It can be difficult to process payroll by yourself. If it’s your first time, you might want to consider consulting a professional to help you out.
Processing payroll by yourself has its own challenges – if mistakes are made in regards to deductions or tax-related issues, it can result in serious complications for your business. As a small business owner with a few employees, doing the payroll by yourself will probably be worth the time.
Organizing your business’ payroll involves a range of tasks, from registering it as an employer to preparing your pay stub, paying your employees, tax agencies, and other relevant entities.
Companies may suffer consequences such as reduced employee retention, low engagement levels, and reputational problems if they do not have a streamlined and reliable payroll system.
The following steps will teach you how to do payroll yourself in 2021, so you can save some money:
Step 1: Obtain an employer identification number
You will need an Employer Identification Number (EIN) from the IRS if this is your first time running payroll. The EIN identifies your business as a unique entity. Applicants can access the application online, by email, or over the telephone for free.
Step 2: Compile all your tax information
As soon as you have your EIN, you must collect the necessary tax information from your employees. To do this, all employees should complete the W-4 and the I-9 forms. Normally, contractors and freelancers are required to file 1099s.
In these payroll forms, employees are required to provide legal information about their employment status, select which deductions they wish to make, and further fill out other relevant information.
These forms are necessary in order to process payroll. The IRS regulations determine when you must file this paperwork. Still, it can also depend on what information your employees provide. Learn more about submitting W-2s and I-9s to determine what your business must do.
There are also rules for preparing and sending 1099s to both your employees, independent contractors and the IRS. Since your employees and contractors do the majority of the work in completing these forms, your business will only be wasting a small amount of time distributing, collecting, and submitting these forms to the IRS.
Step 3: Select your payroll schedule
Having compiled all the relevant tax information about your business and employees, you will need to decide how to pay your workers. There are four main types of pay schedules:
- weekly
- Bi-weekly
- semiweekly
- monthly.
Each schedule has its advantages. In most companies, employees are paid either semi-monthly or biweekly based on their yearly schedule. However, some states require that hourly workers must be paid weekly.
Considering how often you will pay employees is important, but you don’t want to go too long without paying them. It’s also a good idea to read up on state payroll regulations for 15 to 30 minutes each.
Step 4: Calculate gross pay
The first step toward creating your own payroll is to calculate the gross pay. An employee’s gross pay is calculated by multiplying how many hours they worked in a pay period by their hourly rate. Spreadsheets are the best tool for tracking payroll calculations.
Step 5: Calculate and withhold income taxes
As part of your payroll processing, you must calculate the payroll taxes withheld from each employee’s pay. In order to figure out which federal and state taxes to withhold from your employees’ wages, use the IRS Withholding Calculator. Withholding, tax deductions, and allowances are determined by reviewing each employee’s Form W-4 or Form 1099. For each paycheck, you will need to consider other aspects of payroll processing beyond withholdings and deductions. In other words, you may have to consider these things:
- State taxes
- Federal taxes
- Social Security tax
- Local taxes
- Workers’ compensation contribution
- Medicare tax
- 401(k) contributions.
Step 6: File your payroll report
As soon as your employees receive their paychecks, you’ll need to file, pay, and report payroll taxes to the IRS. For tax payments, you should submit your federal, state, and local taxes, as applicable (normally monthly). Federal and state regulations require you to meet the following:
Federal tax deposits: The IRS must be paid all employee taxes withheld, including FICA taxes.
File state tax reports: Depending on your state’s tax laws, you may be required to collect state income tax and unemployment taxes as well.
FUTA tax deposits: Employers are mandated by law to pay unemployment taxes to the IRS every quarter.
File Form 941: You must file this form every quarter.
File Form 940: You must file this form every year.
Step 7: Maintain accurate payroll records
Maintaining organized and accurate payroll records is critical to the payroll process. Reference to old records will be necessary, and you will only be able to do that if you keep documents well-organized.
New employees will need to be reported to the IRS. Therefore, each new employee is effectively verified as legally eligible to work in the United States through this process.
