Welcome to Payroll Desktop Solutions, lets have a look at the web’s most downloaded and cost-effective payroll software for small businesses on the market today. Have a read of our review and discover what makes this product so great for small to medium sized businesses.
Small Businesses are the backbone of the economy in most countries. Without them, everyone would be out of jobs. As a business owner it is essential to make payroll online software for small business your top priority.
The Best Free Payroll Software Apps
When evaluating the best free payroll software, we prioritized small business needs, including calculating paychecks, making deductions, and time tracking hours and PTO. Read on for our top free payroll software picks.
Payroll4Free: Best Overall Free Payroll Software
Payroll4Free | Visit Site |
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Best for smaller businesses that need the tools to do direct deposits and tax calculations by themselves, free of charge.
True to its name, Payroll4Free is a handy tool for completing payroll for free. If you are paying 25 or fewer people, your small business is eligible to access its basic services for free.
Even at its most stripped-down level, Payroll4Free still packs a comprehensive array of features that can take the hassle out of completing payroll. For starters, it allows users to pay both W2 and 1099 employees. The software also can print checks and calculate federal, state, and local taxes. Furthermore, users can export their payroll data to be integrated with accounting and banking software like QuickBooks.
Payroll4Free’s portal and reporting features let employers and employees alike keep track of sick days, vacation, and other PTO. Additionally, employees can print out their pay stubs and W2 forms off the platform, saving small business owners time and resources.
The platform is able to offer free service through paid advertising, which users will encounter periodically while using the software.
Pros
- Direct deposit and tax calculations are available as free basic services
- Basic service includes unlimited customer support by phone, email, and online chat if you hit any roadblocks.
- Customer data and information is encrypted.
- Provides preset tax forms for submission.
Cons
- Mac users will need to use Windows operating software since iOS isn’t compatible.
- Direct deposit through Payroll4Free’s own bank is not free
Payroll4Free Features & Pricing
Payroll4Free offers all of its basic services free of charge, which it achieves by hosting advertisements within its software for companies who pay them for their exposure. The free version of Payroll4Free places no limits on payroll or direct deposit processing and doesn’t require that you upgrade to a higher-tier plan to enjoy its basic features. Features that Payroll4Free offers at no additional cost include:
- Direct deposits and paper checks
- Tax calculations and required forms
- Time tracking for vacation and time off
- Employee dashboard portal
- Customer service
- Employee enrollment
The above basic services are for free for clients who staff 25 or fewer employees, although not all of Payroll4Free’s benefits are free.
Despite its name, Payroll4Free places two optional services behind a paywall. Employers that don’t want to deal with depositing and filling out payroll taxes themselves need to pay a $15/month fee for Payroll4Free to take care of it for them. However, Payroll4Free does offer free tools as a basic service that you can use to make this process easier.
If you don’t want to rely on your own bank to transfer direct deposit funds to your employees, you will need to pay another $15 dollars per month for Payroll4Free to complete these transfers using their bank. So, if you decide to opt-in for all paid services that Payroll4Free offers, you’ll be paying $30 every month at the very most.
Payroll4Free Summary
Payroll4Free is the best choice for small businesses with fewer than 25 employees that want an easy-to-use payroll application that gives them the tools they need to succeed. Free features like direct deposit and a self-service portal are absolute must-haves for small companies that need to invest in other areas of their business. Payroll4Free is the best overall payroll software choice for businesses that need basic features with a simple, easy-to-use interface.
ExcelPayroll: Best For Spreadsheet-Based Bookkeeping
ExcelPayroll | Visit Site |
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Best for businesses that have access to a version of Microsoft Office Suite and want a payroll solution that behaves with a spreadsheet format.
Spreadsheets are a helpful and time-tested tool for creating budgets and making calculations. If you’re already using spreadsheets or Microsoft Excel to handle payroll, ExcelPayroll can simplify the process for no extra cost.
After entering employee information, along with their earnings and deductions, ExcelPayroll can run the payroll calculations from there. Users can also print checks and tax forms, see workers’ compensation reports, and record payroll deductions, such as 401k contributions.
Pros
- Whereas Microsoft Excel charges a subscription fee, ExcelPayroll is free.
- Easily translatable for anyone savvy in Microsoft Excel.
- Customized withholding and timecard options are available.
Cons
- More manual entry involved than other payroll software.
- Does not handle tax or benefits administration.
- Not ideal for employers with 50 or more employees because Affordable Care Act compliance isn’t programmed in.
ExcelPayroll Features & Pricing
According to its program mission, ExcelPayroll strives to create a Microsoft Excel-based payroll application that includes no monthly fees and zero costs attached to using it. Installation is also free of charge, so you don’t need to pay anything extra to get your software set up and running smoothly. Best of all, ExcelPayroll offers a full set of reliable payroll tools for free including:
- Prints tax forms including W2s, W3s, 940, 941, DE9 & taxes liabilities
- Vacation accrual
- 401(K), garnishment, and other payroll deductions
- Print checks
- Time-tracking
- Bookkeeping entries
ExcelPayroll itself is free to download, and you don’t need to pay any fees to use its features. Technically speaking, though, ExcelPayroll isn’t completely free, since it requires that you purchase a licensed version of Microsoft Office Suite to run Excel.
Microsoft’s 365 Business Standard plan is the cheapest of its cloud-enabled plans that offer the Microsoft Excel application, which charges a monthly fee of $12.50 per user. Keep in mind that you also need to pay an annual commitment fee to retain access to your Office 365 applications, including Excel.
