How Do I Do My Own Payroll and Payroll Taxes?

An Employer's Checklist

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Many business owners dread the thought of doing payroll because it can be a complex and exacting challenge. You might want to do it yourself rather than hire a third party, however, if you have only a couple of employees. It's doable if you take some basic steps, understand what you're getting into, and pay attention to detail.

Steps in the Payroll Process

The payroll process includes three basic steps:

  1. Preparation: Prepare for payroll calculation and processing, and decide who will do all the payroll tasks before you begin to hire employees.
  2. Paying employees: Set up a system to calculate employees' pay, to write paychecks, and to distribute them. 
  3. Post-payment: Set aside money for taxes, complete a payroll register, make tax payments, and send payroll reports to the IRS at the correct times after you've paid your employees.

Before You Hire Employees

Understand your legal responsibilities as an employer. 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 your 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're not legally required to pay employees for holidays, vacations, or personal days, but most businesses do, and 12 states and the District of Columbia have passed legislation making paid sick time mandatory.

Decide on an Accounting System

Most small businesses use an online accounting system with a payroll processing option. Look into Android small business payroll apps and QuickBooks payroll online.

Collect Paperwork New Hires Must Sign

Each new employee must complete certain paperwork as part of the onboarding process. You must be certain that the new hire forms and applications are completed and filed. These 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

Set up Direct Deposit for Paychecks

Contact your bank to find out how their direct deposit system works. You'll also need to get authorization from each employee and information about their checking accounts, such as account numbers and routing numbers.

You might be able to do direct deposit by connecting the service to your bank if you have payroll features through QuickBooks or another accounting system.

Set up a Separate Payroll Account

Set up a separate bank account for writing paychecks or paying through employee direct deposit. You'll also need this account for depositing funds you collected from employees for federal and state income tax and for Social Security and Medicare taxes (referred to as FICA taxes) and other amounts.

A separate payroll account can help you keep track of these transactions without getting them mixed up with your general business bank account.

Get an Employer Identification Number

This is effectively a Social Security number for businesses. You'll need one if you're going to have employees. Contact the IRS and they'll assign one to you, or you can apply online or by fax.

Paying Employees

Pay your employees according to the pay periods you've decided upon. This involves figuring out how much they're each owed, and withholding and other deductions you must make from their pay.

Calculate Employee Pay

Calculate the gross pay amount for each employee. This is the total amount you owe the employee based on hours worked and the hourly rate or the total for the pay period for salaried employees.

Calculate Withholding and Deductions

You'll use the gross pay amount to calculate withholding for federal, state, and any local income taxes. Calculate the deduction for FICA taxes, as well as for things like health plans and retirement plan contributions.

The IRS offers a helpful online tool to walk you through this step by step.

Employers and employees both contribute to FICA taxes, each paying half. Social Security is 12.4% and Medicare is 2.9% for a total of 15.3% as of 2020. You must pay 7.65% and withhold 7.65% from your employee's pay.

Write Paychecks

Write paychecks and distribute them to the employees, or send them by direct deposit.

Get Totals for Payroll Tax Deposits

Get totals for all employees for gross pay, federal, state, and local withholding, FICA taxes, and any other deductions. You'll need these amounts for your payroll tax deposits and reports.

These steps apply specifically to employees. You don't have to withhold taxes for individuals who work for you as independent contractors. The Equal Employment Opportunity Commission provides a comprehensive guide for who's an employee and who's an independent contractor, and it explains all the rules.

After You've Paid Employees

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

  • 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

You must make payments for federal unemployment tax on a regular basis in addition to federal withholding and Social Security/Medicare deduction payments. You must also make payroll tax deposits to your state, and possibly your locality, in addition to federal payroll tax deposits.

Payroll Tax Reporting

Businesses are required to submit certain payroll tax reports on a regular basis:

  • Quarterly reports to the IRS on Form 941 showing the amount of your payroll tax liability and the amounts you've paid on this liability during the previous quarter
  • Annual unemployment tax reports to the IRs on Form 940 showing the amount of your unemployment tax liability and the amounts you have paid on this liability

You might also have to submit other state unemployment and workers' compensation reports. Check with a local accountant to be sure of the rules of your state.

Create a Payroll Register

Create and maintain a payroll register to keep track of all payroll information for each employee. Most online accounting systems these as part of their package of reports. You'll need this information for year-end payroll totals and reports.

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.