', remotely, until they decide they want to bring you on long term. The founder indicated that they pay them for the work and only bring some of them on. Obviously, they are getting paid via invoicing.
Startups will often bring someone on for a project/consulting, and then decided to keep them full time. This is not uncommon. It's also happened to me.
I'm going to guess that most of you commenting have actually never run a business, paid an invoice, or submitted and invoice.
Independent contractors and employees are two different things.
It's quite legal to hire people to serve in roles that are not, under the tax code, employees but independent contractors, without being able to handle payroll. But that's not a status that a company can freely choose independent of the nature of the work, it's a status that is controlled by the nature of the work by rules set out in the tax code.
You seem to think that employees hired as employees can elect invoicing and 1099 status if the company isn't up to handling employment law requirements, order that the company can hire people as employees and then treat them as contractors until it is ready to handle employment law requirements. Neither is the case, and either is a situation in which the company violates many aspects of the law (and more if it doesn't pay timely on a regular schedule but instead waits for invoices.)
You seem to persist in not understanding the difference between a w2 and a 1099.
fyi, as alluded to elsewhere in this thread, the government deems payroll taxes to be paid by the employee on the date he or she receives his or her share of the paycheck. At that point, the business is holding the taxes on behalf of the government. Officers of the company are regularly held personally liable for unpaid payroll taxes. The irs and state tax agencies choose a "fuck you, pay me" approach to these taxes. You should probably not screw about with them, but to each his own...
It is a big deal, running a business requires following the law. There is no special "startup" case where you're allowed to be loose on your obligations.
Accurate payroll costs somewhere between $50-100 per month per employee with dozens of great vendors available. This is an incredibly trivial cost (especially compared to the fines for breaking these laws) and means there's no excuse to not have things in order. If you can afford a salary, you can afford accurate payroll and bookkeeping - otherwise you have no business being in business.
"It is a big deal, running a business requires following the law."
Again - I would suggest that maybe you have never started a company or done payroll, or paid anyone yourself.
It is not required to have 'payroll' to pay individuals for services rendered, nor have properly managed books.
I once created a 'side company' to manage some IP. The company had no employees. All participants (there were five of us over time, but only three at any given time) - were paid as consultants. Two of us had equity.
This arrangement was far superior than having payroll for this particular situation.
You're right, in that case. In the case of contractors invoicing is normal and legally acceptable. In the use case you mention here, contractors are appropriate and legal.
It is, however, illegal to pay employees like contractors. When you are hired to work full time for a start up you almost always meet the test of being an employee. The author of this article did. It IS therefore illegal to not give her a paystub or ask her to invoice.
This is generalizable to start ups. I've worked for start ups. Every time I was hired as an employee and treated as one. It would have been a red flag and illegal for them not to pay me as an employee.
Again, everything you're saying for the most part is true if you're talking about paying IC's. Where you are demonstrably wrong is assuming that you can treat start up employees as ICs You can't. Therefore doing what you're claiming is "normal" is actually illegal on many levels.
I've started several companies with my own employees and I've always paid them correctly and on time with proper payroll and accounting. That's because it's the right and legal way to conduct business.
If you're talking about instances where you use contractors instead, then that's an entirely different scenario.
As long as you treat employees and contractors separately and properly, there are no issues - but having employees and paying them like contractors is illegal. Invoicing is not a replacement for payroll.
I know that things are different in Canadia, but in the US you appear (up thread) to be conflating W2 employees and 1099 contractors. Yes, you can pay the latter as vendors - because that's what they are. No worries about vacay, health benefits either.
I would suggest that your little side gig did not provide you panoptic insight.
> Again - of all flags - lack of pay stubs is the least of them
Its not the least, though it may be less than just being late on payroll. Posted paydays, of a certain minimum frequency, and timely payment on those paydays is a bare minimum legal requirement in most jurisdictions for which there are generally fairly significant liabilities that attach for failure. [0] A business that fails this in any broad way (for lots of employees and/or for multiple pay periods) is seriously and fundamentally broken.
(OTOH, tax withholding and lots of the other things that go on paystubs are similar bare minimum legal requirements with significant liabilities for failures, and if you are doing them correctly in the first place, actually providing paystubs is trivial -- the hard part is doing the required things that end up getting reflected on paystubs. So missing paystubs is at least nearly as big of a red flag as late payroll.)
[0] In California, for instance, failure to either post paydays meeting the legal requirements or to pay on those posted paydays as required by law is a crime (misdemeanor) by the employer. http://www.dir.ca.gov/dlse/faq_paydays.htm
The CEO blamed ADP for the payroll being late. When you combine that with the lack of paystubs, if alarm whistles aren't going off, you are just not paying attention.
That's not what matters. What matters is that the information is correctly documented. Taxes man. They make a difference. Say I make $100 a day before taxes. I get a check that shows they took out $25 for federal, $5 for State, etc. Whoopie, my take home is $70. At the end of the year I get a W-2 showing all the taxes they company took out etc..
But what if they just give me a hand written check for $70 made out to me, Joe Blow. There is no indication of taxes being taken out, but hey, I got $70, so all is great right? Wrong..
At the end of the year I get a W-9. They say I wasn't an employee but a contractor. I have no proof that they took out taxes and now suddenly I am on the hook to pay taxes to the government that were already taken out by the crappy employer and pocketed.
No, this is huge. Paystubs are a major thing. And if you can't get the money operating, then you shouldn't be hiring people. And if you are, you should be up front about it.
You are NOT entitled to people working for you for free, under deceptive pretenses.
He got paid - that's what matters.
The paystub is a minor thing/