ExcelPayroll Summary
ExcelPayroll makes sense for small businesses that are already comfortable with using Excel spreadsheets and want to use core payroll features such as W2 form and check printing in a spreadsheet format. ExcelPayroll directly syncs up with the Excel app, so you don’t need to worry about creating a spreadsheet from scratch — ExcelPayroll can do that for you. So long as your business either currently has access to a licensed version of Office 365 or doesn’t mind subscribing to a new plan, ExcelPayroll is a robust spreadsheet-based solution that still behaves like payroll software.
HR.my: Best for Multinational Businesses
HR.my | Visit Site |
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Best for companies that largely do their business overseas or staff many multilingual employees.
Managing employees is a major task for any business. When employees are spread across multiple locations, or even countries, there may be language barriers and added steps for completing payroll taxes to account for. Boasting support for a whopping 65 languages, HR.my is perfect for multinational teams that also need access to basic payroll processing features and human resource management tools.
HR.my is able to support payment by direct deposit, check, or even cash. A business can also designate multiple managers in the system through a role-based user access control feature to divide payroll responsibilities. Additionally, employees can use the platform to input hours worked, request PTO, print their pay stubs, and check their vacation accrual among other tasks. Users can also import timesheets, expense reports, and share documents via the software’s workflow function.
Pros
- The software supports a total of 65 languages.
- Businesses with any number of employees may utilize HR.my.
- The flexible payment schedule lets you cut checks monthly, semi-monthly, biweekly, and weekly.
- Data is encrypted and secured daily with off-site backup.
Cons
- Does not incorporate U.S. labor law compliance.
- Customer support is handled through a crowd-sourced online forum.
HR.my Features & Pricing
HR.my offers free access to one-hundred-percent of its features and doesn’t require that you subscribe to any plans to unlock extra benefits. It accomplishes its free service through crowdfunding from its user community, so you just need to sign up to start using it. HR.my’s free features include:
- Payroll processing that supports multiple pay periods
- Attendance management & time-tracking
- Employee self-service portal
- Print & export payroll results, leave transactions, and time clock records
- Regular software updates that introduce new free features
For the number of features it offers for free, HR.my is a contender not to be taken lightly when compared to other ostensibly free payroll software solutions, which sometimes gate certain features behind monthly fees and annual renewals. HR.my is “Free! Forever.” according to their home page, so what you see with them is what you get when you sign up: support for unlimited user accounts, time management, multiple pay schedules, a self-service portal, and much more.
HR.my Summary
Small business owners and HR managers who need multi-lingual payroll software will be pleased with HR.my’s support for literally dozens of languages. The software offers payroll features such as online HR and payroll, leave management, and expense reporting that are essential to businesses that don’t yet have mature payroll processes set up. And, since HR.my supports an unlimited amount of user accounts, it’s a feasible payroll solution for businesses that want to increase their number of employees in the near future.
Timetrex: Best For Employee Time Tracking
TimeTrex | Visit Site |
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Best for companies that need a full-fledged time-tracking solution that also offers payroll features.
Calculating payroll requires knowing how much time employees have worked during a pay period. Recording any sick leave or vacation days is also important too. Timetrex is a good bet for small businesses with hourly employees, as it synthesizes time-tracking into payroll software.
The free option is known as the community edition; it is an open-source platform supported by volunteers from over 50 countries. Timetrex stands out for its time and attendance tracking for employees, who need simply log their hours online. This information is automatically linked with payroll, so running the numbers at the end of the pay period is a breeze.
Timetrex’s community edition covers most of the bases of completing payroll, including calculating net pay, taxes, and deductions. Users can utilize Timetrex to pay their employees via direct deposit or paper check, as well as prepare tax forms. Some other HR functions are featured too, such as submitting PTO requests and schedule changes.
Pros
- Can be integrated with other payroll services, such as ADP and QuickBooks.
- Cloud-hosted support for free
- Employees can easily access app via web browser
- Includes automated multi-week scheduling for recurring or rotating shifts.
Cons
- The free community version does not assist with filing taxes.
- Non-transparent pricing
- Tax filings and payments to third parties are not included.
Timetrex Features & Pricing
TimeTrex offers its most basic payroll features for free under its Community Edition service plan. The TimeTrex Community Edition is exclusively cloud-hosted, doesn’t require any downloads or software installations, and comes with free features such as:
- Payroll processing
- Human resource management
- Web browser support for time & attendance
- Leave management
TimeTrex does offer mobile app and on-site service in addition to its web portal support, but you’ll need to purchase at least the Professional plan to access it. TimeTrex’s pricing starts at $2.99 per month, per user, and begins at a beginning flat rate of $29.90 for businesses that pay up to 10 employees. Additionally, the company offers a plan comparison online but doesn’t include any further pricing details, so you’ll need to request a demo with them to learn more about which plan makes sense for your business.
TimeTrex Summary
TimeTrex’s free features make the most sense for small, dispersed teams that need web access to time-tracking. Business owners who already use a payroll software they enjoy can integrate it with TimeTrex, as well as sync it automatically with TimeTrex’s attendance tracking. Unfortunately, TimeTrex’s lack of pricing transparency makes it difficult for busy companies that need immediate payroll solutions to quickly choose a plan that suits their needs.
eSmart Paycheck: Best For Quick Payroll Calculations
eSmart Paycheck | Visit Site |
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Best for companies that want to quickly crunch payroll numbers with state-specific calculators.
