How to Process Payroll on Your Own – business.com
Our step-by-step guide teaches you how to process payroll yourself.
Processing payroll by yourself can be difficult, and if it’s something you’re doing for the first time, it’s crucial that you consult with an expert before you get started.

The challenge with processing your own payroll comes with what you may miss – if there are deductions or tax-related issues that you file incorrectly, you can expose your business to serious liability. Processing payroll can still be done manually– in eight steps – and if you’re a small business owner who employs only a few people, it may be worth it to do payroll on your own.

How to do payroll: 8 easy steps
Step 1: Find your employer identification number.
Your first step is to set up an EIN with the IRS. This number is issued so the IRS can identify your business. If you’re a new business, you’ll have to apply for an EIN. Applying is free, and you can apply online, by fax, mail or by phone. On the IRS’ website, you can read about how to apply for an EIN and learn more about the EIN program and process.

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 take, respectively, four business days and one month.

You’ll also need to check with your state and local (city and/or county) for those tax ID numbers.

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Step 2: Collect employee tax information.
Once you have your EIN, you need to 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 workers or freelance staff, you’ll have to collect 1099s. On these payroll forms, employees provide important 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. Laws govern when you have to submit this paperwork to the IRS, but varies based 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.

Keep in mind that 1099s also have a different set of rules on how they’re prepared and submitted to both the IRS and your employees. Since the majority of work done for these forms falls to these employees, your business will only spend a short amount of time – say, 15 minutes at most – distributing these forms to your employees and contractors, collecting them, and submitting them to the IRS.

Step 3: Choose a payroll schedule.
Once you’ve established all the relevant tax information for your business and its employees, you have to decide on how you want to pay your workers. There are four different types of pay schedules; weekly, biweekly, semiweekly and monthly. All four schedules have their advantages. Most companies opt for either a biweekly or semimonthly pay period depending on how they want to approach their yearly schedules, though some states require that hourly workers be paid weekly.

You want to 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 also devote 15 to 30 minutes to looking up state laws about your payroll schedule.

Step 4: Calculate gross pay.
Calculating gross pay is the first step toward processing payroll on your own. Calculating it is simple: Gross pay is the number of hours an employee has worked in a given pay period multiplied by their hourly rate.

The easiest way to track employee hours is via a spreadsheet. Once you have the total hours per pay period, multiply that by the employee’s hourly rate, and you’ll have that specific employee’s gross pay. All of the steps discussed here need to be completed 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.

80 hours x $10/hour = $800
5 hours x $15/hour (overtime pay) = $75
Gross pay = $875
If you use a spreadsheet to determine your employees’ gross pay, you can likely make all the required calculations in just a few minutes using 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 amount of time adds up quickly when applied to an entire team of workers.

Step 5: Determine deductions, allowances and other withholdings.
One of the most important steps to processing payroll is determining each employee’s deductions and allowances.

As a quick refresher, exemptions and allowances are the same thing: They refer to how much money that’s taken out of your paycheck during the year. Allowances are specified on a W-4. Deductions, on the other hand, are specified by the employee on a 1040EZ form, and these refer to things you can deduct from your income when you do your taxes. This is where you have to pay close attention to how employees fill out their tax-related forms and make the proper withholdings.

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:

Federal taxes
Social Security
State taxes
Local taxes
Medicare
401(k) contributions
Workers’ compensation contribution
Other benefits
Since the rate by which you much multiply your employees’ paychecks for each of these deductions and allowances varies both by category and employee, this step can be quite time-consuming – potentially on the order of hours – if done by hand. However, if all your information is stored and meticulously organized in a spreadsheet, this step, too, takes minutes.

Step 6: Calculate net pay and pay your employees.
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. Make sure you create a pay stub for each employee and track what you’re withholding. Tracking payment and maintaining the right records benefit your business in the long run. It also helps you keep track of how an employee is progressing at your company.

Once net pay is calculated for each employee, pay each employee, if you can, using 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 amount of time required to handle all these steps. It also means that your employees can receive their paychecks in a variety of forms, including checks, direct deposits and payroll money cards.

As the prominence of payroll solutions suggests, calculating net pay – just as with determining deductions and allowances – can take hours if done by hand. Even if you can quickly determine net pay using a spreadsheet, delivering your payments to your employees without an automated system in place can likewise take hours.

Step 7: Keep payroll records and adjust to fix mistakes.
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 expected 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.

Record-keeping is also essential for payroll taxes you have to pay out on a regular basis. Most electronic methods of gross pay, deduction, and net pay calculation generate automatic records as long as you upload the files you used to cloud storage and make sure to save a separate copy of any spreadsheets used after executing your payroll.

For paper calculations and paychecks delivered by postal mail, you’ll need to keep written, tangible ledgers and mailing receipts. While each of these steps can take mere seconds, the time involved with them adds up when these processes are done for several employees.

Step 8: Withhold, report and pay payroll taxes.
Part of processing your own payroll is calculating payroll taxes that have to be withheld from employee paychecks. This includes income tax, Social Security and Medicare taxes. Your business may also need to pay Federal Unemployment Tax (FUTA), State Unemployment Tax Act (SUTA), State Unemployment Insurance (SUI) and Federal Insurance Contributions Act (FICA) without deducting these funds from your employees’ paychecks.

These are all important aspects of processing your own payroll. Luckily, there are online calculators where you can crunch FUTA, FICA, SUTA and SUI numbers. Check on when you have to issue payroll tax payments in coherence with your state laws. Also, you must report new hires to the IRS, and file your federal business taxes on a quarterly and annual basis. 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.

Why do you need a payroll system?
The most obvious reason is because you need to pay people who work for your company. It’s easy to pay employees once a job is completed, but having a proper system in place 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 is working for your company, how long they’ve worked for you and how much money you’re spending on labor. Terms like "payroll processing" and "payroll system" can make this sound complicated, 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:

Track employee hours
Track employee wages
Track deductions and other withholdings
Keep tax documents organized
Track direct deposits and payments
How to create your own payroll system
Before diving into how to do payroll yourself, it’s important to review the overall process. 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’ll be able to report on important business aspects.

As you plan your payroll system and decide how you want to structure employee payments, keep this roadmap in mind:

Gather the preliminary information you need to process payroll
Find your employer EIN through the IRS.
Establish state and local tax ID numbers.
Collect employee financial information like W-4 and 1099 forms.
Set up a payroll schedule
Choose a weekly, biweekly, semiweekly or monthly payroll system.
Establish payroll tax payment dates.
Manually process payroll
Calculate employee hourly schedules and overtime pay.
Calculate gross pay for each employee.
Determine deductions and subtract from gross pay.
Calculate net pay and issue payment.
Complete these follow-up tasks after each pay period
Report new hires to the IRS.
Stay up to date on any miscalculations or mistakes, which should be documented and eventually reported to the IRS.
This is a general road map that encapsulates both your payroll system and how to process payroll. If you’ve created a system that addresses all these needs in an organized fashion, you’re on your way to handling payroll successfully.

Payroll checklist: What you need to process payroll
With a roadmap to follow and an overview of the important steps involved, it’s also important to understand exactly what you need from each employee to process payroll. Payroll is complicated, and it’s easy to get lost in the details of how everything works. Follow the checklist below as an overview of the information you should gather before you process each pay period’s payroll.