Key takeaways:
If doing payroll by hand doesn’t sound like the best option, explore our Payroll Software Guide to browse solutions that can handle much of this process for you.
In this article...
How to do payroll yourself
Manual payroll processing involves the following steps:
- Apply for applicable tax ID numbers
- Select a pay schedule
- Gather your payroll information
- Calculate each employee’s gross pay
- Calculate each employee’s deductions
- Distribute paychecks and file tax forms
- Store payroll records
1. Apply for a tax ID number
Before digging into the logistics of payroll, you must first apply for a federal Employer Identification Number (EIN) with the IRS. Without an EIN, you won’t be able to open a business bank account, hire employees, or file federal taxes. You might also need to obtain separate tax IDs for each state, county, and/or city where your business operates, depending on the tax obligations.
2. Select a pay schedule
The four most common pay schedules are weekly, bi-weekly, semi-monthly, and monthly. Some states have laws about how often you have to pay certain types of employees, so be sure to look up the rules for your area before setting a pay schedule.
Read more: What is the Best Payroll Schedule for Your Business?
3. Gather your payroll information
For each employee who will receive a paycheck, you will need to have:
- Their compensation information.
- Their most recent W-4 form.
- Enrollment paperwork for benefits such as health insurance and retirement savings.
- Approved reimbursements, if applicable.
A basic HR information system (HRIS) can centralize these details for you so you won’t have to sort through stacks of paperwork when you’re ready to pay your staff.
Additionally, you’ll need to know the current rate for Federal Insurance Contributions Act (FICA) taxes, as well as the current tax withholding tables for federal, state, and local governments.
4. Calculate each employee’s gross pay
To calculate gross pay for an hourly employee, multiply the number of hours they worked in the pay period by their hourly rate. Don’t forget to add overtime pay if applicable.
For a salaried employee, divide their annual salary by the number of pay periods in the year. Then subtract any pre-tax deductions, such as employee contributions for health insurance or retirement funds, to get net pay.
5. Calculate each employee’s deductions
Federal, state, and local income tax deductions are perhaps the most complex element of payroll processing. Use the information on each employee’s W-4 form to determine where they fall on the tax withholding tables in the Publication 15-T.
You will also need to take applicable post-tax deductions from the net pay, including Social Security, Medicare, workers’ compensation contributions, and wage garnishments.
6. Distribute paychecks and file tax forms
There are a few different ways to pay employees, including paper checks, cash, and direct deposit. Regardless of the payment method, most states require you to deliver a paystub to employees as proof of payment. You will also need to submit your payroll tax deposits to the appropriate agencies, including the IRS.
Also read: What Are the Best Methods for Paying Employees?
7. Store payroll records
You must kep income tax records for at least four years. Other payroll records have longer or shorter storage requirements depending on state and local jurisdictions.
Thorough record-keeping will help you avoid compliance issues down the line and prove useful if you are audited by the IRS. In fact, periodically auditing your records is an excellent idea to ensure that your record-keeping is above board.
Advantages of doing your own payroll
In some cases, calculating your own payroll is the most affordable and practical option.
Cost
First and foremost, processing your own payroll means you don’t have to budget for software or third-party services. Although it requires more time and energy on your part, running payroll on your own allows you to prioritize other operating expenses that might be more important.
Practicality
If you know the basic calculations, manual payroll processing means you don’t need to spend time learning how to use new software. Similarly, outsourcing your payroll or leveraging advanced technology may be impractical if you only need to pay a handful of employees.
Disadvantages of doing your own payroll
Running payroll by yourself can be time-consuming, prone to human error, and legally risky.
Time constraints
Running payroll by hand takes quite a bit of time, especially if you have more than one or two employees. Payroll software simplifies the whole process and allows you to spend your time on more valuable tasks. Some apps can even run payroll and issue direct deposits automatically, so you never have to worry about remembering your payroll schedule.
Human error
Processing payroll on your own also significantly increases the chances of errors compared to using software. You might enter the data incorrectly, or make a mistake while performing calculations such as wage garnishments by hand.
You also need to make sure that you account for any updates each pay period, such as new state or federal income tax rates or increased employee withholding allowances. Carefully checking your work for errors and correcting them adds still more time to payroll processing.
Legal risks
If you don’t check the errors, you expose yourself and your business to the consequences of these compliance issues whenever you process payroll. You might get audited and/or have to pay a penalty, and you might even get sued by a worker for paying them the wrong employee wages.
If any of these situations arise, the legal fees and penalties will typically far outweigh any money that you would have spent on payroll software.
Alternatives to doing payroll yourself
There are several different options that you can pursue if you no longer want to calculate your small business payroll on your own:
- Hire an accountant
- Hire a third-party service
- Use free or low-cost payroll software
Read more: Methods of Conducting Payroll: In-House vs Outsourcing
Option 1: Hire an accountant
If your company is large enough, then you may benefit from hiring your own in-house accountant. A staff accountant will handle payroll for you, using their expert knowledge to ensure accuracy and compliance.
However, hiring an in-house accountant may be too expensive for small businesses, so most companies hold off on it until they have enough employees to justify the workload for a full-time accountant.
Option 2: Hire a third-party service
If you can’t make a financial case for hiring a full-time accountant, then you might want to look into outsourcing payroll to a third-party provider instead. These outsourcing services perform payroll for multiple businesses, so you can still hire them even if you don’t have enough work for a full-time position.
Different payroll providers offer different levels of assistance; some take care of the whole process from start to finish, while others only provide support while you do most of the work. Choose the one that makes the most sense for your needs and budget.
Option 3: Use free or low-cost payroll software
If you’re looking to keep payroll in-house but are tired of doing manual calculations, implementing a software application may be your best option. Even if you’re not ready to invest in a full-service system, there are some competitive free payroll software options that can increase accuracy and reduce the time needed to complete payroll.
Check out our Payroll Software Guide to explore free and low-cost options that will work for your business’s budget.
1 Justworks
Justworks Payroll is a lightweight solution that simplifies Payroll and HR operations so you can focus on what matters most – running your business. Our user-friendly navigation, paired with reliable support, helps you monitor and maintain compliance, onboard and manage your teams, and navigate the complex world of payroll with confidence.
Designed for today's needs and tomorrow's ambitions, our adaptable solutions will elevate your operations & provide the tools for your business to thrive.
2 Paycor
Payroll can be a time-consuming, administrative task for HR teams. Paycor’s solution is an easy-to-use yet powerful tool that gives you time back in your day. Quickly and easily pay employees from wherever you are and never worry about tax compliance again. Key features like general ledger integration, earned wage access, AutoRun, employee self-service and detailed reporting simplify the process and help ensure you pay employees accurately and on time.
3 Multiplier
Multiplier is a SaaS-based global employment solution, providing payroll, EOR and benefits solutions for over 150 countries across the world including the US, Europe, and APAC.