There’s a lot of arithmetic that goes into completing payroll. eSmart Paycheck is a free payroll calculator that can quickly compute payroll for hourly or salaried workers while taking care of 401k contributions and other deductions.
eSmart stands out from other payroll calculators in that it lets users download and print paychecks and pay stubs. If you live in a state with more complicated payroll taxes, such as New York or Maryland, state-specific calculators can help safeguard you’re withholding the right amount.
Pros
- Helps you abide by state income tax laws
- The pay cycle has eight settings (daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually)
- The interface for inputting information is very intuitive.
Cons
- The free calculator does not save data, so you’ll need to make records separately.
- Does not help file taxes.
eSmart Paycheck Features & Pricing
eSmart Paycheck is more of a payroll calculator than it is a software solution. Small business owners can use eSmart to input employee wage and withholding information to run payroll themselves. Among the standout free features that come with the eSmart Paycheck calculator include:
- Print paychecks and pay stubs
- State-specific calculators
- Adjustable pay cycles
- Quick web-based access
Businesses that need tools to file tax information will need to subscribe to a paid eSmart Payroll service plan. eSmart Payroll provides paid access to federal and state payroll forms at various prices.
eSmart Paycheck Summary
eSmart is best saved for businesses that already have a firm grasp on how to calculate their payroll and are confident in filing taxes themselves. If your company is well-organized and just needs a solution to calculate and print its payroll numbers, then eSmart Paycheck may be right for you.
Honorable Mentions
IRIS: Best UK Payroll Service
UK-based businesses with fewer than 10 employees can take advantage of IRIS’s free payroll software. Payroll calculations are done automatically on an ongoing basis once information is inputted. Data is backed up with each use, so you won’t have to start over from scratch each time you do payroll. Besides the geographic and employee constraints, another downside is that the ability to print pay stubs and reports is only free for 30 days.
Rise: Best Canadian Payroll Service
At this stage, Rise only offers payroll services for small businesses in Canada with 20 employees or less. In addition to calculating payroll, qualifying businesses can generate personalized payroll reports and completely customize their payment schedule.
Should You Use Paid Payroll Software Instead?
If the aforementioned free platforms aren’t checking all your boxes, a paid payroll software is another option. In addition to greater customer support, these apps typically come with a more diverse array of features that businesses with any number of employees can utilize.
Paid VS Free Payroll Software
While the best free payroll software can come in handy for payroll calculations and printing checks, it may not cover all the bases for completing payroll. Also, companies may not be eligible for free services as they grow in size.
If you’re looking to take your payroll support further to file taxes and make direct deposits, the time savings may be worth the cash required monthly to pony up for a paid payroll software. Many paid providers offer different payroll tiers according to access, meaning there are options for nearly any budget.
The Best Free Payroll Software Alternatives
If you decide that the free apps aren’t cutting it for your payroll and HR needs, there are plenty of other cost-effective options to consider. There are many solutions out there, so we’ve done some of the legwork to put together a list of the best payroll software for small businesses.
ADP
ADP Payroll | Get A Quote Read our Review |
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Get three months free when you sign up with our links!
ADP has been working in payroll and workplace management for decades. As an established firm, they have built their reputation on customer service and support for major companies with thousands of employees. However, ADP’s four-tiered RUN plan is geared towards small businesses with 1-49 employees. The software includes payroll processing, direct deposit, tax filing, new hire reporting. To manage HR through payroll, you will have to upgrade above the Essential RUN plan.
To determine if ADP fits your budget, you’ll have to reach out for a quote, as pricing and add-on fees are not explicitly disclosed online. For growing mid-sized businesses, the extensive features and in-depth customer support could be worth the higher prices and hidden fees. Read our complete ADP review to see if this payroll software is right for you.
Gusto
Gusto | Start Trial Read our Review |
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If your main priority is getting payroll taken care of without much hassle, then Gusto is a top candidate for the job. The cloud-based system can fully automate calculations and tax filing through a service called Gusto AutoPilot, which can provide 24-hour notice and ultimately submit payroll on time in case you forget. Even Gusto’s cheapest package, the core plan, lets customers manage deductions, garnishments, and additional earnings for their payroll. Employees can do some time tracking and download pay stubs within the portal too.
If reporting and complex scheduling are a priority for your small business, then Gusto may not be the best choice. Otherwise, its straight-forward approach and attentive customer support make it a hit among small to mid-size businesses. Read our full Gusto review for more details.
Intuit Online Payroll
Intuit Online Payroll | Visit Site Read our Review |
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Intuit QuickBooks is one of the most well-known accounting platforms, and fans of this product may want to sync it with Intuit Online Payroll to streamline their business operations further. The most basic coverage, core payroll, can tackle paycheck and tax calculation, as well as deliver reports and next day direct deposits. Upgrading to either premium or elite will bring automated payroll, greater HR support, and time tracking features.
To access the Intuit Online Payroll service, you are required to have an existing QuickBooks Online account. If you don’t already use QuickBooks for accounting, this could make the switch more costly. Meanwhile, the abundance of features lends itself to larger entities and mid-size businesses with aspirations to expand. Read our complete Intuit Online Payroll review for more information.
Wave Payroll
Payroll by Wave | Visit Site Read our Review |
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To get the most bang for your buck on payroll and accounting, Wave is hard to beat. Of course, the accounting and payroll apps can be used separately, but the integrated nature of the two — and the fact that Wave’s accounting platform is free — can be big plusses for small businesses on a shoe-string budget.
