How to Do My Own Payroll: A Guide
Looking for a guide on how to do my own payroll? We’ve got you covered!
It’s hard to imagine but payroll was once done entirely by hand. With just a pencil, paper and a calculator, some well-meaning person calculated paychecks for dozens, sometimes hundreds, of employees seeking paychecks.
A quick search for ‘how to do my own payroll’ will likely yield more ads for payroll software than actual information on manual payroll techniques. This is because payroll today does require some computer input to keep you on track.
Here’s a quick guide to doing your own payroll instead of using a subscription service.
Confirm Your EIN
Most businesses get an EIN when they incorporate their businesses. The EIN, or employer identification number, is like a social security number for your business.
It’s the number you use when you file taxes to identify your business as an entity separate from yourself. When you start the manual payroll process, you’ll want to confirm your EIN number.
If you don’t have an EIN number, you can apply for one for free on the IRS website or call to request one over the phone. The IRS usually provides an EIN instantly if you apply online.
The process can take up to 4 weeks if you request by mail. This number will be used to confirm that your business is making payments to its employees and paying the right amount of taxes on each paycheck.
Even if you are your company’s only employee, it’s important to have an EIN setup to distinguish your personal and business taxes. With certain types of businesses, like S and C corporations, you can’t use your social security number to represent the business.
Get Information from Employees
Once you have your EIN on hand, gather information from your employees to determine their tax withholdings. You’ll need to have them fill out an I-9, W-4 form, and work authorization information.
These are usually completed when you hire a new part-time or full-time employee to make sure the employee has the legal right to work in your state. All forms completed by employees should be signed before you submit the information into your payroll.
Their signature confirms that the information provided is true and accurate. It holds them accountable in case there is a tax liability issue later on.
Employers are responsible for making sure each employee pays the right amount of taxes based on these documents. The W-4 is one of the most important documents to review because it tells you the following information:
- If the employee is married or single
- The employee’s tax rate
- The employee’s number of tax allowances
- Whether the employee wants to claim exemptions
- The number of additional withholdings the employee wants to claim
Whenever an employee has a major change to his family structure—gets married, divorced or has a child–he needs to submit a new W-4 form. These changes impact the amount of taxes that should be taken out on each paycheck.
If you use a payroll system down the road, you can enter these data points directly into the software to get a calculation of each person’s tax liability. Learn how to make pay stubs, so that your employees have a record of the amount of taxes they pay each pay period.
How Often Will Everyone Be Paid?
The next thing you need to determine is how often to pay your employees. There’s no right or wrong answer if you are compliant with local laws.
For example, if your business is located in Arizona, you have to pay employees at least twice per month. But employers can choose to pay weekly, twice each month or monthly depending on what makes the most sense for your business.
The most common pay frequency is weekly. This helps employers and staff keep track of hours worked including overtime and benefits payments.
If you’re doing manual payroll, it might make more sense to run payroll more often so you have fewer calculations to do over a set period of time.
Calculate Number of Hours
Decide how you want employees to track hours. At many companies, a time clock keeps the employees’ time by letting them clock in and out at the end of each shift.
This makes sense if your employees are paid hourly. In cases where your employees receive a daily rate or monthly salary, you simply need to know the days they work.
A supervisor can offer this information on a time card. You can also work backward by excluding any unpaid vacation or sick days from their timesheets.
No matter the method of tracking hours, you need to tally all paid hours and multiply this number by their hourly rate. For salaries, simply list their contracted salary amount before taxes.
For hourly employees, it’s important to subtract time for breaks and lunch. You also want to include overtime and special pay during holidays.
Multiply the employee’s hourly pay by the number of hours they work and you get their gross pay.
Calculate Federal and State Taxes
The amount of federal and state taxes each employee pays varies based on the information included on the W-4 form. The IRS offers a withholding calculator to help you determine how much to deduct from each person’s gross wages.
The amount you deduct should be ‘held in trust’ for the government to cover all tax obligations. The final step is to calculate the amount you pay as the employer in taxes.
Every employer is responsible for unemployment taxes based on the number of employees you have and their monthly earnings.
How to Do My Own Payroll
If your search for ‘how to do my own payroll’ is more about paying yourself in a sole proprietorship, all you need to do is calculate your self-employment and income taxes from each check.
But for most employers, doing payroll requires complicated calculations to account for everyone’s unique family structure and tax situation. Once you arrive at this magic tax number, you know how much to deduct from an employee’s paycheck every week.
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