How to do payroll yourself for your small business

As a small business owner, there are few times as exciting and impactful as the moment you decide to hire your first employee. After all, it’s a sign that your business is growing and expanding—and that you might finally be able to take a day off every now and then!

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But it can also be a time of confusion and questions. What benefits, like health insurance or retirement contributions, should you offer your new employees? If you’ve been working out of your home thus far, do you now need to find office space—or can your employees do their job while working from home? And perhaps most importantly: How do you actually go about running payroll. 

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If you expect your employees to stick around for the long haul, it’s critical that you get payroll right from the start. 

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Below, we walk through the steps involved in doing payroll for yourself. We also offer a number of alternatives that you may want to consider—such as working with a payroll service, hiring an accountant, or using payroll software—and answer other common questions small business owners like you often have.

How to do payroll manually

Running payroll on your own isn’t exactly difficult. After all, millions of small business owners around the country run payroll for themselves. But it also isn’t something that you should jump into blind at the last minute. 

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If you think you’d like to manually handle payroll yourself, it’s important to familiarize yourself with the key steps in the process, as well as the federal and state labor and tax laws that affect it. 

1. Apply for an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a lot like a Social Security number, only for your business. You’ll need one to hire employees and to perform many of the functions associated with payroll—like opening a business bank account or payroll account and filing income taxes. 

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To apply for an EIN, you’ll need to complete the IRS application form here. Once you’ve completed the application, the IRS will verify the information you’ve provided. If you complete the application online, you’ll receive your EIN immediately; if you submit the application by mail, it can take up to 4 weeks to receive your number. 

2. Register with the Electronic Federal Tax Payment System (EFTPS)

As an employer, you are responsible for collecting and remitting payroll taxes on behalf of both your employee and your business. This includes the income taxes withheld from your employee’s paycheck, as well as both the employee and employer share of Social Security and Medicare taxes (FICA). 

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To make these payments, you’ll need to register with the EFTPS, create an account, and link the bank account you’ll use to make these payments—typically a payroll account or tax account. You can register online here. 

3. Collect a W-4 from all employees

Before you can start paying your employees, they’ll first need to complete and submit IRS Form W-4. This form collects information you’ll need to determine how much federal taxes to withhold each pay period, such as their:

• Social Security number (SSN) or Tax Identification Number (TIN)
• Tax filing status (single, married, married filing separately)
• Number of allowances they are claiming
• Any additional withholdings they want withheld from their paychecks

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If your employee lives in a state that collects a state income tax, you’ll also need to complete that state’s W-4 as well. 

4. Establish a payroll schedule

Next, you’ll need to decide on a payroll schedule that will dictate when and how often you actually cut a check to your employees. While most businesses settle on a weekly or bi-weekly pay schedule, there are other options available to you—including monthly (once a month) or semi-monthly (twice a month).

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As you choose the pay schedule that works best for your business, you should be sure to consider your business’s typical cash flow and any other recurring expenses that might affect your ability to pay. 

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Likewise, consider your employees’ expectations and obligations. Just because a monthly payment schedule works for you, for example, it doesn’t mean it’ll work for your employees, which might make it difficult to attract and retain talent. 

5. Calculate each employee’s gross pay

Each pay period, you’ll need to calculate your employees’ gross pay. This is the amount of money they earned before you account for taxes and other withholdings. 

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The gross pay for salaried workers will typically be their annual salary divided by whatever pay schedule you establish. The gross pay for hourly workers, on the other hand, would be dependent on the number of hours they worked during the pay period, as well as their compensation rate (straight time, overtime, shift differentials, etc.).

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If your employee earned any supplemental wages (tips, bonuses, commissions) or received any reimbursements, then you’ll need to account for those as well.

6. Calculate each employee’s deductions and taxes

Once you have each employee’s gross pay, you’ll need to make adjustments based on their deductions and tax withholdings.

