How to Do Payroll Yourself: A Comprehensive Small Business Guide (2024)

Disclaimer: TechnologyAdvice is not a tax or legal service/agency. The portions of this article about federal, state, and local employee and employer tax withholdings are for informational purposes only and are not intended as legal advice. Please consult your accountant, tax expert, or labor law attorney for specific situations.

Free payroll spreadsheet template

DIY payroll can be scary, but our payroll spreadsheet template is a great starting point. Use it to calculate paychecks for your employees, including tax liabilities at the federal and state levels.

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How to do your own payroll

Payroll is a complex and time-consuming process. Your employees depend on payroll for their livelihoods, so accuracy is vital. Besides employee frustration and anger, payroll mistakes can also lead to hefty fines, audits, and even jail time, depending on the error and its frequency and severity.

That said, running payroll yourself is possible. And if you’re a new startup or small business owner with 10 or fewer employees, it’s often more practical to process payroll manually before investing in a service or software solution.

Here’s a summary of the steps involved:

If doing payroll yourself looks daunting, you have other options. Check out our Best Free Payroll Software and Payroll Software Guide for free and low-cost solutions that can handle the majority of this process for you.

Before you start

This guide will help you complete payroll for workers who are classified as employees, not contractors. There are three things to do before processing payroll for the first time:

1. Familiarize yourself with the state and local labor and tax laws of your employees. This how-to goes into depth about calculating federal payroll taxes but only provides cursory guidance on state and local laws. Understanding the payroll laws where your employees live and work will reduce the likelihood of inaccurate deductions and tax contributions from you and the employee.
2. Understand common payroll terms. Jump to our payroll glossary and learn about this guide’s different terms.
3. Decide on your do-it-yourself (DIY) method. You’ll need a paper payroll record book with a pen and calculator or a basic computer spreadsheet program to calculate and track your payroll expenses. Pro tip: Download our payroll template to get started.

1. Obtain applicable tax ID numbers

Before digging into the logistics of payroll, you must first apply for a federal Employer Identification Number (EIN) with the IRS. Without an EIN, you won’t be able to open a business bank account, hire employees, or file federal, state, and local taxes. You might also need to obtain separate tax IDs for each state, county, and/or city where your business operates depending on your tax obligations.

After you receive your EINs, register with the Electronic Federal Tax Payment System (EFTPS). This free system by the Department of the Treasury lets you electronically pay your federal payroll taxes in one place. All employers must use this system for remitting tax payments, so it’s a good idea to have your account ready before your first payday.

Did you know?

Several payroll providers can help you obtain your EINs in multiple states. Gusto, for example, offers state tax registration services alongside its payroll platform. It will handle all the paperwork and keep you updated on the progress.

Visit Gusto

2. Select a pay schedule

The four most common pay schedules are:

• Weekly (52 pay periods per year).
• Bi-weekly (26 pay periods per year).
• Semi-monthly (24 pay periods per year).
• Monthly (12 pay periods per year).

The best schedule for your business depends on your cash flow and the types of workers you have.

For example, let’s say you offer a monthly subscription service and bill customers on the 15th or the last day of the month, depending on when they signed up. A semi-monthly payroll schedule would align with your cash influx and ensure you have enough money to pay your labor costs on time.

In contrast, a weekly schedule may be easier if you have many non-exempt hourly employees, as it is much simpler to calculate overtime payments. Factoring in the employee experience is also important, as workers in some industries, like construction, may expect their paychecks at a particular frequency.

3. Gather your payroll information

At the end of your pay period, you’ll need the following information to process payroll:

Compensation rates

To calculate employees’ earnings, you’ll need their compensation information. Salary-exempt employees will receive the same gross pay each payroll with few exceptions. However, for hourly non-exempt employees, you’ll need their:

• Straight-time rate.
• Overtime rate.
• Premium pay rates for any shift differentials.
• Hours worked at each pay rate in the pay period.*
• Any paid time off (PTO) hours for things like holidays, injury/illness, or vacation.

You may also need to collect information on any supplemental wages for your employees, including:

• Commissions.
• Bonuses.
• Tips.
• Reimbursements.

*Note: The FLSA defines overtime as any hours worked over 40 a week. However, some states have more stringent laws. California, for example, requires employers to pay employees at their overtime rate for any hours worked over eight in a day. Make sure to double-check state requirements before calculating overtime.

