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If you’re a small business with fewer than 10 employees, you might not be able to afford a full-on, expensive payroll software or hire a professional accountant. In this case, the best option can be to do the payroll yourself.
Doing payroll yourself does save time, but it’s a bit tricky. To do payroll properly, you need to understand the complete tax laws and regulations of the federal government, as well as the state you’re going to live in. Secondly, you also need to know the meaning of all the terms used in payroll management and essential calculations.
In this article, we’re going to discuss exactly how to handle payroll for a small business yourself. We’ll talk about the exact steps you need to seamlessly manage your payroll and stay compliant. Let’s dive in!
How to Do Payroll for Your Small Business: Step-by-Step Guide
Follow these exact steps to do payroll for your business with as little hassle as possible.
1- Get an EIN
The first thing you need to start doing your payroll and filing taxes for your business is Employer Identification Number (EIN). You can get this number by applying on IRS website. This number is important for any business to open a business bank account and operate legally.
Once you get your EIN, the next step is to register with the Electronic Federal Tax Payment System (EFTPS). This is an online system for easy remittance of taxes by businesses.
2- Decide Pay Period
The next step is to decide your pay period. Your pay period could be monthly, bi-monthly, bi-weekly, or weekly. This depends on the type of business you have and the type of employees that work for you (e.g., full-time or hourly basis).
Just make sure that whatever pay period you choose aligns with your cash flow and labor costs so that you have a healthy cash flow.
3- Gather Employee Information
The next step is to collect information about employees. This includes the following:
Compensation Rates:
For exempt employees, you don’t need much information. But for the non-exempt employees, you will need:
- ➡ their work hours
- ➡ their overtime
- ➡ any supplemental income, like bonuses
- ➡ any reimbursement
- ➡ the days they took off
W-4 Form and Tax Information:
The next thing you need to have is your employees’ financial and tax information. Whenever you onboard new employees, ask them to fill out their W-4 forms. The details that employees fill in these forms are important for you to calculate their Federal Withholding tax deductions according to the IRS tables.
Make sure to refer to your local state laws and tables for any other specific tax deductions. You are responsible for withholding the Social Security, insurance contributions and other taxes on behalf of your employees and remitting them to the government.
Employee Deductions:
The next information you need is employee deductions. Employee deduction is the amount that you deduct from their paycheck in return of various benefits like Investment in 401(k) and a health savings account. For this information, you will need their insurance details, which you can get from your carrier or broker.
There are some taxes that both you and employees pay, like the federal insurance contributing act tax (FICA), which is 6.2% that applies to employees and 6.2% that you add to it, making 12.24% total. And lastly, you should also know the preferred payment details of each employee.
4- Calculate Paycheck:
Once you have all the details of your employees, their pay rates, their work hours, their payment method, and their tax deductions, it’s time for you to calculate your paychecks.
You calculate the gross salary of each employee by taking their work hours and multiplying them by their base salary. If they are an exempt employee, you don’t need much calculation.
You then deduct the employee deductions from the gross salary because the taxable income is the one that’s left after deductions. Most states treat deductions like contributions to retirement accounts and health savings accounts as non-taxable income.
Then you apply the taxes for further withholding tax. Basically, you deduct the taxes based on the tables provided by the IRS. You can see a detailed guide on our website regarding FWT here if you want to know more about it.
By deducting taxes from the taxable income, you have the net income that you can mention on the paycheck of the employee and give that.
5- Calculate Employer Taxes and Paying Them
The next step is to calculate the taxes that you have to pay. There are some employer-specific taxes like FUTA and SUTA. Other than that, you also have to manage (and match) the FICA contributions of your employees.
The FUTA rate is 6% and SUTA varies from state to state. You can also get a tax credit on FUTA if you pay your SUTA on time.
Make sure to remit these taxes along with the employees’ FICA and FWT on their respective schedules through the IRS EFTPS system.
6- Send Paychecks
Once you have the paychecks ready and taxes are withheld, distribute the paychecks to your employees. Don’t forget to send the positive pay information to the bank or financial institution you’re affiliated with.
You also need to give your employees pay stubs as proof of their paychecks. Since you’re a small business and not using dedicated payroll software, PaystubsCity can be incredibly helpful for you to generate effortless, customized pay stubs. It also does automatic tax calculations for you so you have the peace of mind.
Keep a record of all the pay stubs and all the employee wage information for at least 3–4 years. This is required by labor laws and the IRS. You also need this information to submit the W-3 form to the IRS at the end of the year and issue W-2 and 1099 forms to your employees.
Final Words
Doing payroll yourself is not that hard once you get the hang of the few basics. It all simply boils down to calculating each employee’s gross salary, minus the deductions, withholding the tax and giving them the rest as net salary. Just make sure you’re complying with local and federal laws and complying with keeping proper records. As your business grows, you can pay for more sophisticated software or hire an accountant.
