Are you the business owner of a small or medium sized company? Are you looking for a quick, simple and easy to use solution to doing your own payroll? Have you ever done payroll before, have no clue where to start, or just want to save money by doing it yourself instead of paying an expensive local accountant to do it for you? If so, we may be able to help you!
Your business can get free help with payroll from the Payroll for Small Business program. Payroll for Small Business is a free service offered through the U.S. Small Business Administration that can help you do your own payroll. It provides pre-formatted payroll reports, tax tables and deductions to help you pay employees the right amount without having to search for them. The system won’t do a lot of mathematical calculations or complicated filling out forms, but it will make getting tax payments to employees and filing your payroll taxes much easier and hassle-free.
Payroll for your company doesn’t have to be an impossible task. If you’re looking to learn how to manually process payroll yourself, you have some options.
Below, we walk you step by step through what each process entails, as well as which option might be best for your business. Remember, this post is for educational purposes only. For specific advice, be sure to consult with a professional.
How to do payroll taxes manually
Payroll taxes are federal, state and local taxes withheld from an employee’s paycheck by the employer. They include Income Tax, Social Security, and Medicare. In order to properly calculate what your payroll tax should be, you need to know the current tax rates. For example, the Social Security tax for 2020 is 6.2% and the Medicare tax rate is 1.45%. The percentages are determined on a yearly basis.
If you want to know how to process payroll yourself, read below.
How to process payroll yourself
Summary: Doing your company’s payroll on your own costs less, but is time consuming and prone to errors.
If you’re tax savvy, you may be able to take on a DIY approach to paying your employees. But given all the payroll mistakes you can make (and nasty fines you can incur as a result), make sure you’re completely comfortable with everything you need to do before you dive in.
To get started:
Step 1: Have all employees complete a W-4 form. To get paid, employees need to complete Form W-4 to document their filing status and keep track of personal allowances. The more allowances or dependents workers have, the less payroll taxes are taken out of their paychecks each pay period. For each new employee you hire, you need to file a new hire report. Note that there is a new version of the Form W-4 for 2020, so this is the form you should have new hires fill out starting January 1, 2020.
Step 2: Find or sign up for Employer Identification Numbers. Before you do payroll yourself, make sure you have your Employer Identification Number (EIN) ready. An EIN is kind of like an SSN for your business and is used by the IRS to identify a business entity and anyone else who pays employees. If you don’t have an EIN, you can apply for one here on the IRS site. You may also need to get a state EIN number; check your state’s employer resources for more details.
Step 3: Choose your payroll schedule. After you register for your Employer Identification Numbers, get insured (don’t forget workers’ compensation), and display workplace posters, you need to add three important dates to your calendar: employee pay dates, tax payment due dates, and tax filing deadlines (read more about basic labor laws here).
Step 4: Calculate and withhold income taxes. When it comes time to pay your employees, you need to determine which federal and state taxes to withhold from your employees’ pay by using the IRS Withholding Calculator and your state’s resource or a reliable paycheck calculator. You must also keep track of both the employee and employer portion of taxes as you go.
Step 5: Pay payroll taxes. When it’s time to pay taxes, you need to submit your federal, state, and local tax deposits, as applicable (usually on a monthly basis).
Step 6: File tax forms & employee W-2s. Finally, be sure to send in your employer federal tax return (usually each quarter) and any state or local returns, as applicable. And last but not least, don’t forget about preparing your annual filings and W-2s at the end of the year.
Why do you need a payroll system?
The most obvious reason is that you need to pay people who work for your company. It’s easy to pay employees once a job is complete, but having a proper system in place mitigates risk and vastly improves your business operations.
It may sound counterintuitive, but payroll systems aren’t just about paying employees. Payroll processing is a detailed documentation system that tracks who is working for your company, how long they’ve worked for you, and how much money you’re spending on labor. Terms like “payroll processing” and “payroll system” can make this sound complicated, but it’s quite simple.
If you work with a payroll provider, your “system” is automatically set up through the company. If you’re on your own, you’ll have to set up your own system. The point of this system is documentation.
Here’s a list of things your payroll system should do:
- Track employee hours
- Track employee wages
- Track deductions and other withholdings
- Keep tax documents organized
- Track direct deposits and payments
How to create your own payroll system
Before we dive into how to do payroll yourself, it’s important to review the overall process. Creating a payroll system with steps to follow is all about organization and planning. Once your system is set up, information and documentation will flow through it, and you’ll be able to report on important business aspects.
Follow these steps as you plan your payroll system and decide how to structure employee payments:
- Gather the preliminary information you need to process payroll.
- Find your EIN through the IRS.
- Establish state and local tax ID numbers.