Employee tax forms

You’ll need to collect your employees’ W-4 forms to determine what they own per paycheck in Federal Income Tax (FIT). You should also gather their state and local W-4 equivalents, if applicable. Each form will help you determine the appropriate tax withholding amounts since they depend on the employee’s tax filing status, income level, and number of dependents.

In addition to income taxes, employees pay their portion of Federal Insurance Contribution Act (FICA) taxes from their paychecks. As an employer, you are responsible for calculating, withholding, and remitting these taxes to the appropriate agency on your employees’ behalf.

What if I don’t have an employee’s W-4 form?

All employers should receive a W-4 from their employees during onboarding before they start work. However, if an employee fails to provide you with a completed W-4 form by the time you process payroll, you must still pay them per your established pay schedule.

In this case, you can determine their tax payments as if they are filing single without any dependents or additional withholding amounts. However, you must still check the federal tax tables to calculate FIT deductions correctly based on the employee’s taxable earnings and pay schedule. You’ll also need each state’s income tax rates and tables, if applicable.

Employee deductions

You’ll need to collect information on items employees pay through payroll. Typical payroll deductions include:

• Health, dental, and vision insurance premiums.
• Disability and life insurance premiums.
• Commuter benefits.
• FSA and HSA contributions.
• Retirement plan contributions, like 401(k).
• Garnishments.
• Company expenses, such as uniform or equipment deductions.
• Other voluntary deductions for things like pet insurance or charitable donations.

To determine each employee’s premium amount for their plan, you’ll need their insurance enrollment forms plus information from your broker and carrier. Employees complete similar paperwork for retirement benefits. Other deductions, like uniforms, also need written authorization before you can deduct the amount from their paychecks.

Employer tax rates and insurance premiums

You are responsible for withholding and remitting employees’ portion of payroll taxes. There are also several payroll taxes that only employers pay, including:

• Federal Unemployment Tax (FUTA): At 6% as of 2024.
• State Unemployment Tax (SUTA): Varies by state.
• Federal Insurance Contribution (FICA): Shared between you and the employee — you match the employee’s contribution of 6.2% for Social Security and 1.45% for Medicare.

You should also look into workers’ compensation (WC) insurance requirements for your employees’ states. Most employers traditionally receive a bill from their private insurance carriers or state fund with the premium amounts they owe outside of payroll.

Similarly, you’ll receive health insurance premiums and other benefits from your carriers. These payments usually occur outside payroll, but you’ll want to record what you pay monthly for end-of-year 1095-C and W-2 forms.

Pro tip:

If you’re using our payroll template, you must add your payroll tax rates in the “Employer taxes” tab under the section “Employer tax rates.” Since FICA rates are the same for everyone, you only need to enter your FUTA and SUTA rates, plus any other employer payroll taxes specific to your employee’s state and municipality. The rest of the chart auto-populates as you complete payroll.

Employee payment details

You’ll need to know each employee’s payment method, such as check, pay card, or direct deposit, which includes peer-to-peer payment applications like Venmo.

You must collect direct deposit authorization forms from employees with account and routing numbers for any electronic payment method. It’s also wise to request a voided check, bank letter, or pay card form with account and routing numbers from the issuing bank to verify that you received the correct information.

4. Calculate each employee’s paycheck

Let’s use an example to calculate an employee’s paycheck step-by-step. Here’s an employee record for Mikhail Scotch, the regional manager at a paper company called Blunder Bifflin:

To calculate Mikhail’s paycheck amount by hand, we need to determine his gross pay, deductions, taxes, and net pay in order. This is where it can get tricky — take your time and double-check each detail to avoid costly mistakes.

How to calculate gross pay

An employee’s gross pay is the sum of their earnings before taxes and other deductions. For salary-exempt employees, their gross pay every payroll is usually their annual salary divided by the total number of payrolls in a year.

For example, say Mikhail was not an hourly non-exempt employee but salary-exempt. If his annual salary is $62,400 and he’s paid weekly, then his gross pay each pay period is:

$62,400 / 52 pay periods annually = $1,200 regular pay

But Mikhail is an hourly non-exempt employee, so to calculate his gross pay, we need to know how many hours he worked at his straight-time and overtime rates. If you’re currently using timesheets that employees complete and their managers approve, have these in front of you to make the calculations.

