Payroll is an essential part of any business, whether you have one employee or 10,000. Do-it-yourself payroll can lead to costly mistakes and delays without the right know-how. This article explains how to do payroll successfully in 15 straightforward steps.
How to Do Payroll Yourself In 15 Steps
Running payroll is not simple, with many pieces to consider. Having an understanding of each piece is paramount to an issue-free result. Below we take a detailed look at each step that makes up the process.
Step 1: Acquire an Employer Identification Number (EIN)
Before thinking about payroll, you need to legitimize your business with the federal government. While sole proprietorships can get by using the owner’s social security number for tax purposes, any venture paying employees requires an employer identification number. This nine-digit number is unique and differentiates your company from all others.
To acquire an EIN, simply pay a visit to the IRS site to check eligibility and submit an application. The process is free, and you’ll receive your number shortly after completing the process.
Step 2: Register Your Business in Your State
Every state is different when it comes to requirements for registering a business. Some states require a state-level EIN, while others mandate registration with specific agencies. Be sure to check in with your state to see what’s required.
Step 3: Understand Local, State, and Federal Laws
Federal, state, and sometimes local governments have labor laws that you as a business owner have to comply with. When laws differ across government levels, you’ll have to use the one that best benefits your employees.
Laws can vary significantly from state to state or city to city. Here are some important payroll items you should look out for:
- Minimum wage
- Timeframe for delivering paychecks
- How to calculate overtime
- If there is local income tax
- Worker’s compensation requirements
- Information required on pay stubs
Step 4: Figure Out Who You’re Going to Pay – and How
This may seem like a no-brainer, but your team may not have defined roles in a new enterprise. You’ll need to assign hourly rates or a salary for individuals working for you, and pay may not be the same if someone wears several hats. Make sure there aren’t any assumptions or miscommunications that could spell disaster when payday rolls around.
You also need to decide who is an employee and who you’re keeping on as an independent contractor. Independent contractors pay their own taxes, and you only need to pay them a flat rate for their services each week. You’re not required to include independent contractors on your payroll, but you do need to keep all employees on the books.
It’s illegal to misclassify employees as independent contractors, so be very careful when assigning these titles to anyone you work with. Mistakes here can lead to issues involving fines or worse. There are differences between the two roles to help you make proper designations.
Step 5: Have Employees Fill Out Forms
After you’ve identified who your employees are, each one will need to fill out a W-4 form to document their filing status. This document tells you as an employer the tax rate you need to use for each employee. Your workers also need to complete an I-9 form to confirm eligibility to work in the United States. Be aware that some states may have forms of their own as well.
Step 6: Decide on a Pay Schedule
With your team in place, you need to decide how often you pay them. Whether it’s once a week or twice a month, it’s important to be transparent with this information up front and stick to it. Failing to do so can result in upset employees or a high turnover rate that can affect the success of your business.
Step 7: Track Employee Hours
Salaried employees aside, you’ll need to keep tabs on how much time each hourly team member spends working each day. Most companies do so through time cards employees use to identify when they’re on or off the clock. Knowing to the minute how long your employees work each pay period is essential for calculating accurate wages. Read our article on how to convert minutes for payroll for a more accurate calculation.
Step 8: Calculate Gross Wages
At the end of a pay cycle, you’ll calculate gross wages from an employee’s hourly rate and the number of hours they worked, up to 40 hours. You’ll have to factor in overtime for any work beyond that, which usually amounts to 1.5 times the base rate. Salaried employees are easier to calculate, as each should have a set amount earned for each pay interval.
Step 9: Deduct Amounts for Tax Purposes, Retirement Accounts, Insurance
Calculating gross wages is necessary, but this is not the amount you’ll pay your team. It’s crucial to know which payroll deductions to remove from each employee’s paycheck and subtract those from gross pay.
Payroll deductions come in many forms, but the most common is for tax purposes on both the state and federal level. Employees filled out W-4 forms to declare the rate you need to tax them, and you’ll need to make this unique calculation for each team member. The IRS created an Excel spreadsheet to make the process a little easier.
Some deductions are pre-taxed, and you’ll need to remove these before calculating payroll taxes. Typical examples of pre-taxed deductions are employee contributions to a health insurance plan or a 401(k).
You’ll need to take out other deductions after calculating payroll taxes. Amounts removed in this way are typically Roth IRA contributions, life insurance policies, and wage garnishments.
This area can get a little tricky, especially when it comes to pre-and post-tax deductions. It may be easier to list each deduction on a separate line when running calculations to reduce errors.
Step 10: Finalize Employee Net Pay
With a complete list of gross wages and deductions in hand, you’ll calculate net pay, the actual amount that will go on an employee’s paycheck. To reach an amount for net pay, you need to subtract all deductions from the gross pay amount.
Step 11: Determine Amounts for Employer Taxes
After you’ve figured out how much you’re going to pay each employee, you still need to deal with employer taxes. As an employer, you’re required to pay two different taxes on the federal level. The Federal Insurance Contributions Act (FICA) tax covers social security and Medicare, whereas the Federal Unemployment Tax Act (FUTA) goes toward federal unemployment insurance.
