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Are you wondering how to do payroll yourself? Though there’s a lot to manage, from picking a pay schedule that fits your company’s needs to calculating and withholding employee income taxes, some employers take this task on themselves (and keep it in-house).
Fast facts about doing payroll yourself
- Set a pay schedule that works for your business, examples include bi-weekly, semi-monthly, and weekly pay periods
- Organize employee payment information, including hours worked, pay rates, deductions, and tax withholding.
- Figure out and contribute the federal, state, and local payroll taxes you’ll owe
- Keep records of payroll and taxes for at least four years to comply with Internal Revenue Service (IRS) rules
But what are some things you’ll need to keep in mind — and have ready — before running payroll yourself? In this employer’s guide, we will go over how you can handle payroll on your own, what taxes need to be withheld and paid, and how you can pay employees.
What are payroll taxes?
Before we start the how-to, let’s briefly touch on the payroll taxes you’ll need to pay attention to, whether you handle this yourself or work with a payroll provider. As an employer, you are responsible for making sure certain payroll taxes are withheld from employee paychecks correctly and remitting these taxes on behalf of your employees.
Get familiar with FICA
Did you know that both the employer and the employee are responsible for paying FICA taxes? These are taxes under the Federal Insurance Contributions Act (FICA) made up of the old-age, survivors, and disability insurance taxes, commonly known as Social Security taxes.
It also includes hospital insurance taxes, though most employees will be more familiar with the term Medicare taxes. The current tax rate for Social Security is 6.2% each for employer and employee, up to the annual wage base limit. For Medicare, it is 1.45% each for employer and employee, which has no wage base limit.
Employees contribute a percentage of their gross wages to these taxes, and employers then match the FICA taxes paid by their employees (note that there isn’t a way for an employee to opt out of paying these, just in case you are asked).
FUTA is in your future
Federal Unemployment Tax Act (FUTA) payments help fund unemployment for workers who have lost their jobs and is a tax that’s paid solely by employers. You don’t deduct anything from workers’ wages. You pay 6% of the first $7,000 of each employee’s wages. However, employers typically receive a credit for paying state unemployment taxes, reducing the effective FUTA rate to 0.6% in most cases. To learn more about the purpose of this tax, here’s our FUTA guide.
State taxes
In addition to federal payroll taxes, employers may also be responsible for state and local payroll taxes, such as state unemployment insurance, disability insurance, and income taxes, depending on the state and locality.
The takeaway is that all payroll taxes must be calculated properly when running payroll and the deposits for both employees and employer portions need to be made during this process. So if you are running payroll on your own, it’s important to remember to calculate and pay all the payroll taxes.
As we start this conversation and go through the must-dos when paying employees, you’ll get some first-hand insights and experience from Tom Brock, a certified public accountant (CPA) and chartered financial analyst (CFP).
We just touched on taxes you’ll need to pay attention to — and here’s Tom’s take on what you’ll want to keep in mind as you’re getting started.
“It is possible to do payroll yourself. However, taking on responsibility for this critical business function is not to be taken lightly. Just remember having a structure before you start will go a long way — because there is so much to keep track of: calculating wages, taxes and deduction; withholding and remitting amounts due to other parties; maintaining detailed records and safeguarding personal information; and ensuring compliance with federal, state and local laws and regulations.”
— Tom Brock, CPA and CFA
How to do payroll for beginners?
“Opting to do payroll yourself is an ambitious undertaking,” explains Tom. “It can be done, but it entails a lot of work, especially for beginners. In my experience, here’s an overview of the various tasks and processes you want have top-of-mind.”
- Establish a sensible framework. This entails formulating an official payroll policy, determining pay frequency and gathering the necessary information from your employees.
- Apply for an employee identification number (EIN). You can do so for free in a matter of minutes via the IRS’ online website.
- Ensure you have a bank account. To bolster controls, opening a dedicated checking account for payroll processing is recommended.