Currently, Wave only offers full-service in 14 states, though small businesses located elsewhere can opt for the cheaper self-service option. The key difference is that full-service customers can take advantage of tax filing and reporting services. Still, self-service handles payroll basics at a lower cost, including direct deposit, printing checks, and calculating PTO and paychecks. Read our complete Payroll by Wave review for more information.
Paylocity
Paylocity | Visit Site Read our Review |
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After years of success managing payroll and human resource management for large businesses, Paylocity has dived into the small business market. The software stands out for its capacity to integrate solutions and services, such as time tracking, performance reviews, and employee benefits alongside payroll. Paylocity’s lowest tier, Effortless Payroll, still packs a wealth of features on top of the standard payroll calculation components, such as tax services, labor law poster updates, and a self-service mobile app for employees
Paylocity isn’t known for offering competitive pricing to small businesses. But if customizability and a full-scale HR integration is what you’re after, then look no further. Read our full Paylocity review to learn more.
Free Payroll Software: The Bottom Line
In some cases, free payroll software can help crunch the numbers and make sure employees are paid on time. On the other hand, they may have limitations in fulfilling all your tax filing and compliance needs. There are certainly more options beyond our five picks, but other free programs may lack security measures that could put your small business at risk.
Try A Top Pick For Payroll
| ADP Payroll | Get A Quote Read our Review |
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We like ADP Payroll for its advanced employee management, strong payroll features, and great customer support. Get three months free when you sign up through our links!
How to do Payroll For Your Small Business:
Andi Smiles Small business financial consultant
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Your business is growing. Exciting times are ahead, but before you can reap the rewards of extra help, you need to figure out how to do payroll.
There are four ways to run payroll as a small business. You can:
- Do payroll yourself
- Use an online payroll service like Gusto
- Hire an accountant
- Hire someone to do it at your business
(If you already know how you want to run payroll, skip ahead to the corresponding section to learn exactly how to do it.)
This guide will explain how to do payroll manually, along with the biggest pros and cons of going with that approach. We’ll also reveal the other options you have if manual payroll isn’t your thing.
Quick links
- Determining who should be on your payroll
- How to do payroll yourself
- What you need to do before you start running payroll
- What do you need to have before running manual payroll?
- How to do payroll manually
- Run payroll
- FICA payroll taxes
- Federal income tax
- Pay payroll tax
- File quarterly and annual tax forms
- Keep accurate payroll records
- Other options if you don’t want to do payroll by hand
Run payroll and benefits with Gusto
Determining who should be on your payroll
First things first—before we jump into how to run payroll yourself, let’s quickly cover who you need to run payroll for.
As an employer, you may employ a variety of workers, both employees and contractors; for example, you may hire full-time and part-time workers for steady, long-term employment—and bring in independent contractors for more project-based work.
So, the question is, who needs to be on your payroll?
As an employer, you’re legally required to include all employees on your payroll, whether they’re designated as full-time or part-time, exempt or nonexempt. You’ll need to withhold all relevant local, state, and federal income and payroll taxes from your employees’ paychecks.
Independent contractors are responsible for paying their own taxes. So, if you employ contractors, you don’t need to run payroll or withhold anything from their checks; instead, you would issue them a check for their full hourly or project rate—and, from there, they would handle calculating how much tax they owe and paying those taxes to the proper authorities.
Some employers try to get around paying payroll taxes by misclassifying employees as independent contractors—but this can lead to serious issues with the IRS, including fines, penalties…even jail time.
So, it’s important to understand the differences between employees and independent contractors, classify your team accordingly, and make sure that any workers that fall under the “employee” umbrella are included in your payroll.
How to do payroll yourself
The only free payroll processing solution is to do payroll by hand. Payroll software, accountants, and bookkeepers all charge a service fee.
If you don’t have extra funds to spend on a payroll service, the DIY approach can save you some cash. Doing manual payroll isn’t the most straightforward task, but armed with the right knowledge, time, and a sturdy calculator, you can do payroll for your small business yourself.
Here’s how to do payroll manually.
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.
What do you need to have before running manual payroll?
Okay, you’re finally ready to run payroll! But before you do, it’s helpful to have a few things handy.
- Employee’s W-4
- Federal payroll tax withholding tables: The withholding tables are located in Publication 15-T.
- State or local payroll tax withholding rates: If you’re required to withhold state or local income tax, then you’ll also need your state’s tax tables or withholding rates.
How to do payroll manually
At long last, it’s finally time to run payroll. When it comes to manual payroll, there are three main phases:
- Run payroll
- Pay payroll taxes
- File quarterly and annual tax forms
Each phase has its own set of steps. While it may seem overwhelming at first, just focus on following the instructions one step at a time.
Run payroll
1. Calculate your employees’ gross wages
Gross wages are the total amount of wages that your employee earns, before payroll deductions like retirement contributions, health benefits, and payroll tax withholdings.
How you calculate your employee’s gross wages depends on if your employee is an hourly or salaried employee.
For hourly employees, multiply the total hours they worked in the pay period by their hourly wage. For example, if you pay Riley $15 per hour and they worked 64 hours in the bi-weekly pay period, here’s how you would calculate their gross wages:
$15 x 64 = $960
For salaried employees, divide their total annual salary by the number of pay periods you have throughout the year. For example, Riley’s yearly salary is $60,000 and you have 24 payrolls in the year. Their gross wage each pay period is $2,500.
$60,000/ 24 = $2,500
Gross wages also include:
If your employee has any of these during a pay period, you’ll need to add it to their base wages.