- Collect employee financial information like W-4 and 1099 forms.
- Set up a payroll schedule.
- Choose a weekly, biweekly, semiweekly or monthly payroll system.
- Establish payroll tax payment dates.
- Manually process payroll.
- Calculate employee hourly schedules and overtime pay.
- Calculate gross pay for each employee.
- Determine deductions and subtract from gross pay.
- Calculate net pay and issue payment.
- Complete these follow-up tasks after each pay period:
- Keep and document payroll records.
- Report new hires to the IRS.
- Stay up to date on any miscalculations or mistakes, which should be documented and eventually reported to the IRS.
What you need to do before you start running payroll
It’s easy to get swept up in the idea of hiring your first employee, but there are a few things you need to do as a new employer before you ever start interviewing people.
These are one-time tasks that need to be completed before you can run payroll.
1. Get a federal Employer Identification Number (FEIN)
A federal employer identification number, commonly called an EIN, is a number the IRS uses to identify and track your business’s payroll tax payments and forms. It’s like a Social Security number for your business.
If you’re running payroll, you’re required to get an EIN. Luckily, getting an EIN is free and easy. You can apply for one directly through the IRS website, and learn more in this EIN overview.
2. Register with the Electronic Federal Tax Payment System (EFTPS)
A big part of running payroll involves paying payroll taxes on time. The EFTPS is a free payment system that lets you do just that, by allowing you to pay both your federal payroll taxes and federal unemployment taxes right from your computer.
If you’re using a payroll service, then you can skip this step since they’ll send in your tax payments for you.
Get started with the EFTPS here on their website.
3. Register as an employer in your state
Before doing your own payroll, you’ll also need to register as an employer with your state. Every state has a different registration process and requirements;most states require employers to also register with agencies that collect tax information (like the state-specific Department of Revenue and Department of Labor), so check out your state small business registration requirements to get started.
4. Learn federal and state labor and pay laws
When using an automated payroll service, you typically don’t need to have as much in-depth knowledge of pay and tax laws, since they’re usually already applied to the software.
But if you don’t, it’s important to know about relevant pay and labor laws before you run payroll. Some of these laws relate to things like how often you run payroll and what information you need to provide on your employees’ pay stubs. These can be tricky because there are federal, state, and even local laws you need to comply with.
The general rule of thumb is that you must follow the law that provides the greatest benefit to your employees. For example, if the federal minimum wage is $7.25 per hour, but your city’s minimum wage is $15 per hour, you’ll pay your employee $15 per hour.
At the very least, these are the payroll-related laws you should know:
- The minimum wage in your state, city, or county
- How overtime is calculated
- The information you’re required to provide on a pay stub
- Your state’s payday frequency requirements
- How and when you need to deliver an employee’s final paycheck
- If you’re required to withhold money for state disability insurance
- If you need to withhold local income tax
- What paid and unpaid breaks you’re required to provide
- Your workers’ compensation insurance requirements
- Make sure your state doesn’t have any additional tax withholding requirements (such as family leave, state unemployment insurance tax, state disability tax, etc.)
If you use an online payroll service then you won’t have to go as in-depth with your research. Your payroll service can help you comply with things like pay stub requirements and state disability and local income tax withholdings.
5. Choose your payroll schedule
Before you hire someone, you’ll need to decide how often you’ll run payroll. Don’t forget to check your state’s labor laws about payday frequency before making the call.
6. Ask employees to complete new hire paperwork
After you hire your new employee, they need to complete new hire paperwork. These forms are mandatory and provide the details you need when you run payroll.
Keep in mind that many online payroll services can handle this type of paperwork for you by enabling employees to electronically submit the required forms.
You need to collect:
- Form W-4
- I-9 Employment Eligibility Verification form
- State Tax Withholding form, if your state requires that you withhold state income tax (many states allow the federal W-4 to be used in place of the state withholding form.)
- Direct deposit authorization form, if you plan on direct depositing your employee’s pay. This form gives your permission to direct deposit your employee’s pay into their bank account.
Some payroll services send these forms to new employees via email and even let them submit their forms and documents electronically.
7. Report your new hires to the state
The last thing you’ll need to do is to report your new hire to your state’s new hire reporting agency. Every state has its own new hire reporting agency and data requirements.
Click into this PDF to view a state-by-state list of new hire requirements and agencies.
You can typically skip this step if you’re using a payroll service, since most will report your new hires for you.
Conclusion
If you’re self-employed or a small business owner, it’s likely that you pay your own payroll. Payroll taxes are notoriously complicated and time consuming, so we’ve done the hard work for you. This guide will walk through all the tasks one must complete to do their own payroll for their small business, using a real case study.