Can I Do Payroll Myself?
When business owners think of Payroll, they immediately start to number crunching. While calculations are an important part of it, you’ll need to learn the entire procedure to understand how to do Payroll yourself.
Doing Payroll comprises everything from establishing your business as an employer to paying your staff, tax agencies, and other relevant entities. Since payroll can get complex quickly, many companies choose a leading Payroll software system to use for processing payroll with ease and accuracy.
While small business owners make efforts to be familiar with the service or product they offer, not everybody has the time or knowledge to handle all Payroll functions. There are four methods to run Payroll as a small business. You can:
- Hire an accountant
- Use an online Payroll provider or Payroll software (QuickBooks Payroll, Wave Payroll, Patriot Payroll, Paychex, and Gusto)
- Hire somebody to do payroll at your business
- Do Payroll yourself
Find Out Who Should be on Your Payroll
At first, before we dive deeper into how to run Payroll yourself, let’s understand who you should run Payroll for. As an employer, you may hire various workers, both contractors, and employees. You're legally required to add all salaried employees on your Payroll, whether they're employed as exempt or nonexempt, hourly employees, or seasonal contractors. You'll need to withhold all applicable federal, state, and local income and Payroll taxes from your employee paychecks.
Independent contractors are liable to pay their taxes. Some employers try to pay Payroll taxes by misclassifying employees as independent contracts, which can lead to penalties, fines, and even jail times with the IRS. Thus, it's crucial to know the difference between independent contractors and employees and ensure that any person who falls in the "employee" category is included in your Payroll.
Can I Do Payroll Myself?
Yes, you can do Payroll yourself after understanding the Payroll software completely.
Processing Payroll by yourself can be daunting, and if you're doing it the first time, it's vitally important to consult an expert before getting started. Doing Payroll by hand is the only free Payroll solution. Bookkeepers, accountants, and Payroll software all charge a service fee. If you are on a tight budget and can't spend on a Payroll service, the DIY approach can do the magic. Let’s know the Payroll methods and systems first.
The Payroll procedure comprises two key steps. Number one is the preparation of Payroll inputs, while the second step is centralized across generating Payroll reports founded on those numerical inputs. In the last stage, these reports are utilized to send regular employee wages. Although apparently simple, Payroll is truly complex and needs various intricate moving parts for proper processing.
Businesses use three traditional ways to complete their Payroll:
- With Payroll software
- With the help of an expert.
Let's proceed to understand how you can do Payroll yourself.
How Can I Do Payroll Myself?
Getting swept up in the thought of hiring your first employee, but there are several things you should do as a new employer before you even start hiring people. These are one-time tasks that you should complete before you can run Payroll. The best payroll software systems help you manage payroll with tools and automation for payments, taxes, and reporting.
1. Get a FEIN (Federal Employer Identification Number)
A Federal Employer Identification number represents a number used by the IRS to identify and track a business’s Payroll tax forms and payments, and it's more like a social security number for your business. If you’re running a Payroll yourself, you will need to get an EIN. Thinking you've already established your business and applied for all required licenses.
The first step of doing Payroll yourself is to make sure that your business has met all the legal demands to operate as an employer. Think of any industry-specific Payroll rules you may have to follow.
- Apply for a federal employer ID number
- Purchase worker’s comp insurance (required in most states)
- Complete the verification of your state tax identification number
- Start a bank account only for Payroll transactions (other than your main business account)
- Sign up for an account with Electronic Federal Tax Payment System
- Sign up for any relevant state electronic tax payment account.
2. Set Up Your Payroll Process
Now, you must make some important decisions about running Payroll. You must understand what will work for your business to be confident that your staff is trained in the process. Find out the “why” behind every section. Be sure to consider your employees and your business profit, in addition to any legal requirements.
- Types of employees (hourly, salary, contractor)
- Pay schedule: weekly/ biweekly or semimonthly
- Tracking employee work time: hourly/ per day
- Benefits: what benefits will you offer? Who will pay for them? How will you handle the Payroll deductions?
- Income taxes: how often will you be paying the taxes? Which income taxes are you subject to? Will you pay federal income tax? Local? Know the rates to find out how much you will be withholding.