2. Calculate your employees’ pre-tax deductions and subtract them from gross wages
Pre-tax deductions are payroll deductions that your employee volunteers to withhold from their paycheck. Common examples are:
- Retirement contributions
- Health benefits
- Disability insurance
- Commuter benefits
These deductions are subtracted from your employee’s gross wages before payroll taxes are calculated. That means they lower your employee’s taxable income.
Let’s say Riley contributes $200 per pay period to their retirement plan and $100 per pay period to their health insurance premium. You would deduct these contributions from their gross pay:
| Gross pay | $2,500 |
| Retirement contribution | – $200 |
| Health insurance | – $100 |
| Taxable gross wages* | $2,200 |
*This number could be different depending on the type of tax because not all pre-tax deductions are exempt from all taxes. For example, health benefits are excluded from FICA payroll tax (more on that next) and federal income tax but retirement contributions are not excluded from FICA payroll tax. Be sure to double check what taxes your employee deductions are subject to.
3. Calculate your employees’ federal tax withholdings and subtract it from their paycheck
Now that you know your employee’s taxable gross wages, the next step is to calculate and withhold mandatory payroll taxes. These are the employee’s portion of payroll taxes. Later, you’ll figure out your share.
There are two types of federal payroll taxes:
- FICA payroll tax (FICA)
- Federal income tax (FIT)
FICA payroll taxes
FICA payroll taxes go towards your employee’s Social Security and Medicare. The total tax is 15.3% of the employee’s taxable gross wages. Employees are responsible for paying half (7.65%) of the tax, and you, the employer, are responsible for the other half (7.65%).
Here’s how your employee’s portion is allocated:
- Social Security tax: 6.2%
- Medicare tax: 1.45%
Even though employees pay half of their FICA payroll taxes, you’re responsible for subtracting their payment from their paychecks and sending it to the government.
Here’s how you would calculate FICA payroll taxes from Riley’s paycheck:
| Gross pay | $2,500 |
| Health insurance | – $100 |
| Taxable gross wages (FICA) | $2,400* |
| Social security tax (6.2%) | – $148.80 |
| Medicare tax (1.45%) | – $34.80 |
| Net pay after FICA payroll taxes | $2016.40 |
* Wait! What happened to the retirement contribution deduction? Retirement contributions are taxable for FICA payroll tax, which is why we haven’t deducted it from Riley’s gross pay.
Seems easy enough, right? Well, there are two important things to be aware of:
- The Social Security wage base: There’s a cap on the number of wages subject to Social Security tax, which is called the Social Security wage base. In 2021, the wage base is $142,800. If your employee earns more than $142,800, then you won’t withhold Social Security tax on wages over $137,700.
- Additional Medicare tax: If your employee earns more than $200,000 in taxable gross wages, they’re required to pay an additional tax of 0.9% on wages over $200,000.
These special cases mean that you need to keep careful track of how much you pay your employees throughout the year.
Federal income tax
There are two methods for calculating your employee’s federal income tax withholding:
- Wage bracket method
- Percentage method
If your employee earns more than $100,000 annually, then you can’t use the wage bracket method and instead, need to use the percentage method. If your employee earns less than $100,000 per year, then you can use either method. The wage bracket method is simpler than a percentage method, so if you have a choice, this will be the easier option.
In 2020, the IRS released a new W-4 form for employees. How you calculate employee withholdings will vary based on the type of W-4 your employee uses. For most businesses, there are four different ways to calculate an employee’s withholding:
- Wage bracket method for employees with a W-4 from 2020 or later
- Wage bracket method for employees with a W-4 from 2019 or earlier
- Percentage method for employees with a W-4 from 2020 or later
- Percentage method for employees with a W-4 from 2019 or earlier
If the wage bracket method or percentage method isn’t the best option for your payroll system or team, the IRS offers alternative methods for calculating employee withholding, including annualized wages, average estimated wages, cumulative wages, or part-year employment.
Refer to IRS Publication 15-T for detailed instructions for each method. We’ll be doing our example based on the Wage bracket method for employees with a W-4 from 2020 or later.
Step 1: In this step you’ll adjust the employee’s wage based on the information on their W-4. You’ll account for any additional income or deductions that your employee has listed on their W-4. After you take all of these factors into account, you’ll have your employee’s adjusted wage amount.
Let’s say Riley expects to make $12,000 in dividend income during the year. They don’t plan to claim any additional deductions. The process looks like this:
| Taxable gross wages | $2,200 |
| Number of pay periods | 24 |
| Other non-employee income (annual amount is listed on Riley’s W-4, under Step 4, line 4a) | $12,000 |
| Other income accounted for during current pay period (divide the total annual income by the number of pay periods) | $500 |
| Adjusted Wage Amount (add their taxable wages to their other income) | $2,700 |
Step 2: Now that you know your employee’s adjusted wage amount it’s time to figure out their tentative withholding amount. To do this you’ll need to know:
- Your pay frequency
- The employee’s filing status
- If your employee checked the box in Step 2 of Form W-4
Then, open IRS Publication 15-T and find the wage bracket table that corresponds with your pay schedule, the employee’s filing status, and their adjusted wage amount.
For example, you file payroll on a semi-monthly basis and Riley is a single filer and didn’t check a box in Step 2. According to the wage bracket table, the tentative withholding amount is $304.
Step 3: Next you’ll account for additional tax credits, like your employee’s dependents. Look at your employee’s W-4 and line 3 of Step 3. This is where your employee claims their dependents.