For this pay period, Mikhail worked 40 straight-time hours and two overtime hours. To calculate his gross pay, you’ll need to multiply the total number of straight-time hours by his straight-time rate. Then, separately, you’ll need to multiply the total overtime hours by his overtime rate. Add both straight-time and overtime amounts to get his gross pay. See how below:

$30 (straight-time rate) X 40 straight-time hours = $1,200 straight-time pay

$45 (overtime rate) X 2 overtime hours = $90 overtime pay

$1,200 (straight-time pay) + $90 (overtime pay) = $1,290 gross pay

Don’t forget other income!

Gross pay also includes any earnings from tips, commissions, bonuses, reimbursements, and shift differentials. Be mindful, however, that you have to tax some of these income types differently or even change how you calculate the employee’s overtime rate.

For example, the IRS considers accountable reimbursements to be nontaxable income. Meanwhile, you must factor non-discretionary bonuses into your overtime rate calculations for that pay period — learn how in the FAQs below.

How to calculate deductions

You should calculate your employees’ payroll deductions before their tax withholdings since deductions affect what part of their income is taxable. For example, the IRS considers retirement contributions and medical, dental, vision, and commuter benefits premiums to be pre-tax deductions for calculating employees’ federal income tax (FIT) withholdings.

By comparison, only health insurance premiums are pre-tax deductions for determining FICA withholdings. You’ll want to confirm what each state and local tax considers pre- and post-tax deductions so you don’t over or under-withhold taxes.

With this in mind, let’s determine Mikhail’s total deductions plus what portion of his wages are taxable for FIT and FICA. First, Mikhail’s total deductions for his health insurance, pet insurance, $401(k), and garnishment:

$200 + $27 + $3 + $30 + $150 + $25 = $435 total deductions

Now, let’s deduct Mikhail’s health insurance premiums and retirement contribution from his gross pay to determine taxable gross pay for FIT:

$1,290 – ($200 + $27 + $3 + $150) = $910 taxable gross pay (FIT)

And finally, let’s do the same for FICA. Remember, the IRS considers retirement contributions post-tax deductions for determining taxable income for FICA, so we’ll remove Mikhail’s 401(k) contribution from our formula.

$1,290 – ($200 + $27 + $3) = $1,060 taxable gross pay (FICA)

Keep all these totals handy! We’ll need them to calculate Mikhail’s tax withholdings next.

How to calculate taxes

To calculate tax withholdings, make sure you have the employee’s taxable income amounts from the previous step, their W-4 forms, and the appropriate rates for state and local taxes. In the sections below, I’ll show you how to calculate the most common tax withholding amounts: FIT, state income, and FICA.

Federal income tax

There are two ways to calculate employee FIT withholdings: wage bracket or percentage. Although the bracket method is easier, it only applies to employees who make less than $100,000 annually. We’ll use the percentage method since it covers a broader range of compensation amounts and produces more accurate tax withholdings.

The easiest way to determine the employee’s withholding amount for FIT is to use the worksheet provided on page 56 of IRS Publication 15-T. Using Mikhail’s information, let’s take a look at it together:

Step 1: Adjusted wage amount

First, we’ll need to determine Mikhail’s Adjusted Wage Amount. Start by dividing any additional, non-job-related income Mikhail expects to receive this year, like interest or dividend payments, by the number of pay periods in the year. Then add this amount to Mikhail’s taxable gross income for this paycheck.

If an employee wants to reduce the amount you withhold from their paycheck for FIT, their W-4 will include an annual amount they want deducted from their FIT payments. Like above, you’ll divide this amount by the number of pay periods in the year but subtract the amount from their taxable gross income.

You can find this information listed on lines 4(a) and 4(b) of the W-4 form. For Mikhail, he expects to receive $1,500 in interest payments for the year and does not have anything on line 4(b). With this, let’s figure out his adjusted wage amount:

1. Taxable gross pay (FIT)	$910
2. Expected non-employee extra income for the year (line 4(a) from W-4 form)	$1,500
3. Additional income per pay period ($1,500 / 52 pay periods)	$28.85
4. Add the additional amount to taxable gross pay (FIT)	$938.85
5. FIT deductions (line 4(b) from W-4 form)	$0
6. FIT deductions per pay period ($0 / 52)	$0
7. Subtract the deduction amount from the amount in Step 4 ($938.85 – $0)	$938.85
Adjusted wage amount	$938.85

Step 2: Tentative withholding amount

Next, we’ll calculate Mikhail’s tentative withholding amount using his adjusted wage amount from Step 1. You’ll also need the IRS’s percentage withholding tables on pages 57–61 of Publication 15-T, Mikhail’s filing status, multiple job status, and payroll schedule.

