How to Do Payroll Yourself in 7 Steps
Payroll is hardly the most exciting part of running a business. And while outsourcing this kind of work is more practical, knowing how to do payroll on your own saves you money and ensures all your employees are paid on time.
Processing payroll is a complex task, not least because of your legal obligations. However, with the right strategy and payroll systems, you don’t have to worry about leaving your business exposed to potential liabilities and/or penalty charges.
This guide provides essential insight into handling payroll, but you may still require professional assistance from payroll services for specific information relating to your business.
The Importance of Strong Payroll Systems
Every business owner knows that a good payroll system is a critical aspect of managing their company. Of course, this is more than just about ensuring that everyone gets paid on time.
A good payroll system forms an essential part of the company culture and impacts virtually every aspect of the company, including cash flow and productivity. In addition to HR, payroll is arguably the key to managing a successful workforce.
Payroll covers benefits, compensation, and a range of perks to achieve better use of resources while simultaneously improving employee engagement and progression. Your payroll records also help satisfy state and national regulations.
In other words, the payroll system is used to track employee hours, wages, deductions, and payments while also keeping all relevant documents organized. The following stats on payroll further highlight its importance in business:
- Nearly half of all workers start looking for a new job after just two payroll errors from their employer.
- Between 10% and 30% of employers misclassify employees to deprive them of protections under workplace laws.
- Over 54% of American workers have experienced problems with payroll processing.
In short, processing payroll in the correct way benefits both the employees and the company. But even when payroll is outsourced, it’s still one of the main sources of disputes between employees and business owners. As such, manually getting payroll under control can be beneficial for the entire operation.
Seven Steps to Processing Payroll
Before considering payroll software, it’s important that you understand how to process payroll manually. While this is most certainly challenging, the process can be simplified into just seven steps.
If you follow each of the steps below, you’ll be able to file payroll taxes in no time.
Step 1: Get Your Employer Identification Number
Before you can start processing pay, you’ll need to set up an employer identification number or EIN, which is used by the government to ensure businesses pay taxes to the Internal Revenue Service and meet other legal requirements. Without an EIN, you cannot process payroll payments for your employees.
The EIN is used by the IRS to identify your business and record all submitted tax files for each financial year. New businesses can sign up for the EIN by completing an online application on the IRS website. If you’re looking to manually process payroll for the first time, you’ll need to find out what your EIN is.
In addition to a national EIN, you may also need a state EIN. Both are free for all businesses.
Step 2: Have All Employees Complete Their Payroll Forms
Before employees can be paid, they must provide your business with the relevant tax information. It’s important for the employer to check that all data is accurate. For each employee, the information should cover their work status, deductions, and other details that are relevant to their employment and financial packages.
Employees should complete a W-4 form, which includes details of their filing status and keeps track of personal allowances and other tax details. They’ll also have to fill up an I-9 form to verify their identity and employment eligibility. Additionally, a new hire report should be filed for all new employees.
Contractors and freelance workers will also need to complete 1099 payroll forms. While most of the responsibility for filling these out falls on the shoulders of the worker, your company must be ready to distribute, collect, and submit them. The IRS handles submissions for W-4, I-9, and 1099 forms.
Step 3: Select Your Payroll Schedule
Payroll isn’t just about ensuring your employees get paid on time. Still, paying employee wages is one of the key objectives here. Therefore, establishing a clear payroll schedule is crucial.
There are typically four types of payroll schedules to consider: weekly payments, biweekly payments, semiweekly payments, and monthly payments. In most cases, companies will want to adopt the same schedule for workers across all departments. If nothing else, when learning how to do payroll on your own, this option helps prevent errors or missed payments. Additionally, it creates a culture in which all employees are treated equally.
After selecting your employee payment dates, you’ll also need to confirm the tax payment due dates and tax filing deadlines.
Step 4: Calculate Pay and Deductions
Manually calculating an employee’s gross pay is pretty simple. You take their hourly rate and multiply it by the number of hours they’ve worked in a set period. Here’s the most basic formula:
Hourly rate x hours worked = gross pay for that period
However, it should be noted that you may need to break the equation into two parts if a worker’s hourly rate is increased for overtime or unsociable hours. In this case, you simply work out the gross pay for contracted hours and overtime as separate parts before adding them together. If you're working on payroll in Excel, the program can complete the calculations on your behalf.
Calculating the employee’s allowances (also known as exemptions) and deductions is another crucial factor. Allowances are completed via the W-4 form, while deductions should appear on the employee’s 1040-EZ form. The legitimate payroll deductions are what a worker can claim back against their earnings to effectively reduce their taxes.
As an employer, you need to ensure that employees have completed this step in an accurate fashion. You may also need to consider other elements of payroll processing and withholdings. The list includes 401(k) contributions, state and federal taxes, medical insurance, Social Security, and the workers' compensation contribtion.
Perhaps the most complex issue, or at least the most time-consuming, stems from the fact that the rate at which you multiply the deductions depends on the category of each employee. Once again, the right payroll software will do the calculations on your behalf - you just need to enter the right formulas.
Step 5: Pay Employees
Once you have completed all of the stages in step four, you can work out the worker’s net pay. This process can be automated with a payroll calculator and is determined by using the following formula:
Gross pay - deductions = net pay
The net pay is what the employee receives in their pay packet at the end of the pay period. After working out the worker’s individual net pay, you can process the payment via their preferred method, including bank transfers, payroll cards, or checks.
