What should pay be before payroll is setup?

All,

I am a cofounder at a startup and we are still in the process of setting up payroll. For the time being, we have estimated taxes and are paying both my cofounder and myself the after-tax amount. I have a gut feeling that this is incorrect and could lead to trouble in the future.

How should we get paid until payroll is setup?

As an entrepreneur (not an accountant or lawyer), my gut matches yours: this is a mistake.

A cleaner way to do it would probably be for the company to loan both of you money. Take a loan each month for your expected after tax salary, and fill out a simple loan agreement promising to pay the money back to the company (you may have to include interest, which is so low right now that you won't care).

When you have your payroll set up, pay both of you a bonus which covers the total salary owing for previous months plus interest (if any) you owe on the loan ... and then use the cash you receive to pay back the loans to the company. You should be free and clear from then.

P.S. I am Canadian ... and in Canada it's no work to set up payroll. Once your business is registered and you have a business number, one 5 minute call to the government and they will tell you where to send the cheque for your payroll account. You may try calling the IRS and say "I want to send you payroll taxes, where do I send them to" to see if they are as helpful as the Canadians.