- Determine how you are going to pay your employees. The most common options include cash, paper checks, pay cards and direct deposit.
- Make sure you are positioned to pay your federal, state and local tax obligations. Strive to establish electronic pay accounts at the various government portals.
- Implement a process to administer each pay run. Implement a clear process to track hours; calculate wages, taxes and deductions; withhold and remit amounts due to other parties; maintain detailed records and safeguard personal information; and ensure compliance with federal, state and local laws and regulations.
“The tasks and processes above could be handled via a homegrown spreadsheet application and an assortment of policies and procedures,” he says. “Though leveraging a payroll software company is usually a more efficient, accurate and risk-conscious option.”
Now that we have covered some of the particulars of payroll taxes, its time to find out what’s included when processing payroll on your own. Before we dive in, the graph below shares some information on how small businesses run payroll in their organization.
Set up a payroll infrastructure
Payroll policy
As a first step, it is a good idea to outline your company’s payroll policy. Simply put, a payroll policy explains how items such as timesheets are kept, what the company wage methods are, how deductions work, what staff members should do if they experience errors on a paycheck, and the type of payroll schedule a company uses (we’ll cover some common pay periods in the next section).
This policy can be included in your employee handbook. It can also be a good idea to remind your team to review it a couple of times a year (you could send a company-wide email). If you use an instant messaging system at your organization, that is another place to share the details.
Pick a pay schedule
When doing your own payroll, you’ll need to pick a pay schedule. Some common options employers choose from include:
Weekly pay schedule
This schedule covers 52 pay periods during the year, one for each week.
Bi-weekly pay
A bi-weekly pay period refers to a payment schedule in which employees receive their wages every two weeks, typically resulting in 26 pay periods in a year.
Semi-monthly (or bi-monthly) pay
This schedule covers 24 pay periods each year. A semi-monthly pay period is a schedule in which employees are paid twice a month, typically on the 15th and the last day of the month. This differs from a bi-weekly pay period, which occurs every two weeks on a consistent day of the week.
Monthly pay schedule
This is another option for employers which covers which adds up to a total 12 paychecks per during the year.
Though the information above is a general overview of different pay periods, we also have a guide on picking a payroll schedule with more details to consider. If you’re wondering what SMB’s tend to use we found that most end up with either weekly or biweekly schedules (the table below is from our own research).
Here’s some related reading on payroll reporting.
Get employee information organized
To run payroll correctly, you need certain information from your employees. That is why one of the first things you should do when hiring a new employee is to have them fill out a Form W-4, also known as the Employee’s Withholding Certificate. Why is this so important to the process? It helps you to gather the information needed to properly withhold the correct federal income tax from employee wages, which is an important part of running payroll (and keeping you compliant with paying the appropriate federal taxes). This form contains the employee’s filing status (single, married, or head of household) as well as:
- The number of dependents they’re claiming
- Any other amounts the employee wants withheld
- If they are exempt from withholding (if applicable)
On the other hand, if you’re working with a freelancer or independent contractor, ask them to complete a Form W-9 so you can get the information you need to pay them. The W-9 allows the employer to obtain the contractor’s taxpayer ID for issuing a 1099 form, which is used to notify a taxpayer that you paid them $600 more in non-employment income in the tax year. This is also filed with the IRS.
“Based on the way the W-9 is completed by the contractor, the business will know whether or not it is required to issue the contractor Form 1099.”
— Navi Maraj, CPA
Did you know new hires should be reported?
Keep in mind that new hire reporting is a federal requirement that requires you to report hiring a new employee to your state. This should be completed within 20 days of a new employee’s start date. But some states require reporting earlier than that. For example, in Georgia, new employees must be reported within the first 10 days of their hire date.
You’ll want to take care of this before getting payroll started (most payroll software companies handle new hire reporting as part of their services).
