How to process payroll yourself
Summary: Doing your company’s payroll on your own costs less, but is time consuming and prone to errors.
If you’re tax savvy, you may be able to take on a DIY approach to paying your employees. But given all the payroll mistakes you can make (and nasty fines you can incur as a result), make sure you’re completely comfortable with everything you need to do before you dive in.
To get started:
Step 1: Have all employees complete a W-4 form. To get paid, employees need to complete Form W-4 to document their filing status and keep track of personal allowances. The more allowances or dependents workers have, the less payroll taxes are taken out of their paychecks each pay period. For each new employee you hire, you need to file a new hire report. Note that there is a new version of the Form W-4 for 2020, so this is the form you should have new hires fill out starting January 1, 2020.
Step 2: Find or sign up for Employer Identification Numbers. Before you do payroll yourself, make sure you have your Employer Identification Number (EIN) ready. An EIN is kind of like an SSN for your business and is used by the IRS to identify a business entity and anyone else who pays employees. If you don’t have an EIN, you can apply for one here on the IRS site. You may also need to get a state EIN number; check your state’s employer resources for more details.
Step 3: Choose your payroll schedule. After you register for your Employer Identification Numbers, get insured (don’t forget workers’ compensation), and display workplace posters, you need to add three important dates to your calendar: employee pay dates, tax payment due dates, and tax filing deadlines (read more about basic labor laws here).
Step 4: Calculate and withhold income taxes. When it comes time to pay your employees, you need to determine which federal and state taxes to withhold from your employees’ pay by using the IRS Withholding Calculator and your state’s resource or a reliable paycheck calculator. You must also keep track of both the employee and employer portion of taxes as you go.
Step 5: Pay payroll taxes. When it’s time to pay taxes, you need to submit your federal, state, and local tax deposits, as applicable (usually on a monthly basis).
Step 6: File tax forms & employee W-2s. Finally, be sure to send in your employer federal tax return (usually each quarter) and any state or local returns, as applicable. And last but not least, don’t forget about preparing your annual filings and W-2s at the end of the year.
Note: This is not an exhaustive list of your responsibilities as an employer. For advice specific to your business, be sure to go over federal and state requirements or consult with a professional.
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