- Paychecks: how will you be paying? Via direct deposit or employee paycheck? Cash? Pay cards?
- Payroll processing and calculations: how will you calculate and process Payroll? By hand, using excel, with a calculator, or using Payroll services by some company?
3. Gather Employee’s Payroll Forms
Once your employee has commenced work, you must collect some vital Payroll documents. These involve a form of tax withholding and work authorizations, which the employees should sign. You’ll use the details on the forms: I-9 form, State W-4 (or equivalent), Federal W-4, or other Payroll forms to add the employee to your Payroll or HR system if you have one. It would be great to store this record as an electric personnel file or a paper document.
A W-4 is the federal withholding document for the tax that tells you what tax rate is applicable for the employee. This number and percentage will vary based on the information you gathered from your employee's W-4 form. (business.org) Get a signed Federal W-4 form of tax withholding and store it electronically or in a paper personnel file. You must register your employees in your state's New Hire Reporting Program. Ensure that you register all new or rehired employees. These steps below will be a part of your regular Payroll services, unlike the previous three basic steps you need to do one time only.
4. Rack Up Timesheets, Follow-Up and Approve
Now you're all set to collect employee details such as work time to know how much you will be paying. Find out the total working hours for those hired hourly. Salaries employees usually get the same payment every period, but you can track their work time if needed. Lunch breaks are not counted.
You can start with a simple timesheet. After growing your business, you can switch to a time and attendance system to manage employee working hours, break time, and schedules.
5. Do Payroll Calculations
Once after estimated employees' working hours, you can start doing the Payroll calculations. Payroll calculations comprise taxes due, gross pay, withholdings for insurance premiums, and final net wage.
- Calculation of Gross pay is simple. You just need to add working hours and multiply by the employee's hourly rate. For overtime payment, add up the overtime working hours and apply the wage for those hours.
- Doing Payroll needs you to know your Payroll withholdings. Deductions involve federal and state payroll taxes, benefits for your employees like health insurance, and things like Social security or unemployment insurance security.
To process the deductions, collect all the deductions for each employee to get a total, then deduct the total from the employee's gross pay.
6. Make Payments to Employees, Tax Agencies, and Benefit Providers.
Make payments to all entitled entities according to the payment schedule to know what to expect always. Tax agencies and benefit providers have their due dates. Many businesses pay these amounts monthly, but they can deviate. You must pay out the amounts to keep back from your employees' paychecks in addition to any premium amounts or employer Payroll tax your business owes.
Always check the amount existing in your Payroll back account before making any payments. Spending more money than you have in your account can lead to unwanted litigation and fees.
7. Work on Year-End Payroll Tax Reports
As the year-end draws near, you should start distributing year-end Payroll tax reports. Employees must get their W-2 forms by January 31 of the new year, and the forms must show employee tax amounts, and total earnings paid. If you’re paying a freelancer or an independent contractor, you must prepare 1099 NEC forms that show earnings and no taxes. A payroll system is especially helpful for tax calculations and once set up and configured for your employee details, can automate much of the tax compliance steps for you.
8. Write and Store Your Payroll Records
To stay compliant with federal labor laws, you must write specific data for each pay period. Store Payroll documents like pay stubs, time cards, and any other pay raise details.
How Do I Manually Calculate Payroll?
Your manual Payroll calculations are based on the pay schedule and the employees' hourly wage.
For an employee working full-time making $12 an hour on biweekly pay frequency, the calculation would be 40 hours x 2 weeks = 80 hours x 12/hour = $960 (gross regular pay).
Is Doing Payroll Easy?
If you learn how to do Payroll, only then can it be an easy task; otherwise, it's very daunting. If you make a mistake, there's so much that can go wrong, affecting your employees' well-being with the possibility of getting penalized by the IRS.
Doing Payroll is a huge responsibility, and it ensures that the money is getting distributed accordingly. Once you take the time to flex Payroll, everything will be easy eventually.
Learning how to do Payroll can be complicated. You have to be sure that your business has registered with the right tax agencies and benefit providers. You might need to fill out employee forms and buy workers’ compensation coverage – all on a tight schedule.
Even experts can get overwhelmed with the Payroll compliance complexities. That's why choosing software offering Payroll solutions is the time-saving and easiest approach for business owners.