How To Do Payroll Yourself: A Guide for Small Businesses

As a self-employed entrepreneur or the owner of a small business, you are likely wearing multiple hats every day—one minute, you're formulating strategy, and the next, you're handling customer issues, and then it's time to do the payroll. It can feel downright overwhelming! But if the term 'payroll' makes you flinch and rush to call your accountant, here's the good news: you can do payroll yourself, and it might be easier than you think!

This guide has been specifically tailored for business owners like you, and it will take you through a comprehensive step-by-step journey of understanding and executing payroll for your small business effectively.

Main Takeaways From This Article:

• Payroll processing involves tracking hours, calculating wages, tax withholding, and ensuring timely payments, combining finance, legal, and HR aspects for legal compliance and employee satisfaction.
• Payroll processing options include manual processing, software, or outsourcing, depending on team size, skill level, and budget. Each method varies in control, cost, time efficiency, and error reduction.
• Setting up payroll involves applying for an EIN, checking local/state tax IDs, creating a payroll policy, buying workers’ compensation insurance, setting up taxes, choosing payment methods, considering benefits, and ensuring compliance and smooth operation.
• Executing payroll includes determining pay, collecting employee information, calculating gross and net pay, managing deductions, choosing payment methods, reporting, record-keeping, and year-end tasks, focusing on accuracy and legal compliance.
• To understand employer payroll responsibilities, business owners must adhere to federal, state, and local laws, including tax withholding/reporting, managing benefits/deductions, resolving payroll issues, and handling audits.

What Is Payroll Processing?

Payroll is the total of all compensation that a business must pay employees for a set period of time or on a given date. It involves the tracking of worked hours, calculating wages, withholding taxes, and other deductions, and paying these net amounts to employees.

But handling payroll is more than just writing checks. It's a diverse task that calls for precise calculation of each staff member's earnings, performing salary deductions, fulfilling your payroll tax responsibilities, and making sure that your team gets their pay on time.

The process is methodical, weaving together aspects of finance, legal, and human resources to ensure your business stays legally compliant and employees remain satisfied.

How Do I Start Paying Payroll?

Small business owners often grapple with the question: "How should I process payroll?". Three common choices present themselves - manual payroll processing, using payroll software, or outsourcing to a payroll service. The best option for your business hinges largely on your team's size, your proficiency with payroll tasks, and your budget.

Processing Payroll Manually

For small businesses with tight-knit teams and predictable payroll needs, self-managed payroll can be a surprisingly effective and cost-conscious option. By handling payroll in-house, you retain direct control over your payroll processing, and you can save money by avoiding the software or service fees. However, this means you are wholly responsible for ensuring accuracy and compliance with tax and employment laws. It's time-consuming but can be cost-effective for smaller teams.

Platforms like PayStubsNow become your trusty sidekick, streamlining the process with intuitive tools and accurate calculations. You handle the data, PayStubsNow handles the heavy lifting, generating error-free paystubs and tax calculations, all without the hefty price tag of outsourcing. It's the perfect blend of control and simplicity, ideal for small businesses.

Utilizing Payroll Software

Next up is payroll software. This option is ideal if you're looking for a blend of control and convenience. Payroll software automates most payroll tasks, such as calculating wages and deductions, creating pay stubs, and filing taxes.

However, they do come with a price tag. This option can save precious time, and it's less prone to errors compared to manual processing. It's a suitable choice if your team is growing and you're willing to invest a little for efficiency.

Considering a Payroll Service

Lastly, we have payroll services. If you find yourself bogged down by payroll tasks or if you can afford to delegate this responsibility, hiring a payroll service is a good option. These services handle all facets of payroll processing, from wage calculations and pay stub creation to tax filing.

In essence, they free you to focus more on core business activities. However, they're more expensive than the prior options and might be a good fit for businesses without the time or inclination to manage payroll internally.

Setting Up Payroll for Your Business (Checklist)

Setting up and running payroll isn't as complex as it may initially seem. Follow the checklist below and complete each step to set up the payroll successfully.

✔ Apply for an Employer Identification Number (EIN)

As the first step in setting up your payroll, apply for an Employer Identification Number (EIN). This nine-digit number, assigned by the Internal Revenue Service (IRS), is critical for reporting taxes and other documents to the IRS. You can apply via mail, fax, or online, which is the most convenient and fastest method.

✔ Check if You Need Local or State Tax IDs

To efficiently and legally deal with payroll, check if you need local or state tax IDs. This requirement can vary based on your location and your business activity. Make an exhaustive list of necessary IDs, such as State Employer Identification Number, State Unemployment Insurance Tax Account, Sales and Use Tax ID, etc., and acquire them in a timely manner to avoid penalties.