Divide the number on line 3 by the number of pay periods. Then, subtract that total from your employee’s tentative withholding amount from Step 2.
Here’s how it works for Riley, who has one child under 17.
| Amount from Step 3 on Form W-4 | $2,000 |
| Number of pay periods | 24 |
| Tax credit for current pay period (divide the amount from Step 3 by number of pay periods) | $83.33 |
| Adjusted withholding amount (Tentative withholding amount from Step 2 less the tax credit) | $219.67 |
Step 4: You’re almost there! The last step is to add additional withholdings that your employee requested on their W-4. To find this information, go to Step 4, line c of your employee’s W-4.
Add that number to the adjusted withholding amount from Step 3. The total is the final withholding amount.
For example, Riley has requested that an additional $50 is withheld from their paycheck every pay period. Step 4 looks like this.
| Additional withholding from W-4 | $50 |
| Adjusted withholding (from Step 3) | + $219.67 |
| Employee’s withholding for the period | $269.67 |
Now let’s put that all together to calculate Riley’s net pay after their federal income tax withholdings.
| Gross pay | $2,500 |
| Retirement contribution | – $200 |
| Health insurance | – $100 |
| Taxable gross wages (FICA) | $2,400 |
| Taxable gross wages (FIT) | $2,200 |
| Social security tax (6.2%) | – $148.80 |
| Medicare tax (1.45%) | – $34.80 |
| Net pay after FICA payroll taxes | $2,016.40 |
| Federal income tax withholdings | – $269.67 |
| Net pay | $1744.73 |
Related
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4. State income tax and other state taxes
Depending on your state, you may also need to withhold state or local income taxes from your employees’ paychecks. Some states even require that you withhold additional state taxes.
Check with your state’s labor department to learn what you need to withhold.
5. Calculate other voluntary and mandatory payroll deductions and subtract from paycheck
There are other voluntary and mandatory payroll deductions you may withhold after taxes. An example of a voluntary post-tax payroll deduction are the employee’s union dues, which they are electing to pay.
Mandatory payroll deductions are deductions you’re required to withhold and that the employee doesn’t opt-in to. These are called wage garnishments and they’re deducted from your employees’ paychecks.
Garnishments can be for unpaid child support, delinquent student loans, unpaid taxes, credit card debt, and unpaid medical bills.
The government will notify you if your employee has a wage garnishment. The notification will tell you when to start and end the garnishments, how much to withhold, and where to send the funds.
Then you’ll subtract the wage garnishment from your employee’s “disposable earnings.” Disposable earnings are your employee’s earnings after mandatory payroll deductions but before their voluntary deductions, like retirement contributions and health insurance. The definition of disposable earnings varies by state. In some states, health insurance is part of disposable earnings. Check with your state’s payroll department for their definition of disposable earnings.
Let’s say you’re required to garnish 15% of Riley’s earnings. Here’s how you would calculate Riley’s paycheck:
| Gross pay | $2,500 |
| Social Security tax (6.2%) | – $148.80 |
| Medicare tax (1.45%) | – $34.80 |
| Federal income tax withholding | – $269.67 |
| Disposable earnings | $2,045.73 |
| Wage garnishment (15%) | – $306.86 |
| Net pay after taxes and garnishment | $1,737.87 |
| Retirement contribution | – $200 |
| Health insurance | – $100 |
| Net pay | $1,437.87 |
6. Pay employees and record payroll totals
After you’ve calculated each employee’s paycheck, it’s time to pay them.
If your state requires that you provide a pay stub (which most states do), be sure to include a pay stub with their paycheck. Also, be sure to check on your state’s pay stub requirements. Some states have strict pay stub requirements.
Here’s an example of a pay stub:
This is also an excellent time to record the payroll totals for each employee. This comes in handy later when you’re paying payroll taxes and filing out your quarterly and annual forms.
For each employee record their:
- Gross pay
- Voluntary deductions
- FICA payroll taxes
- Federal, state, and local withholdings
- Wage garnishment totals
7. Calculate federal employer payroll taxes
As an employer, you pay two types of federal employer taxes:
- FICA payroll taxes
- FUTA payroll tax
You pay half of FICA payroll taxes, which is 7.65% of their gross pay.
The Social Security wage base applies to both employees and employers. Once your employee’s wages exceed the wage base, you don’t need to pay Social Security tax.
The Additional Medicare tax is only imposed on employees. That means you’re not responsible for paying more Medicare tax after their wages exceed $200,000. Instead, you’ll continue to pay 1.45%.
The other employer tax is FUTA tax, which goes towards federal unemployment insurance. FUTA tax is 6% on each employee’s first $7,000 in wages. After your employee earns $7,000, you no longer pay FUTA tax.
If you pay your state unemployment taxes on time, you’ll receive a 5.4% federal tax credit. This lowers the effective FUTA tax rate to 0.6%. Some employers may have to pay more in FUTA tax if they are in a state with an outstanding federal loan balance. These employers will not receive the full 5.4% credit. Check with your state’s payroll agency to find out your FUTA tax rate.
Here’s how you’ll calculate your federal employer taxes for Riley (our example from above):
| Taxable gross wages | $2,400 |
| Employer portion Social Security tax (6.2%) | – $148.80 |
| Employer portion Medicare Tax (1.45%) | -$34.80 |
| FUTA tax (0.6% on first $7,000 wages) | – $14.40 |
| Total federal employer taxes | $198.00 |
8. Calculate state employer taxes
All states require that you pay state unemployment tax (SUTA). This tax goes towards funding public unemployment programs.
