Processing payroll by yourself can be complex, and if you’re doing it for the first time, it’s crucial to consult an expert before you get started.
The challenge of processing your payroll is what you may miss. For example, entering deductions or filing payroll taxes incorrectly could expose your business to severe liability. However, you can still process payroll manually – in eight steps – and if you’re a small business owner who employs only a few people, it may be worth learning how to do payroll independently.
Your first step is to set up an employer identification number (EIN) with the IRS. The IRS issues this number so it can identify your business. If you’re a new business, you must apply for an EIN. You can read about how to apply for an EIN and learn more about the EIN program and process on the IRS website.
Applying is free, and the IRS prefers that you apply online, though you can also apply by fax or mail. International applicants may also apply by phone. Online applications, if approved, result in instant EIN assignment, whereas fax and mail applications take four business days and one month, respectively.
You’ll also need to check with your state and local (city and/or county) tax office for those tax ID numbers.
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Once you have your EIN, you must collect relevant tax information from your employees. This means having all employees fill out a W-4 and an I-9. If you have contract or freelance workers, you’ll have to collect 1099s. On these payroll forms, employees provide legal information about their work status, elect to take out certain deductions and fill out other important information.
You can’t process payroll without the details provided on these forms. There are laws on when you must submit this paperwork to the IRS, depending on the information your employees provide. You can read more about submitting W-2s and I-9s to determine what’s required of your business.
Remember that 1099s have a different set of rules for how to prepare them and submit them to the IRS and your employees. Since most of the work done for these forms falls to the employees, your business will spend only a short time – 15 minutes – distributing these forms to your employees and contractors, collecting them, and submitting them to the IRS.
Once you’ve established all the relevant tax information for your business and its employees, you must decide how to pay your workers. There are four types of pay schedules: weekly, biweekly, semiweekly and monthly. All four schedules have their advantages and disadvantages. Carefully consider how often you’ll pay employees, but don’t take so long that your employees go without pay for unreasonable periods. You should devote 15 to 30 minutes to reviewing state laws about your payroll schedule.
Most companies choose either a biweekly or semimonthly pay period, depending on how they want to approach their yearly schedules. However, some states require hourly workers to be paid weekly.
Calculating gross pay is simple: Just multiply the number of hours an employee has worked in a given pay period by their hourly rate.
The easiest way to track employee hours is via spreadsheet. Once you have the total hours for a pay period, multiply that by the employee’s hourly rate, and you’ll have that employee’s gross pay. You must complete all of the steps discussed here for each employee in your company.
Here’s a quick example: An employee has worked 85 hours in your biweekly pay period and is paid $10 per hour. Your pay period this time around is 80 hours.
If you use a spreadsheet to determine your employees’ gross pay, you can likely make all the required calculations in just a few minutes with your software. If you plan to calculate all your employees’ gross pay by hand, you may need a few minutes for each calculation, and this time adds up quickly when you have an entire team of workers.
One of the most important steps in processing payroll is determining each employee’s deductions and allowances.
As a quick refresher, exemptions and allowances are the same: They refer to how much money is taken out of your paycheck during the year. Allowances are specified on a W-4. Deductions, specified by the employee on a 1040 or 1040-SR form, are the things you can deduct from your income when you do your taxes. This is where you must pay close attention to how employees fill out their tax-related forms and withhold the proper amounts.
On top of deductions and exemptions, factor in other aspects of payroll processing and withholdings from each paycheck. Depending on your business’s situation, you may have to consider the following:
Since the rate by which you must multiply your employees’ paychecks for each of these deductions and allowances varies by category and employee, this step can be quite time-consuming – potentially on the order of hours – if done by hand. However, if you’ve stored and meticulously organized all your information in a spreadsheet, it takes mere minutes.
Storing and organizing employee tax deductions and withholdings with a spreadsheet or payroll software can expedite this process.
After tallying the deductions, allowances and other taxes, subtract what’s being withheld from each employee’s gross pay. The resulting number is net pay.
Gross pay – deductions = net pay
Net pay is what each employee is paid at the end of each pay period. This is also known as take-home pay. Create a pay stub for each employee and track what you’re withholding. Tracking payment and maintaining the right records benefits your business in the long run. It also helps you track how an employee is progressing at your company.
Once you’ve calculated net pay for each employee, pay each one by their preferred payment method.
Payroll is a big expense for businesses, and while using a payroll solution costs money, it can cut down on the time required to handle all these steps. It also means your employees can receive their paychecks in various forms, including checks, direct deposits and payroll cards.
As the prominence of payroll solutions suggests, calculating net pay – like determining deductions and allowances – can take hours by hand. Even if you can quickly determine net pay using a spreadsheet, delivering your payments to your employees without an automated system can likewise take hours.
Maintaining honest and organized payroll records is essential. You want to be able to reference your records if there’s ever a discrepancy between an employee’s net pay and what they expect to receive. It’s also important from a tax perspective to have these records on hand in case you have to work with the IRS. Mistakes happen, and as long as you correct them quickly and honestly, you’ll recover quickly.
Recordkeeping is also essential for payroll taxes you have to pay out regularly. Most electronic methods of gross pay, deduction and net pay calculation generate automatic records if you upload the files you used to cloud storage. Save a separate copy of any spreadsheets you used after executing your payroll.