✔ Create a Payroll Policy

It is imperative to develop a comprehensive payroll policy. This important document should cover key facets of your business, including salary scales, your chosen payroll schedule (weekly, bi-weekly, semi-monthly, or monthly), guidelines for overtime pay and bonuses, and policies pertaining to leave entitlements.

✔ Purchase Workers’ Compensation Insurance

As a key step in doing your own payroll, ensure you secure suitable workers' compensation insurance. This is not only an effective safety net for your employees, but it's also mandated by state law. Find an insurance provider who fulfills your specific needs and stays within your budget.

✔ Set Up Payroll Taxes

As a crucial part of payroll management, it's vital for you to familiarize yourself with payroll taxes. You are legally obliged to withhold a certain percentage of employee wages and remit these to federal, state, and local tax authorities. Conduct extensive research to fully understand your taxing obligations, ensuring you stay on the right side of the law and avoid hefty penalties or back taxes.

✔ Choose a Method for Payroll Distribution

It's necessary to decide how your employees will receive their payment. You have a few options: traditional physical checks, direct deposit into their bank accounts, or reloadable payroll cards. Each option has its own set of implications for your business operations, affecting speed, convenience, and cost.

✔ Consider Employee Benefits

If you provide benefits like health insurance or retirement plans, make sure to establish and comprehend their integration with your payroll system. This consideration will ensure seamless deductions from employee wages while maintaining compliance with regulations, providing peace of mind for you and your valued team.

✔ Set Aside Funds for Payroll

Create a strategy for allocating the necessary funds toward payroll. This includes the salaries of your employees but also means factoring in additional expenses, such as tax obligations and other payroll-related costs. This proactive step ensures smooth operation and legal compliance.

How To Do Payroll Yourself in Eight Steps

We've outlined a simple eight-step guide to help you navigate payroll processing with ease and confidence.

1. Determine Employee Pay

Let’s start by outlining how to determine employee pay that both attracts and retains top talent while ensuring transparency and legal compliance:

• Start by researching market wages for similar roles in your area. Consider industry standards, experience levels, and required qualifications. This paints a clear picture of the competitive landscape and informs your base pay range.
• Next, define the employee classification. Salaried employees receive a fixed annual salary, while hourly employees earn based on hours worked. Don’t underestimate the importance of this step. Misclassifying an employee can open you up to additional tax burdens and legal liabilities.
• Never fall short of the legal minimum! Research and adhere to all minimum wage laws, both federal and state-specific. Remember, exceeding the minimum sets your company apart as a competitive and ethical employer.
• Strive for pay equity across similar roles within your organization. Conduct internal pay audits to identify and address any discrepancies based on gender, race, or other protected characteristics.

Clearly communicate pay rates to employees verbally and in writing. Ensure offer letters, employment contracts, and pay stubs reflect all compensation details, including base salary, overtime rates, and benefits.

2. Gather Employee Information

Now that you’ve determined your employee’s pay rate, there are a few other pertinent documents you’ll need to collect in order to manually process payroll:

• W-4 Employee's Withholding Certificate: This form holds the key to determining the correct federal income tax withholding for each employee. Your employee must fill out this form accurately to determine the right amount is set aside from their paychecks.
• I-9 Employment Eligibility Verification: This form verifies your employee's legal authorization to work in the United States. It's a crucial step to ensure compliance with employment eligibility laws.
• Direct Deposit Form: If you offer direct deposit, make sure to obtain your employees' bank account information, including routing and account numbers. This convenient option eliminates the hassle of paper checks and ensures paychecks land securely in their accounts.

Ensure this information is stored securely and confidentially to maintain trust and adhere to financial regulatory guidelines.

3. Calculate Employee's Gross Pay

When you process payroll manually, you'll need to calculate gross pay for each employee. This calculation should factor in either the hourly rates or salaries that each employee receives.

For hourly workers, multiply their hourly rate by the number of hours worked in the pay period. If they’ve worked overtime, those hours should be compensated at a higher rate. For salaried employees, divide their total annual salary by the number of pay periods in the year to get the gross pay per pay period.

Don't forget to add any additional earnings, such as bonuses, commissions, or incentive-based income, to the basic pay. These additions should be incorporated into the gross pay, if applicable, thereby ensuring an accurate calculation of each employee's total earnings.