Each state has its own SUTA tax rate. In most states, the SUTA tax varies based on your employee’s total wages and how many employees you’ve laid off in the past.
Usually, when you register as a new employer in your state, you’ll receive your SUTA tax rate.
Some states require that you pay additional employer taxes. Be sure to check with your state’s labor department to find out what taxes are required.
9. Put money aside to pay the government
After you’ve calculated the employee’s and employer’s portion of payroll taxes, it’s time to put those funds aside.
Later, you’ll send the money to the IRS and state government, but for now, transfer it to a savings or payroll account for safekeeping.
Pay payroll tax
Payroll doesn’t end when you hand your employees their paychecks. Remember that money you put aside for safekeeping? Now it’s time to send those funds to the government.
1. Pay federal payroll taxes
As an employer, you’re required to send both your employee’s tax withholdings and your employer taxes to the IRS.
Exactly when you pay your federal payroll taxes depends on your deposit schedule. There are four types of deposit schedules:
- Quarterly
- Monthly
- Semi-weekly
- Next-day
Your deposit schedule is based on your payroll tax liability for the previous quarter or look-back period. A look-back period is a 12-month period that ends on June 30.
For example, to determine your deposit schedule in January 2020, the look-back period is July 1, 2018 – June 30, 2019. You’ll need to know the total payroll taxes you paid during the look-back period.
Here’s how to know which deposit schedule you’ll follow and when your deposits are due:
| Deposit schedule | Qualification | When deposits are due |
| Quarterly | Your total payroll taxes are less than $2,500 in a quarter | Due with Form 941: April 30, July 31, October 31, January 31 |
| Monthly | Your payroll taxes for the look-back period were $50,000 or less You’re a new employer and didn’t have employee’s during the look-back period | By the 15th of the following month |
| Semi-weekly | Your payroll taxes for the look- back period were more than $50,000 | For payrolls paid on Saturday, Sunday, Monday, or Tuesday, deposits are due by the following Friday For payrolls paid on Wednesday, Thursday, or Friday, deposits are due by the following Wednesday |
| Next day | You accumulate $100,000 or more in payroll taxes during a monthly or semiweekly deposit period | Next business day deposit and you must make deposits based on the semi-weekly schedule for the remainder of the year and for the following year |
To pay your taxes, you must pay through EFT that you initiate through your bank or pay via Electronic Federal Tax Payment System (EFTPS). Monthly and semi-monthly depositors are no longer allowed to mail in their tax payments.
There are penalties for paying late. For businesses on a semi-weekly or monthly deposit schedule, penalties range between 2% and 15% of the unpaid tax (depending on how late the deposit is). If you’re on a quarterly deposit schedule and fail to deposit payroll taxes or file form 941 by the deadline, you may face penalties of between 5% and 25% of the total tax due. For more information on late penalties, refer to IRS Notice 746.
2. Pay FUTA tax
Fortunately, the FUTA tax payment schedule is more straightforward. If your FUTA tax is more than $500 in a quarter, then you’ll deposit the tax on the last day of the month after the quarter ends.
| Quarter | Deposit tax by |
| January 1 – March 31 | April 30 |
| April 1 – June 30 | July 31 |
| July 1 – September 30 | October 31 |
| October 1- December 31 | January 31 |
If your FUTA tax is less than $500 in a quarter, then you’re not required to make a tax deposit. Instead, your unpaid tax liability rolls over to the next quarter. Once your total unpaid FUTA tax exceeds $500, you’ll make a deposit for that quarter.
If your FUTA tax never exceeds $500, then you must pay the total amount due by January 31 of each year.
Again, it’s important to pay your FUTA taxes on time. For every month you’re late, the IRS will hit you with a penalty of 5% the unpaid tax amount.
3. Pay state, city, and local taxes
Just like the IRS, each state has its own deposit schedule for payroll taxes. Check with the appropriate state or local agency in your city and state to find out when and how you’re required to deposit your state and local taxes.
File quarterly and annual tax forms
The final step to running payroll manually is to file the required tax forms with the federal and state government.
1. File Form 941
As an employer, every quarter you’re required to complete IRS Form 941, Employer’s Quarterly Federal Tax Return. This form tells the IRS how much money you withheld from your team’s paychecks and the amount of employer taxes you paid for the quarter.
Most employers are required to file Form 941. The only exceptions are:
- Businesses with seasonal employees
- People with household employees
- Businesses with farm employees
- People who have received a notification that they’re required to file Form 944 instead of Form 941
Form 941 is due on the last day of the month following the end of the quarter—so April 30, July 31, October 31, and January 31. If you make timely online payroll tax deposits in full throughout the quarter, then you have an additional 10 days to file the form. This changes the due date to the 10th of the second month following the end of the quarter.
You can submit Form 941 online or download the form, fill it out digitally, and mail it to the IRS.
2. File Form 940
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return is an annual form that you use to report your FUTA tax payments to the IRS.
You’re required to file Form 940 if either of these statements is true:
- You paid at least $1,500 in employee wages during the year
- You had an employee work for 20 or more weeks during the year. (The 20 weeks don’t need to be consecutive.)
Form 940 is due on January 31 and covers the previous tax year. If you made on-time FUTA tax payments, then you have until February 10 to file the form.
You can file Form 940 online or download the form and mail it to the appropriate address (see Form 940 instructions for a list of mailing addresses).
3. File Form W-2
The Form W-2 Wage and Tax Statement is an annual form that you’ll complete for each employee.
