How Do I Do My Own Payroll and Payroll Taxes?

An Employer's Checklist

Woman working on taxes
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Payroll is something many business owners hate because it can be complex. However, if you have only a couple of employees, you may want to do it yourself rather than using a third party. This article is a step-by-step "mini-course" in payroll. Take special note of payroll and payroll tax due dates.

There are important decisions to be made in setting up your payroll, so think carefully and get advice before you commit to these decisions.

Steps in the Payroll Process

The major steps in the payroll process are: 

1. Preparation: Before you begin to hire employees, you will need to prepare for payroll calculation and processing and decide who will do all the payroll tasks. 

2. Paying employees: When you have employees, you must set up a system to calculate their pay, write paychecks, and distribute them. 

3. Post-payment: After you have paid employees, you must set aside money for taxes, complete a payroll register, make tax payments, and send payroll reports to the IRS at the correct times.

Before You Hire Employees

2. Follow this easy 12-step checklist to make sure you complete all pre-employment tasks for employers.

3. Make decisions on how and when to pay employees, including:

  • Which employees will be hourly and which will be salaried?
  • How often will you pay employees—weekly, twice a month, every other week, or monthly?
  • How and when will you pay overtime?
  • How will you require hourly employees to keep track of their time?
  • What paid time off will you provide for hourly employees? You are not legally required to pay employees for any time off, but most businesses pay for holidays, vacations, sick days, or personal days. 

4. Decide on an accounting system. Most small businesses use an online accounting system with a payroll processing option. You might also look into Android small business payroll apps and QuickBooks payroll online.

5. Collect the paperwork needed for new hires to sign. Each new employee must complete certain paperwork as part of onboarding. You, as the employer, must be certain that the new hire forms and application are completed and filed. These forms include:

  • An IRS W-4 Form to designate withholding.
  • An application form.
  • An I-9 Form to show eligibility to work in the United States.
  • State and local tax withholding election documents.

6. Set up direct deposit for employee paychecks. To set up the direct deposit system, you will need to contact your bank to find out how their direct deposit system works. You will also need to get authorization from each employee and information about their checking account (account number and routing number). If you have payroll features through QuickBooks or another accounting system, you may be able to do direct deposit by connecting this service to your bank.

7. Set up a separate payroll bank account at your bank. This will be used for writing paychecks or paying through employee direct deposit and for depositing funds you collected from employees for federal and state income tax and for FICA taxes (Social Security and Medicare taxes) and other amounts. A separate payroll account can help you keep track of these transactions without having them mixed up with your general business bank account.

Paying Employees

Pay your employees according to the pay periods you have set up:

  1. Calculate employee pay. First, you will need to calculate the gross pay amount for each employee. Gross pay is the total amount you owe the employee based on hours worked and the rate or total for the pay period for salaried employees.
  2. Calculate withholding and deductions. You will use the gross pay amount to calculate withholding for federal (and state and local, if applicable) income taxes. You will also need to calculate the deduction for FICA taxes and other deductions for items like health plans and retirement plan contributions.
  3. Write paychecks (or send them by direct deposit). Write paychecks and distribute them to the employees.
  4. Get totals for payroll tax deposits. When you are finished with the payroll, you will need to get totals for all employees for (a) gross pay, (b) federal, state, and local withholding, (c) FICA taxes, and (d) any other deductions. You will need these amounts for payroll tax deposits and reports.

After Paying Employees: Payroll Tax Deposits

Depending on the size of your payroll, you must make payroll tax deposits to the IRS on a semi-weekly or monthly basis for:

  • the amounts you withheld from employee pay for federal and state income taxes
  • the amounts you deducted from employee pay for Social Security and Medicare
  • the amounts you owe as an employer for Social Security and Medicare

You can make your payroll tax deposit payments on Form 8109 or use the IRS electronic filing system (EFTPS).

Other Payroll Tax Deposits

In addition to federal withholding and Social Security/Medicare deduction payments, you must do the following:

  • Make payments for federal unemployment tax on a regular basis.
  • Make payroll tax deposits to your state, and possibly your locality, in addition to federal payroll tax deposits.

Payroll Tax Reporting

Businesses are also required to submit payroll tax reports on a regular basis. You must do the following:

  • Submit a quarterly report to the IRS on Form 941 showing the amount of your payroll tax liability and the amounts you have paid on this liability during the previous quarter.
  • Submit an annual unemployment tax report on Form 940 to the IRS showing the amount of your unemployment tax liability and the amounts you have paid on this liability.
  • Submit other state unemployment and workers' compensation reports.

Create a Payroll Register

To keep track of all payroll information for each employee, you will need to create and maintain a payroll register. Most online accounting systems have a payroll register as part of their package of reports but, just in case, here's the information on what to include in that document. You will need it for year-end payroll totals and reports.

Finally, Create a Yearly Tax Calendar

Creating and maintaining a month-by-month payroll tax calendar, either on your accounting/payroll software or manually, will help you keep track of all those payroll tax dates during the year. Add in your state's payroll tax dates for a complete calendar.