4. Calculate Employee's Payroll Deductions

With gross pay calculated, the next vital step is determining employee deductions. This process involves subtracting various contributions and withholdings to arrive at the final net pay figure:

• Federal and State Income Tax Withholding: These amounts depend on the employee's earnings, tax filing status, and the information they provide on their W-4 form.
• Social Security and Medicare (FICA) Contributions: As a small business owner, you are responsible for withholding these and matching your employees' contributions. Medicare and Social Security taxes are mandatory deductions calculated based on established rates.
• Other Potential Deductions: These include deductions such as health insurance premiums, retirement plan contributions, wage garnishments, union dues, or other court-ordered deductions.

When correctly calculated and administered, these payroll deductions maintain compliance with the law and help ensure your employees' respective investments are accurately accounted for.

5. Determine Employee's Net Pay

With deductions meticulously calculated, it's time for the grand finale: to calculate the net pay of each employee – the all-important figure that lands in their pocket or bank account. This final step involves a simple formula, ensuring your employees receive the correct compensation after accounting for all financial obligations.

The Net Pay Equation:

Net Pay = Gross Pay - Total Deductions

Essentially, you'll subtract the sum of all calculated deductions (including taxes, insurance premiums, and retirement contributions) from the gross pay figure you established in Step 3. This straightforward calculation reveals the exact amount each employee will receive as their final paycheck.

Don't forget to factor in any additional non-tax deductions authorized by employees, such as voluntary contributions to charitable causes or repayment of company loans.

6. Pay Employee(s)

With net pay figures calculated and verified, the moment of truth arrives – delivering compensation to your employees. This delicate phase demands both efficiency and clarity, ensuring timely and accurate payments alongside transparent communication.

First, decide on your preferred payment method. Popular options include:

• Direct Deposit: The modern maestro of convenience, this method whisks funds directly into employee bank accounts, eliminating paper checks and ensuring prompt delivery.
• Paychecks: While slightly less efficient, checks remain a familiar option some employees may prefer. Ensure accuracy and security by using pre-printed checks or secure printing software.
• Payroll Cards: These reloadable cards offer a hybrid approach, combining the ease of direct deposit with the tangibility of a physical card. Consider employee preferences and accessibility when making your choice.

Remember, punctuality is paramount. Ensure payments arrive consistently and on time, adhering to your pre-established pay schedule. Consistency fosters trust and reduces confusion among your team.

Every employee deserves a clear understanding of their paycheck. Provide detailed pay stubs that itemize gross pay, all deductions (including taxes, benefits, and other authorized contributions), and the final net pay figure. Transparency builds trust and empowers your team to manage their finances effectively.

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7. Report Payroll

While delivering paychecks marks the end of the employee pay cycle, the final step requires meticulous attention to detail – accurate and timely payroll reporting. This critical phase ensures compliance with tax regulations, maintains internal financial records, and provides valuable data for informed decision-making.

• Pay Payroll Taxes: Federal and state taxes withheld from employee pay are not yours to keep! Be sure to make timely deposits of these funds, along with your employer contributions to Social Security and Medicare, to the appropriate government agencies. Missing deadlines can incur costly penalties.
• Prepare Payroll Reports: Beyond tax submissions, generate internal reports summarizing payroll activity. These reports might track gross pay, deductions, net pay, and hours worked, providing valuable insights for budgeting, forecasting, and employee performance analysis.
• File Tax Forms: Quarterly is the standard frequency for filing federal and state tax forms reporting payroll taxes and contributions. Stay organized and submit these forms accurately and on time to avoid additional compliance headaches.

8. Maintain Records

The final step on your payroll journey is recordkeeping, an essential pillar for legal compliance, data security, and business intelligence.

Federal and state laws mandate the retention of payroll records for a specific period, usually ranging from three to seven years. Ensure you have a secure system to store physical and digital copies of all payroll documents, from W-4s and I-9s to pay stubs and tax reports.

Remember, employee payroll information is highly sensitive. Implement strong security measures like password-protected files, access controls, and even data encryption to safeguard their data from unauthorized access or breaches.

Don't wait for a disaster to strike! Regularly update your payroll data to reflect changes and back it up both physically and in the cloud to guarantee recoverable versions in case of any issues.

By meticulously maintaining accurate and secure records, you establish a foundation of trust with your employees, fulfill legal obligations, and provide valuable historical data for informed business decisions. It's the peace of mind that comes from knowing your payroll process is not just efficient but also responsible and secure.

Year-End Payroll Tasks

As we draw the curtain on the financial year, specific activities must also conclude within the payroll process.

One key task includes preparing year-end payroll reports essential for insightful overviews of your company's labor costs and trends across the year. All your financial entries related to salaries, bonuses, and other forms of compensation are made within this comprehensive report. 