You’ll need to keep written, tangible ledgers and mailing receipts for paper calculations and paychecks delivered by postal mail. While each of these steps can take seconds, the time adds up when you handle these processes for several employees.
Part of processing your own payroll is calculating the payroll taxes that you have to withhold from employee paychecks. This includes income taxes, Social Security and Medicare taxes. Your business may also need to pay federal unemployment tax (FUTA), state unemployment tax (SUTA), state unemployment insurance (SUI) and Federal Insurance Contributions Act (FICA) taxes without deducting these funds from your employees’ paychecks.
These are all important aspects of payroll. Luckily, some online calculators let you crunch FUTA, FICA, SUTA and SUI numbers. Find out when you have to issue payroll tax payments in adherence with your state laws. Also, you must report new hires to the IRS and file your federal business taxes quarterly and annually. These steps, combined with the calculations involved in withholding, reporting and paying payroll taxes, can take several hours per pay cycle, especially when the process isn’t automated.
With a road map to follow and an overview of the important steps involved, it’s also important to understand exactly what payroll forms you need from each employee. Payroll is complicated, and it’s easy to get lost in the details of how everything works. Use the checklist below to overview the information you should gather before processing each pay period’s payroll.
Processing payroll in Excel may take some time, depending on your knowledge of payroll and your familiarity with the software. Many small business owners use Excel to track budgets and other financial information, and it’s a useful tool for processing payroll as well.
Follow these steps to do payroll in Excel:
Once you have your spreadsheet downloaded, begin to customize based on your needs. You can also start with a blank Excel sheet if you prefer to start from scratch. Example tabs include:
Start without formulas and then add calculations after all the initial data has been entered.
A few common payroll calculations include:
Pay stubs allow you to track how much each employee is paid each pay period.
QuickBooks provides a full payroll suite to add to your services. Should you add this aspect to your QuickBooks accounting program, you can follow these easy steps to process payroll in QuickBooks and manage your financial information in one place. [Read related article: QuickBooks Payroll review]
If you are not signed up for QuickBooks payroll, you’ll need to do that first through your QuickBooks account. Once signed up, you must know your software tier (Core, Premium or Elite).
If you don’t know what tier you have, you can sign in to your account, go to settings, and select subscriptions and billing. The payroll plan tier is in the second box.
Elite users can use a QuickBooks expert to guide you through the setup process, or they can even do it for you. Simply call to schedule an appointment.
You should have access to the following:
Gather additional information, such as your federal EIN, state withholding numbers and workers’ comp policies, to ensure your payroll taxes are automatically and accurately deducted from employees’ paychecks.
When you add your employees, you can pay them immediately with a paper check, or you can opt out and pay them later.
If you pay employees immediately, you are responsible for any payroll taxes due until you complete the payroll setup.
If you have paid employees already this year, you must complete additional tasks through the Payroll/Overview tab in QuickBooks before you can run payroll.
To finish setup, you must finish the last three sections: “Get ready to pay your team,” “Let’s handle your taxes” and “Take care of your team.”
If you don’t have a workers’ comp policy, QuickBooks can help you find one, or you can choose to add one later.
The most obvious reason is that you need to pay people who work for your company. It’s easy to pay employees once a job is complete, but having a proper system mitigates risk and vastly improves your business operations.
It may sound counterintuitive, but payroll systems aren’t just about paying employees. Payroll processing is a detailed documentation system that tracks who works for your company, how long they’ve worked for you and how much money you spend on labor. Terms like “payroll processing” and “payroll system” can complicate this, but it’s quite simple.
If you work with a payroll provider, your “system” is automatically set up through the company. If you’re on your own, you’ll have to set up your own system. The point of this system is documentation.
Here’s a list of things your payroll system should do:
Creating a payroll system with steps to follow is all about organization and planning. Once your system is set up, information and documentation will flow through it, and you can report on important business aspects.
Follow these steps as you plan your payroll system and decide how to structure employee payments:
This general road map encapsulates how to set up your payroll system and process payroll. If you’ve created a system that addresses all these needs in an organized fashion, you’re on your way to successful payroll.
Even if your company is small, processing payroll can be challenging. It takes time to gather employees’ information, calculate their gross and net pay, and ensure you’re withholding the right amount for state and federal taxes each pay period. It also takes a lot of time and effort to track payroll records organizationally and efficiently.
If you’re a small business owner with several employees, investing in the best online payroll provider that can help you manage this whole process may be useful. Payroll providers take the legwork out of paying your employees. Many also have employee access portals so that your workers can view their pay stubs, track their deductions and make tax adjustments when necessary.
Processing payroll manually may make sense if you have a tiny business with only a few employees and feel confident in your ability to calculate pay, deductions and allowances correctly. If you run a rapidly growing and dynamic small business, it’s likely best to partner with a payroll provider, such as Gusto or ADP. [See Gusto review and ADP Payroll review.] Most companies charge a monthly fee or take a small percentage of your payroll. If you are looking for flexible payroll options, read our review of OnPay.
Whether you run a large or small business, keeping track of your payroll can be tedious and overwhelming. Hiring a professional accountant may seem out of reach, but the costs could be worth the return.
An accountant not only keeps your books up to date but can also manage your tax deadlines and compliance responsibilities – and an accountant who specializes in payroll can minimize costly errors. Plus, having an accountant in place as you scale can add value to your company culture, help you exceed industry standards and help you achieve your overall goals.
Julie Thompson and Max Freedman contributed to this article.