How To Do Payroll Yourself For Your Small Business 2024?

Paying employees feels like it should be simple. But it’s often very complicated. Business owners must accurately calculate an employee’s gross pay based on federal income tax and state income tax. There are also payroll deductions to consider, Medicare taxes, and other factors to keep in mind.

This is why many business owners decide to hire an online payroll service. But it is still possible to do payroll processing on your own. We created this guide to help you do it. Read on to learn more.

Determine Who Will Be On Your Payroll?

The first step in the manual payroll process is determining who will be on the list when you process payroll. The answer is sort of determined for you. As a business owner, you have to put all of your employee’s pay on the payroll. This is a legal obligation set by the federal government. So if you pay an employee wages, there’s a high probability they will need to be on the list when you run payroll.

The only situation in which employee wages wouldn’t need to be on payroll is when you’re not responsible for making tax payments for that worker. This is most common for freelancers and contractors. When you pay these types of workers, you aren’t submitting an employee’s paycheck, so you don’t have to worry about tax withholding for the Internal Revenue Service or FICA taxes.

What Do You Need to Have Before Running Manual Payroll?

Once you know who will be on the list when you process payroll, it will be time to gather the supplies and information you need to do so. That means understanding your tax obligations as a business owner before you calculate gross pay.

There are more than just federal taxes to consider. You will also need to consult with state and local agencies to see what your obligations are there. You might also need to consider FICA payroll taxes when running payroll.

Before you can manually process payroll, you will also need to have a federal employer identification number (EIN) and your employees will need to fill out certain forms, such as a form W-4. But we take a closer look at this process in the next section.

How to Manage Payroll Yourself?

Now that we’ve highlighted payroll taxes and your obligations as a business owner at the federal and state levels, it’s time to review step-by-step instructions for processing payroll. Here’s how to calculate net pay for salaries employees and hourly workers on your own without incurring any fines or penalties.

Have All Employees Complete a W-4 Form

First, you need your employees to complete certain tax forms so that you can accurately calculate tax payments when putting together employee paychecks and determining payroll deductions.

The main item is the form W-4. This lets employees choose their tax withholding status so that you can accurately calculate employment taxes like state unemployment taxes, local taxes, and income taxes for everyone from salaried employees to hourly workers with income tax withholding for overtime pay.

Obtain an EIN for Your Business

Next, if you don’t have one already, make sure your business has an employer identification number. You need one to start running payroll because this number will be used for federal and state taxes as well as things like social security tax in the payroll system. If you need an EIN to start processing payroll, you can get one online by visiting the IRS website.

Set Your Payroll Schedule

Now you’re ready to choose your pay schedule. If you plan on maintaining payroll records and paying payroll taxes without any software support, it will be beneficial to choose a longer pay period. For example, you may want to pay employees once per month instead of bi-weekly.

The reason for this is that you want to minimize the number of times you need to calculate payroll taxes and update your payroll records throughout the year. Each pay period you add is more work for you when you’re not using payroll software to pay your employees and need to calculate payroll taxes on your own.

That being said, you do still need to pay employees with a direct deposit schedule that works for them. In most cases, this will mean using a monthly payroll system so that you only have 12 pay periods throughout the year to worry about instead of 24 pay period work sessions to get through.

Calculate Gross Wages

Next, you can calculate your employees’ gross pay. This is different from net pay in that it’s the amount you would send to a worker’s bank account if you had no payroll tax deposits to consider. 

For example, if an hourly worker worked 100 hours in the pay period and earned $20 an hour, their gross pay would be $2,000. You need to start with this number in order to calculate federal, state, and local taxes.

Calculate Tax Deductions

Once you know a worker’s gross wages, you can start calculating the amount of tax you need to withhold from the paycheck. This will include social security and Medicare tax as well as income tax at the state and federal levels.

Remember, when you hire employees, they need to fill out a W-4. This determines how you should withhold state income tax for them. It’s something you need to consider when determining net pay because the tax forms that employees submit can influence the actual direct deposit amount they receive after they pay payroll taxes.

Make Other Paycheck Deductions

You may also have other payroll tax liability requirements to consider. This can vary based on the type of worker you run payroll for and whether they owe any debts that may require wage garnishment. You will know if this is the case as you should receive detailed information from the federal or state government.

There may be things like FICA taxes and state unemployment tax to consider as well. These payroll tasks can’t be ignored. They’re as important as your tax filing deadlines when you run payroll because, like what would happen if you don’t pay federal unemployment tax, you can be fined or face penalties if you ignore the other payroll deductions you’re required to make for pay periods.

Make Your Paycheck Distribution

Now you’re ready to send employees’ wages to their bank account. This is the most straightforward step when you run payroll manually. But it’s not quite the last thing you need to do as an employer.

File TaxForms & Employee W-2s

The final step in the payroll process is making sure that you file all required tax forms for your business and employees with governments at all levels. You took the time and effort to do everything by the book. But you need to prove that by sending the required paperwork to the state, local, and federal governments so that they can verify it.

The Top 2 Best Payroll Websites

Completing your own payroll may be possible for business owners with only a few employees. But it’s much easier to hire a payroll provider to help you out. Payroll services calculate withholdings and file forms on your behalf. They can help you avoid errors and make sure your employees always get the exact amount of money they should on any given paycheck.

There are many different payroll software options on the market to consider. But if you’re considering outsourcing payroll, the following two payroll software options are the highest rated.

QuickBooks

QuickBooks is the most recognizable and widely used payroll software in the world. It includes all of the same features as Gusto, plus a few extras. For example, it comes with a built-in ledger reporting feature, which Gusto doesn’t offer. You also get broader customer support availability, so it’s easier to get assistance from this provider when you need it.

The only real downside is that QuickBooks charges a higher flat monthly rate. However, it also charges a lower per-person rate than Gusto. This means that if you have enough employees on your payroll, the cost difference between these two options could be negligible.

Gusto

Gusto is a popular payroll software that offers everything you need to simplify the payroll process. They automatically calculate withholdings, deductions, and tax requirements for both employees and you as their employer.

The Gusto platform also integrates with plenty of third-party applications and can even deliver analytics to give you deeper insight into your company’s payroll. When you put it all together you get a payroll provider that can dramatically simplify your life.

Final Thoughts

The bottom line is that although it’s possible to do payroll yourself, it’s much easier and safer to hire a provider to help you out. Payroll taxes get complicated quickly – especially as your business grows and you hire more employees. And if you make any mistakes whatsoever, the fines and penalties could be costly. Not to mention the fact that you could mess up employee wages and either cost your company money or anger your workers.

When you put it all together, the clear solution is to hire a payroll provider to do the job for you. Not only will it save you a tremendous amount of time, but it can also save you money in the long run by helping you avoid costly errors that could come with big fines.

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