Getting IDs, accounts and pay processes in place
Get your (employer identification number) EIN
While we’re on the subject of getting information together, as an employer, you have a very specific to-do to take care of before running payroll, and that’s applying for an employer identification number or EIN. This is a must because, without it, you’ll be unable to:
- Open a business bank account
- Bring on new hires who are salaried employees
- File state or federal taxes
Is there a fee to getting an EIN?
Getting an EIN has zero costs and applying for one should only take a few minutes. The IRS has a website to apply online (which has an EIN assistant too). You can also complete Form SS-4 to get one for your business.
After you get your EIN
On the same subject, once you have your EIN, you can take care of your tax obligations to Uncle Sam. And you can do this all in one place online. How so? The Department of the Treasury has a no-cost, online system that you can use to pay some of those pesky payroll taxes we covered earlier in the article. By registering with the Electronic Federal Tax Payment System or EFTPS online you can remit all your federal taxes in one place.
Figure out how you’ll pay employees
You’ll need to determine a payment method so funds make their way to employees in a timely manner. Here are some payment methods that employers use to pay employees.
Direct deposit
Using direct deposit when paying employees makes it possible to electronically transfer employees’ net pay directly into their bank accounts on payday. Many employees prefer this method as it avoids delays in accessing their pay. Keep in mind that you’ll need to collect bank account and routing numbers from employees to set up this method if you adopt it for your company. It’s also one of the most common (and widely used) methods to pay employees.
Print checks
Another option is to print physical paychecks and distribute them to employees when payday comes around. However, this requires purchasing check stock and potentially a check printer. In this scenario, employees must cash or deposit the checks themselves.
Pay cards
Some companies provide reloadable pay cards onto which employees’ net pay is loaded each pay period. Employees can then use the cards to make purchases or withdraw cash.
Cash
Believe it or not, some small business owners prefer to pay their employees in cash on payday. However, the lack of a paper trail and the many ways for cash to get misplaced make this a risky method.
User-friendly with great value
“OnPay is a great value and easy to use for do it yourself administrators (like myself). Not only only do they have a low monthly fee, it has plenty of features to make sure you are compliant with payroll tax requirements.”
— Jean Kim, Stiller Kim, PC
Payroll calculation and payment processing
Calculating gross pay for each employee
When processing payroll on your own, you’ll need to calculate the total number of hours each of your employees worked during the pay period you use. This will help you figure out their gross pay, which you must calculate before making any deductions (more on that in the next step).
To do this, you can keep track of all the hours each employee worked in a spreadsheet (Google Sheets is free to use). Alternatively, employees can punch a clock, so you have the hours recorded. Whatever method you choose, you’ll want to do this as accurately as possible.
That’s because once you have these numbers together, the total hours worked are then multiplied by each worker’s pay rate, or at least the applicable minimum wage, to calculate the gross pay.
- You’ll tally up all the hours that each employee worked
- Once you have this number, multiply it by the worker’s hourly wage. Then you have their gross wage.
- You’ll repeat this for each employee you have on your staff.
- Note that if you have people working overtime in your organization (meaning working more than 40 hours a week), you’ll want to remember to pay them time and a half for any overtime.
- If employees are exempt (overtime rules do not apply to them), they won’t receive overtime.
To illustrate this a bit more, let’s consider an example. Let’s say you have an hourly employee named Claude who worked the following hours during the week.
Monday: 8 hours
Tuesday: 8 hours
Wednesday: 9 hours
Thursday: 8 hours
Friday: 10 hours
Claude’s regular hourly pay rate is $15 per hour. So how would we calculate his gross pay?
- Total hours worked during week: 8 + 8 + 9 + 8 + 10 = 43 hours
- Regular pay for the first 40 hours: 40 hours x $15/hour = $600
- Overtime pay for 3 hours: 3 hours x $22.50/hour (1.5 x regular rate) = $67.50
- Total gross pay: Regular pay ($600) + Overtime pay ($67.50) = $667.50
So in this example, Claude’s gross pay for the week would be $667.50 based on his 43 hours worked at $15/hour with overtime pay at time-and-a-half for the 3 hours over 40. When businesses want to keep this task in-house, they either manage everything with spreadsheets or use do-it-yourself payroll software to keep it organized.
