If you are hiring employees you’ll need to know how to do payroll. While it may seem like a daunting task, it doesn’t need to be. Business owners who are trying to work out just what they need to do in order to complete payroll using the DIY method can use this guide to make sure they cover all their bases. Take a look at the steps that you need to take below to check that you don’t miss anything important. You can also learn how using a payroll software solution can make the job a lot easier.
Table of Contents:Payroll Taxes
As an employer, you are responsible for withholding some of the taxes that your employees owe. Payroll taxes include federal, state, and local taxes that you withhold from your employee’s paycheck, such as Income Tax, Social Security, and Medicare.
The most important thing to know is which taxes you need to withhold and the rates of each tax. The rates can change each year, so it’s essential to stay up to date with what percentage of your employee’s income you have to deduct before paying them.
How to do Payroll Yourself
Some small business owners choose to process payroll on their own. The advantage to this is that it saves money, but there are downsides too. Firstly, it’s time-consuming and could use up valuable time that you might be able to use a lot more productively. Secondly, there’s a risk of errors when you’re taking care of payroll yourself. Keep these disadvantages in mind if you’re thinking about taking the DIY route for processing payroll.
Steps to do Payroll Yourself:- Employees Complete Form W-4
- Find or Get an EIN
- Create a Payroll Schedule
- Calculate and Withhold Income Taxes
- Submit Payroll Taxes
- File Your Tax Forms
1. Employees Complete Form W-4
To set up your payroll properly, you need to collect all of the necessary information from your employees. To do this, they all need to fill out IRS Form W-4. Every new employee will need to complete one of these forms to provide you with the relevant information so that you can file a new hire report. The form asks them for basics like their name and address, but also information about their tax filing status. There was a new W-4 form introduced at the beginning of 2020, so check that you are using the right one.
2. Find or Get an EIN
All employers need to have an Employer Identification Number also known as an EIN. You may have had to use this to open your business bank account or complete other tasks while setting up your business. If you already have one, you need to find it and make sure you have it on hand. If you don’t yet have an EIN because you are setting up a new business or hiring people for the first time, you need to get one. You can apply online, on the IRS website. As well as an EIN for federal purposes, you might also need a state EIN, so check to see if one is required.
3. Create a Payroll Schedule
Your business needs a payroll schedule so that you and your employees know when it’s time to pay them. When you’re deciding how often to pay your employees, there are a few different factors to take into account:
- Your employees’ needs: Remember that your employees have bills to pay. They probably don’t want to wait too long between paydays when they have financial obligations to meet.
- Your cash flow: This can help you to choose the best dates to pay your employees. If all of your clients tend to pay you on one date, paying your employees the next day can make sense.
- Workweek and overtime: These can be easier to calculate and make clear to employees if you choose a weekly or bi-weekly pay period.
- Cost: Running payroll can be cheaper and less time-consuming if you pay less often, such as on a monthly payroll schedule.
- State requirements: Some state rules require you to pay on a certain schedule. For example, some don’t allow monthly payroll.
When updating your calendar with payroll dates, remember to also include tax payment due dates and tax filing deadlines so that you don’t miss any important dates.
4. Calculate and Withhold Income Taxes
When payday arrives, you need to calculate how much to withhold in tax from each of your employee’s pay. As well as federal and state taxes, there may be other deductions that you are required to make, such as wage garnishments. The IRS Withholding Calculator is one tool that you can use to make your calculations. Your state will also have a calculator that you can use for state and local taxes, and there are other useful calculator tools out there that can help you. This saves you from having to work it all out by hand.
Some people might also choose to use spreadsheets with pre-set calculations so that they only need to input the right numbers and get the correct calculation. This can get a little messy, however, especially when you end up with a lot of spreadsheets.
5. Submit Payroll Taxes
Once you have worked out how much tax you need to hold from each employee, you have to pay your payroll taxes. Check when you need to submit federal, state, and local taxes so that you can schedule your payments. They are usually required to be made monthly but sometimes this can be different.
6. File Your Tax Forms
Filing the correct paperwork is the final step of managing your payroll. You will need to submit your employer’s federal tax return each quarter, as well as state and local tax returns as required. Each year, you will also have to do your annual tax filings and send in your employees’ W-2s.
Alternatives to Doing Payroll on Your Own
Doing your own payroll might look simple at first, but it can quickly get complicated, especially as you hire more employees. It’s time-consuming and it could increase your likelihood of making mistakes. Either you or one of your employees could be spending a lot of time doing payroll when your time could be better used on something else. If you don’t want to do your own payroll without any help, there are other options.
Use a Payroll Software Service
Payroll software helps to make doing payroll a lot easier. You can use it to automate parts of the process and reduce mistakes, saving you both time and money. Here’s what you need to do if you’re interested in using a payroll software service.
Choose a Provider
The first task is to choose a provider. There are various options out there that are suitable for businesses of all sizes. A payroll software service will calculate things for you and ensure everything is sent to the IRS and your state’s tax department too. Take a look at some of the payroll software services that are on offer to see what you can get from each one and decide which one might be right for your business.
Add Employees
When you’ve chosen your payroll provider, you’ll have to add your employees to the software. You’ll need the information that you get from your employees’ W-4s, such as their names, addresses, Social Security numbers, and tax withholding information. It should be pretty easy to set everything up as long as you have the right information.
Track Hours and Import
You need to track your employees’ hours to pay them accurately, and the Department of Labor requires you to keep track of hours worked for up to 2 years. Your state might also have different requirements. You can track time worked using various tools, including those that some payroll software providers have. Choose a tool that makes it easy to import and integrate your data with your payroll software.
Process Initial Payroll
When all of your information is inputted, you can send off your first payroll. It will all be calculated for you so you get accurate numbers, and your tax filings will be sent when necessary.
Keep Track of Tax Payments and Filings
Remember to keep track of your tax payments and filings. Payroll software makes this easier by keeping these things for you. You need to keep IRS tax forms for three years and might have to keep state filings for longer.
Outsource to an Accountant or Payroll Firm
Alternatively, you can outsource your payroll to an accountant or payroll firm. This takes all of the work out of doing payroll but can be a little more expensive. Your accountant or payroll firm will take care of it all for you, including your tax filings, so that you don’t have to.
Payroll Bottom Line
Payroll is possible to do yourself if you have the time. However, if you want to make things easier, payroll software and services can help.