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Paycheck deductions come in two flavors, pre-tax and post-tax:

• Pre-tax deductions are taken out of your employee’s paycheck before they are taxed, effectively reducing the amount of taxes they owe. They can include things like health insurance premiums, retirement contributions to a traditional 401(k) or similar account, and contributions to a health savings account (HSA) or flexible spending account (FSA).
• Post-tax deductions are taken out of your employee’s paycheck after they are taxed. These deductions do not lower their taxes, but do reduce their take-home pay. They can include things like contributions to a Roth 401(k), 529 college savings plan, union dues, and charitable donations.  

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Once you’ve accounted for any deductions, you can calculate how much money you need to withhold from each employee’s paycheck to cover federal and state income taxes, as well as Social Security and Medicare taxes. At the same time, you will need to calculate the employer’s share of these taxes that you are responsible for paying. 

7. Distribute the paychecks

Prior to payday, you should ensure that your payroll account has enough funds to run payroll. Then, on payday, you can distribute paychecks and pay stubs to your employees according to whatever payment method chosen during onboarding. This can be physical paper checks, direct deposit (ACH), or even a payment card. 

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It’s important to note that different payment methods may settle more or less quickly than others. You should account for these different settlement speeds and ensure that on payday, each employee has access to their funds. Being even a day or two late can damage employee trust, and might even result in penalties or legal action, depending on the state your business operates in.

8. Remit any payroll taxes

Each pay period, you will need to set aside any payroll taxes—both the employee and employer share—until it is time to remit payment. 

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For federal income tax, Social Security, and Medicare taxes, there are two deposit schedules: Monthly and semi-weekly. Which schedule your business is required to adhere to will depend on your tax liability during a lookback period. It is not determined by your payroll schedule. The IRS provides detailed instructions on determining your tax deposit schedule here. 

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Federal unemployment taxes (FUTA) will typically be due once a quarter (or less), while state income taxes will be due according to the individual schedule designed by each state.

9. File all necessary tax forms 

Finally, employers are required to submit a number of tax forms periodically through the year. This includes your business’s employer federal tax return (typically due quarterly) as well as a W-2 for each employee (annually). Other forms may also be required. 

Alternatives to doing payroll yourself

As you can see, manually completing payroll yourself can be a time consuming and often complicated process. Often, it’s better suited for small business owners with a relatively low number of employees, or those with fairly simple payroll. The good news is there are a number of alternatives to consider if you can’t or simply don’t want to run payroll yourself.

Use a payroll service

Instead of handling payroll internally, many small businesses choose to outsource the process to a payroll service provider. These are third-party businesses that process payroll for you—and usually many other businesses—so that you don’t have to. Which payroll processes a payroll service provider can handle for your business will depend on the provider you choose to work with. That being said, most will perform at least some of the functions below:

• Calculating employee compensation
• Withholding taxes and other deductions
• Distributing employee pay via check or ACH
• Filing taxes and remitting tax deposits

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Working with a payroll service provider can be an especially good option for businesses that either can’t afford or do not need to employ a full-time accountant.

Hire an accountant

Once your business reaches a certain size and headcount, you can probably justify hiring an accountant and bringing your payroll services fully in-house. In addition to running payroll, an in-house accountant will most likely be involved in other financial matters important to your business. Larger businesses might employ a full accounting department to handle these various processes. 

Purchase payroll software

If you’re looking for something of a balance between the two options above, you might instead choose to handle payroll with a payroll software. Many software options exist that can help make the payroll process more intuitive, streamlined, and possibly automated so that you can keep payroll in-house and continue handling it yourself instead of hiring an accountant. 

The all-in-one platform for expenses

No matter how you choose to handle payroll, Ramp’s all-in-one expense management platform can help. 

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Looking to hire an accountant? Use our accountant directory to filter experts based on sector, industry, services, and even accounting software. Want to handle payroll yourself? Our expense management platform integrates with the biggest names in both payroll and accounting software, making it easier for you to keep all of your business’s expenses in one centralized system.