Health benefits
A little under half of small businesses offer health benefits as a perk to their employees.
Don’t forget deductions
Once gross pay is determined, you’ll use the information on the employee’s W-4 to subtract deductions and calculate tax withholdings.
- Pre-tax deductions are specific amounts withheld from an employee’s gross pay before payroll taxes are calculated. These can be benefits such as group health insurance or disability.
- There can also be after-tax or post-tax deductions — these are deducted after gross pay is determined. This can include items like contributions to a Roth IRA. It can also include involuntary deductions such as wage garnishments.
- And we can’t forget obligations such as Medicare and Social Security which make up FICA taxes. We covered these at the very beginning of this guide, but it’s worth repeating: You must withhold the employee’s portion from gross wages so they can get deposited with the IRS.
Calculate net pay and run payroll
What happens once your employee’s gross pay is calculated and the necessary taxes are withheld? You need to figure out the amount they get to take home (also known as net pay). Net pay is the employee’s gross pay minus all deductions and tax withholdings.
When an employee receives their paycheck, the net pay represents the actual amount of their paycheck that they receive. After you know each employee’s net pay, you can run payroll and deposit funds into their bank accounts, send them a check in the mail, or give them a cash card (depending on the payment method you choose to get the funds in their hands).
Paying and reporting withheld taxes
After distributing your employee paychecks, you must file, pay, and report your payroll taxes to the IRS. How do you know if you are meeting the federal and state regulations? Keep the following tasks at the top of your to-do list to avoid gaps.
File federal taxes and forms
- You must pay all employee tax withholdings and FICA taxes to the IRS. We mentioned EFTPS earlier in this article, and the IRS requires filers to use electronic funds transfer (EFTPS) when making federal tax deposits.
- File Form 941. This is used to report payroll tax withholdings such as federal income tax plus Social Security and Medicare (typically called FICA) that are withheld from employees’ paychecks. Your Form 941 filing also reports your business’s quarterly contribution to Social Security and Medicare taxes for all employees.
- Don’t forget FUTA payments. On a quarterly basis, you’ll want to be sure your federal unemployment tax payments are made to the IRS. You need to file Form 940 with your payment. This is an annual tax form that documents your company’s contributions to federal unemployment taxes.
State tax reports
- If your state requires you to collect and pay state income and unemployment taxes, it’s important to get familiar with (and follow) your state’s individual pay schedule or codes they have in place.
Recordkeeping and year-end requirements
Maintain payroll records for a period of time
Once you have the process of paying employees in place, be sure to keep detailed records of all payments, tax withholdings, and deductions in a secure location that’s accessible. This is more than just a good business practice, as the IRS requires employers to maintain payroll records for at least four years after the date the tax was due or paid, whichever is later.
While an audit is unlikely, having these records on hand is going to come in handy if one does occur. Our guide to payroll record retention requirements provides more information on exactly what records to keep and for how long.
Issuing forms at year-end
After paying wages throughout the year, it’s also important to make sure employees get a W-2 by January 31 so they can file their tax returns. The W-2 summarizes how much they have been paid and the amounts withheld for taxes.
If you hired any independent contractors or freelancers to handle projects for you, you’ll need to issue them a 1099-NEC or 1099-MISC by January 31 as well, reporting the amounts you paid them.
Doing payroll yourself is possible
With a little preparation, businesses that prefer to keep payroll efforts in-house can handle it themselves. At the core of this process, employers must stay on top of gathering employee information, calculating deductions and taxes, and maintaining payroll records. Businesses that better understand the basics are likely to develop a workflow that works well for their organization and avoid mishaps. Whether you decide to manage this yourself or outsource it, look inside OnPay to see how we can help you manage this process.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.