Additionally, a paramount responsibility for businesses is to issue W-2 forms and 1099 forms. W-2 forms must be sent to employees detailing their earnings and deducted taxes for the year. 1099 forms must be sent to independent contractors or freelancers your company has engaged. Remember, your business's credibility in the eyes of the IRS heavily rests on the punctuality and accuracy of these forms. 

With numerous year-end tasks to juggle, it might get overwhelming to manage them all. We suggest creating a year-end payroll checklist. This checklist can help ensure that you fulfill all payroll-related responsibilities in a timely and systematic manner, from verifying employees' information and wrapping up tax documents to reconciling year-end reports. Having an organized checklist can greatly simplify your payroll process and effectively transition your business into the new fiscal year.

Understanding Employer Payroll Responsibilities

As the owner of a small business, handling payroll is one of your key responsibilities. However, it involves more than simply distributing checks to your employees. There are numerous obligations that you need to fulfill, regulations you have to comply with, and issues that you need to spot and resolve. Knowledge is power. So, understanding these responsibilities will help you effectively manage your payroll and avoid costly mistakes. Familiarize yourself with employer responsibilities, including:

Legal Compliance

• Federal, State, and Local Payroll Laws: It's essential to follow the tax and employment laws that are specific to each level of government.
• Compliance With the Fair Labor Standards Act (FLSA): Employers must meet the FLSA requirements concerning employee wages, overtime pay, and record-keeping practices.
• State and Local Wage and Hour Laws: This requires abiding by the regulations set by state and local authorities regarding pay rates, working hours, and labor practices.
• Employee Classification (Independent Contractors and Employees): It's important to correctly distinguish between independent contractors and employees for the purposes of legal compliance and taxation.
• Minimum Wage and Overtime Pay: Employers are mandated to pay their employees at least the legal minimum wage and the appropriate overtime rates.

Tax Withholding and Reporting

• Federal Income Tax Withholding: This involves deducting federal income tax from employees' pay based on their W-4 form information.
• State and Local Tax Withholding: This refers to the deduction of state and, if applicable, local taxes from employees' wages according to regional tax rates.
• FICA Taxes and Contributions (Social Security and Medicare Taxes): Employers are responsible for withholding Social Security and Medicare taxes from employees' pay and matching these contributions.
• Unemployment Taxes: This includes the deduction and payment of taxes to fund state and federal unemployment insurance programs.
  • Federal Unemployment Tax Act (FUTA) and State Unemployment Taxes: Employers must pay federal unemployment tax and contribute to their state’s unemployment tax programs, aiding in funding unemployment benefits.
  • Employer Responsibilities for Funding and Reporting: Employers are required to fund certain tax contributions and report payroll taxes accurately to tax authorities.
• Year-End Reporting and Forms: At the end of each year, employers must prepare and submit forms like W-2s for employees and other tax documents as required.

Benefits and Deductions

• Managing Employee Benefits: This involves administering various employee benefits such as health insurance, retirement plans, and paid leave and incorporating them into the payroll system.
• Garnishments and Other Deductions: This refers to withholding a portion of an employee's earnings (for child support, debt, etc.) and managing voluntary deductions like union dues or charitable contributions.

Handling Payroll Issues

• Addressing Payroll Errors: This entails identifying and correcting mistakes in payroll processing, such as incorrect wage calculations or tax withholdings, and communicating these corrections to affected employees.
• Dealing With Payroll Audits: This involves preparing for and responding to audits by tax authorities or other regulatory bodies, ensuring all payroll records and practices are compliant and properly documented.

Make Manually Processing Payroll a Breeze With PayStubsNow

Doing your payroll doesn't need to be a taxing chore. You can choose a cost-efficient and user-friendly solution with PayStubsNow, which is equipped with all the necessary features to streamline your business's payroll processing.

Our tool ensures state-specific compliance, providing a perfect match no matter where your business operates. Experience our turnkey solution that saves you time and effort, leaving you with more hours to focus on what matters the most in running your business.

We provide 24/7 customer support, 365 days a year, for all your queries, concerns, and technical hiccups. This means our dedicated team is always ready to assist you. Also, our customizable solutions are designed to adapt to your diverse needs, providing an edge over the one-size-fits-all options prevalent in the market.

So why wait? Streamline your payroll process now with our innovative paystub, W-2 Form, and 1099 Form generators. With PayStubsNow, you will not only save time but also eliminate headaches while ensuring legal compliance—leaving you free to focus on growing your business.

Disclaimer: Even though tax professionals use and trust PayStubsNow, we are not a CPA (Certified Public Accountant) firm. Our website helps you make paystubs, invoices, W2s, and 1099 forms easily. We don't give out legal or tax advice. It's a smart idea to talk with your own CPA, tax person, or lawyer to make sure you're doing everything right by the law.