You’ll have to calculate these taxes based on each employee’s taxable gross wages. Rates on each of these taxes change from time to time, so check with the IRS to ensure you’re paying the correct amounts.
Similarly, states mandate you pay a state unemployment tax (SUTA) to help fund unemployment programs. Each state has its own tax rate that can vary depending on how much you pay employees and those you’ve laid off.
Step 12: Double Check All Your Work
We all make mistakes, but in the world of payroll any error can be a costly one. You’ll have to make up the difference any time you underpay an employee, which can cause a panic any time budget numbers are tight. On the other side, you can reclaim overpayments made to an employee, but likely not without hurt feelings and damaged relationships.
The same holds true when submitting payroll taxes to the government, although they may be less forgiving. Miscalculations can result in fines that your company can’t afford to pay.
It’s always best to double-check all your calculations before submitting any payments to help avoid these issues. Even though looking over the numbers again requires time, it can save time in the long run instead of locating and fixing mistakes after the fact.
Step 13: Send Out Payments
Once you’re happy with the numbers, it’s finally time to send out some checks. The most common methods for doing so are direct deposit into a bank account or with paper checks. No matter which route you go, be sure to attach a pay stub that explains how you came to this amount. Don’t forget that some states require certain information to appear on a pay stub.
Step 14: File Tax Forms and W-2s
Checks are out the door, but your work isn’t quite finished. You’ll need to pay those FICA taxes to the government quarterly using Form 941. These taxes are due on the final day of the month following the end of a quarter.
You’re responsible for FUTA taxes once per year using Form 940 on January 31st for the previous year. Lastly, business owners must fill out a W-2 form for each employee by January 31st, containing yearly wages and deductions for the previous year.
Step 15: Document Everything
As you perform your payroll, be sure to document everything you do. Not only is this beneficial for your records, but federal and state governments require having this information on hand. You’ll need to keep the documents for whatever duration state and federal governments require. Moreover, to perform a payroll audit, you need comprehensive and accurate payroll documentation.
Using Payroll Services to Run Payroll
Do-it-yourself payroll can be a very time-consuming process, especially as your company grows. You’re more likely to make mistakes in a manual process that can lead to delays in payment or more headaches down the road. Fortunately, payroll services can help alleviate the strain of running the numbers every pay period. Below are some of the ways using a payroll service can make life easier.
1. Save Employee Information
Payroll services typically use the power of the cloud to securely save important payroll information. Not only can you access this information from anywhere, you won’t have to re-enter the same data each time you sit down to crunch numbers. The platform keeps track of salaried or hourly pay as well as tax rates and the like.
2. Knowledge of Federal, State, and Local Laws
As you register payroll software for use, you’ll need to share your business’s location. In doing so, the software can look into payroll laws relevant to you specifically. Knowledge of these laws can prevent issues with paychecks and ensure you’re providing the information you need to the government and employees.
3. Reduce Errors
It is better to use a computer that won’t make mistakes when calculating payment amounts for each of your employees than by hand. These payroll services can automatically calculate deductions from information you provided when you hired the employee.
Unless you use a service with built-in time tracking, you’ll still have to log employee hours each week. However, the amount of work required of you each week goes significantly down.
4. Does Taxes for You
Since these payroll systems are aware of current tax rates, it can make normally challenging math a breeze. You won’t have to think twice about coming up with amounts for quarterly and annual employer taxes. Some software will even generate forms to send the government and employees as required.
5. Regain Lost Time
Payroll services automate much of the process, giving you back all the time it would take to perform do-it-yourself payroll. The challenge will be figuring out which other area of your business to spend this newfound time in.
6. Payment Reminders
When the time comes to pay your employees or the government, payroll services can leave you a reminder to that effect. These services can automatically send out direct deposits for you or leave paper checks stacked on the printer. Even in the busy shuffle of work life, you shouldn’t miss a payment that could leave you in hot water.
7. Generate Checks and Pay Stubs
Payroll tools also have the ability to create paychecks printable with the click of a button. It’s also possible to generate customizable pay stubs with information required from state or federal governments.
8. Log Employee Hours
You will need to log hours for non-exempt employees to know how much to pay them each cycle. Payroll services may include a means to track hours through a digital time card or by having employees log hours manually. The information gets logged right into your payroll system so you don’t have to transfer it over from elsewhere.
9. Customer Support
In the event of an issue, most payroll services have a customer support line you can reach out to deal with the problem quickly. When you’re under a time crunch, it’s essential to have others on hand that can walk you through a process or clear up a discrepancy.
Some payroll software options charge for their services, but many of these are still cheaper than paying an employee or outside company to do the work for you. Others have free payroll features at least as the base level to get your payroll up and running.
Frequently Asked Questions (FAQs) for How to Do Payroll Yourself
There are many questions surrounding do-it-yourself payroll. This FAQ aims to tackle some of the more common ones.
Bottom Line on How to Do Payroll Yourself
Do-it-yourself payroll is an option for any business but requires a significant amount of time to complete, especially as you bring on new staff. The increased risk of error in the manual process can lead to delays and fees that any company is better off avoiding. Payroll services such as Gusto and Square can remove the strain of payroll by automating calculations and saving time.