Since you’re processing payments for all your workers, doing this by hand isn’t an option. Instead, you should use an automated system, which will save you precious time. Furthermore, you can expedite the process by storing employee tax deductions and withholdings on payroll software, which facilitates timely and accurate payments for all employees.
In addition to processing payments, it’s important to create an employee pay stub that allows you to track what you are withholding. Tracking withholdings will make life a lot easier as you head into the subsequent steps and should promote easier tax planning for your company and workers.
Step 6: Organize Your Records
It’s absolutely essential that the information is accurate at all times. When you document payroll records, the data can be used whenever you face disputes with employees or the IRS. A clear overview of all payments and calculations enables you to offer proof when needed and correct mistakes quickly.
Paying your regular payroll taxes is also made easier when you have clear records. The great news is that a good payroll solution will automate the records by using the gross pay, deduction, and net pay figures you’ve previously calculated. So, most of the hard work is done for you, allowing your team to focus on running the business.
Step 7: Pay Payroll Taxes
Any employer handling payroll must ensure that all payroll taxes are promptly paid. Your federal tax forms need to be submitted quarterly, while local returns should comply with state regulations. Annual tax filings and W-2 forms should be considered too.
Withholding the right amount from each employee is vital. To do this, you must account for income taxes, Social Security, and Medicare taxes, either manually or through some of the online tax software solutions. If you’ve withheld the right amounts, covering the subsequent payroll taxes should be easy. In turn, you will avoid disputes, fines, and problems with your workers and ensure smoother operations at all times.
Meanwhile, your business may also have to cover federal unemployment taxes, state unemployment taxes, the State Unemployment Insurance or SUI, and Federal Insurance Contributions Act taxes. These aren’t deducted directly from workers’ paychecks.
Manual Payroll Options: Excel and More
After confirming that manual payroll processing is the right solution for your company, finding the right system or software to complete the assignment will be key. The right solution should make the process quicker and far less stressful. Moreover, making the right choice early on will spare you the hassle of having to look for a replacement package or template later on.
There are many options on the market, but it’s probably best to choose Excel. Here are a few reasons why you should go with a software:
- No concerns about legitimacy
- Lots of information is available to help you get the most out of them.
- They are built with IRS demands in mind.
- Employees have heard of them, which gives them confidence.
- Offer cost-effective solutions
Using Excel for Payroll
One of the great things about using Excel for payroll is that Microsoft’s payroll templates are free to download and set you on the path to smooth payroll management. It may take a little time to personalize the columns and add features to match your company’s individual requirements, but the process shouldn't be too difficult.
The “employee information” tab is where you can add all relevant data, from hourly rates to tax deductions. All equations are completed automatically as the formulas are already inserted. The “payroll calculator” tab will keep employee data to automate the net pay calculations.
In this part of the spreadsheet, you can insert their hours, sick leave, overtime, and more. Once this has been completed, you can create the pay stubs to determine how much an employee is paid in this period. This figure will subsequently be used for manual or automatic wage payments.
The spreadsheet can be designed to include pages for individual employees or manage all employees on one page through the use of different rows. While Excel isn’t the only option (Quickbooks is another very popular choice), it is one of the easiest to master. If you do opt for Quickbooks, the process is a little longer, but this payroll software offers a step-by-step guide for every detail.
Whichever option you choose, we suggest saving everything in the cloud as well as on your systems. This will help you avoid stressful situations in case your data is lost or corrupted.
If you want to manually process payroll, you do not have to suddenly start completing all the calculations yourself. Whether it’s using Microsoft's payroll calculator template or another automated service, you’ll simply need to input the relevant details for each employee relating to the hours they’ve worked, their hourly pay, and deductions. From here, calculating everything from gross pay to net pay and tax requirements should be an easy task. In short, accuracy is guaranteed.
Some businesses will still choose other payroll options, such as a dedicated payroll provider or simply employing the services of an accountant. And that’s fine. However, if you want to track every aspect of your business at all times, the manual option is easier than ever before.
How do you do payroll for beginners?
To do payroll through in-house methods, you will need to complete the following steps:
- Gather employee tax info (EIN, W-4s, I-9s, and 1099 forms)
- Collect employee data (hours worked, pay rate, overtime)
- Create a pay stub recording system.
Once you have completed these steps and selected a payroll schedule (weekly, monthly, etc.), you can then use a payroll template or spreadsheet to complete payroll manually.
How do you calculate payroll?
To calculate payroll, you will need to work out:
- An employee’s gross pay (hourly pay x hours worked)
- Tax deductions and payroll taxes
- An employee’s net pay (gross pay - deductions and taxes)
Once you have done this, the business can process the correct payment figure to the employee while withholding the necessary payroll taxes that are due to be paid to the IRS.
Can I do payroll manually?
Yes, and it is simpler than ever before. You don’t need to complete the calculations by hand. Modern payroll software will do this for you. As long as you are equipped with the right spreadsheet and a checklist of the required forms and steps involved, you can’t go wrong.
Better still, completing the process through in-house methods can enhance the employer-employee relationships.
Is it easy to do your own payroll?
Completing your own payroll tasks will take some time. With the right templates, though, completing the calculations and understanding the tax implications for employees and the company is far easier. The process can then be repeated to add new employees (with the relevant, personalized data) to the payment schedule within minutes.
Crucially, it’ll save you time and money while keeping you in control of what is a key component of your company culture.
For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.
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