It reports your employee’s yearly wages, deductions, and tax withholdings. You send the copies to your employees, the Social Security Agency, and your state, city, or local tax department. Your W-2s must be submitted by January 31 every year.
There are several options when it comes to preparing and filing your W-2s. You can purchase the forms from an office supply store and complete, print, and mail them yourself. Or you can use an online filing service, which electronically files the forms with the right agencies and sends copies to your employees.
It’s important to file your W2s by the January 31 deadline. Otherwise, you could find yourself facing penalties of between $50 per W2 (for W2s not more than 30 days late) to $270 per W2 (for W2 filed after August 1 or not submitted at all).
4. File state tax forms
Depending on your state, you might also need to file quarterly or annual tax forms reporting your payroll tax withholdings and payments. Again, check with the appropriate state/local agency for the details.
Keep accurate payroll records
Under the Fair Labor Standards Act (FLSA), you’re required to keep certain payroll records on hand for all nonexempt workers, including:
- The employee’s full name, social security number, and birth date (if younger than 19)
- The employee’s address, including zip code
- The employee’s gender
- The employee’s job title
- The time and day of week the employee’s workweek starts
- The hours the employee works each day
- The total hours worked by the employee each workweek
- The basis on which the employee’s wages are paid (for example, “$10 per hour” or “$500 per week”)
- The employee’s regular hourly pay rate
- Total straight-time earned each workday and/or workweek
- Total overtime earnings for each workweek
- All employee wage adjustments (including additions to or deductions from)
- Total wages paid to the employee each pay period
- The date of the payment and the pay period said payment covers
Under the FLSA, you’ll need to keep all these records for three years.
In addition to holding onto your payroll records for three years, the IRS also requires employers to keep records of all employment taxes for four years—so make sure to keep those handy as well.
COVID-19 regulations that may impact payroll
In response to the COVID-19 pandemic, the United States government has passed legislation to help small business owners—and some of that legislation may impact your payroll.
- Payroll tax deferral: Under the CARES Act, employers were given the option to defer their 6.2% Social Security payroll tax for 2020, with 50% of the deferred taxes due by December 31, 2021 and the other 50% due by December 31, 2022. As of August 2020, employees were also eligible to defer their Social Security taxes through the end of the year. If either you or your employees took advantage of the Social Security payroll tax deferral, you’ll need to adjust payroll withholdings to pay back those deferred taxes.
- Employee retention credits: Also passed as part of the CARES Act, employee retention credits aim to help employers keep their employees working—even through financial uncertainty—by providing tax credits of 70% of an employee’s qualified wages (up to $10,000 per employee) through June 30, 2021. If you’re eligible and plan to leverage this credit, there are no penalties for failing to deposit employment taxes in anticipation of the credit being allowed.
- Emergency paid sick leave. Under the Families First Coronavirus Response Act (FFCRA), employers are no longer required to provide emergency paid sick leave—but if you choose to offer it, you may be eligible to get that leave 100% covered by payroll tax credits—as long as the number of sick days per employee qualify for the leave (which means either the employee or a family member or child has COVID-19), doesn’t exceed 10 days, and doesn’t exceed the maximum daily allowed amount ($511 per day for employees experiencing COVID, $200 per day for employees caring for a family member or child with COVID).
Other options if you don’t want to do payroll by hand
Whew! That was a lot of steps. Does payroll get easier? With practice, yes, but most of these steps will be repeated on an ongoing basis. So while it might get easier, it will still take a chunk of your time.
Is there a way to run payroll that doesn’t involve lengthy calculations and piles of paperwork? Yes!
Here’s how to do payroll in a more time-efficient way:
1. Use online payroll
How does payroll software work? Online payroll services, like Gusto, take care of tax calculations, tax payments, and filing quarterly and annual forms for you.
Instead of putting money aside for your tax payments every time you run payroll, payroll software debits your tax liability from your account and makes state and federal tax payments on your behalf.
Every quarter and year, payroll software like Gusto completes and submits your tax forms and even sends W-2s to your employees.
Your only job is to enter the time each employee worked and approve payroll. The automated payroll service takes care of the rest.
Most payroll software offers the following features, which simplify the payroll process:
- Calculates employee and employer federal and state tax withholdings
- Automatically files payroll taxes and returns
- Tracks employee’s paid time off and benefits
- Sends new hire paperwork digitally and reports new hires on your behalf
- Generate annual tax forms, like your employee’s W-2, and submits copies to employees and appropriate government agencies
2. Hire an accountant to take it off your plate completely
If you want absolutely nothing to do with payroll after reading this article, hiring an accountant or payroll specialist is the way to go.
When you hire an accountant, someone trained to process payroll takes over.
The drawback to hiring an accountant is that it often costs more than using a payroll service. Also, because payroll is outsourced, it may take longer to get your payroll questions answered.
3. Hire someone to do it at your business
If you’d rather keep payroll in-house, but don’t want to do it yourself, you can hire someone to do it at your company or delegate payroll to an existing employee.
Ideally, you would hire someone with payroll experience, but you could also train an in-house bookkeeper or administrative person to take it over for you.
And that’s what you need to know about how to do payroll for your small business! And if it’s too complicated to do payroll yourself (we get you), know that you have plenty of options to help you take it off your plate.
CONCLUSION
Choosing the right payroll service provider for your small business can be a daunting task. There are numerous packages to choose from and many price points — each claiming to be the best payroll software for small business. In this article I’ll help you understand the terminology and common features in payroll software. I’ll then outline my recommendations on the best payroll software solutions for small business.