First, find the percentage withholding table for a weekly payroll schedule. Next, narrow your chart scope by whether Mikhail works multiple jobs in Step 2 of the W-4 form. Then, find the section of the table based on Mikhail’s filing status. And finally, we’ll look at the information in the row of that chart based on his adjusted wage amount.

Mikail has a weekly pay schedule, does not work multiple jobs, files his taxes as married, jointly, and has an adjusted wage amount of $938.85. According to the table, his adjusted wage amount is between $562 and $1,008, so the tentative amount to withhold is $0 plus 10% of any amount over $562.

So, to calculate the tentative withholding amount, we’ll need to do the following:

1. Subtract the lowest amount in the employee’s wage bracket from their adjusted wage amount ($938.85 – $562)	$376.85
2. Multiply the amount from Step 1 by the percentage amount of that wage bracket ($376.85 X 0.10)	$37.69
3. Add the amount from column C in the percentage wage table to the amount in Step 2 ($0 + $37.69)	$37.69
Tentative withholding amount	$37.69

If you need help finding the right wage bracket, check out how we found Mikhail’s in the picture below. 

Step 3: Tax credits

Employees may claim tax credits for dependents by marking Step 3 of the W-4 form. Like how we calculated Mikhail’s adjusted wage amount, we’ll take the total tax credit amount in Step 3 of the W-4 form and divide it by the number of pay periods in the year to determine how much tax credit the employee receives per paycheck.

In Mikhail’s case, he has one qualifying dependent under the age of 17, which is equivalent to a $2,000 annual tax credit. Here’s how it affects his FIT withholdings for this paycheck:

1. Total amount for qualifying dependents (Step 3 of W-4 form)	$2,000
2. Total tax credit per pay period ($2,000 / 52)	$38.46
3. Subtract the amount above from the tentative withholding amount ($37.69 – $38.46)	$0*
Tentative withholding amount with tax credits	$0

*Note: If the amount is less than 0, write $0.

Step 4: Final withholding amount

Finally, we’ll add any additional amounts the employee wants withheld from each paycheck to get their final withholding amount. You can find these amounts on line 4(c) of the employee’s W-4 form. For Mikhail, he wants an additional $10 withheld every paycheck for federal income tax.

Considering Mikhail’s filing status and tax credits, his tentative withholding amount is currently $0. Once we add the additional withholding amount to his tentative withholding amount, we’ll get what we actually withhold from his paycheck for FIT:

$0 (tentative withholding amount with tax credits) + $10 (additional withholding amount per pay period) = $10 (final withholding amount for FIT)

State income tax

You must also deduct state and local income taxes depending on where your employee lives and works. You may even be responsible for withholding other state- or local-specific taxes. You should check with the state’s labor department for this information.

Mikhail lives and works in Pennsylvania, which uses a flat 3.07% for determining state income tax withholdings based on the employee’s taxable gross income.* So Mikhail’s total state income tax withholding is:

$910 (taxable gross pay) X 0.0307 (Pennsylvania income tax rate) = $27.94 (total state income tax)

*Note: Pennsylvania employees must also pay local income and services taxes from their paychecks. They are also responsible for contributing a small percentage to SUTA. However, for simplicity, we only focus on federal and employee state income taxes in this guide.

Federal insurance contributions (FICA)

As of 2024, employees pay a flat 6.2% for Social Security and 1.45% for Medicare. These two taxes also go by Federal Insurance Contribution Act (FICA) contributions.

Remember the taxable gross wages for FICA we calculated earlier? Now we’ll use that to determine Mikhail’s withholdings for FICA:

$1,060 (taxable gross pay for FICA) X 0.062 = $65.72 (Social Security tax)*

$1,060 (taxable gross pay for FICA) X 0.0145 = $15.37 (Medicare tax)**

*You can only calculate and withhold Social Security tax on the first $168,600 of FICA taxable gross income the employee earns with you as of 2024. Monitor employees’ yearly taxable income and stop withholding once they reach that threshold.

**Employees must pay an additional Medicare tax of 0.9% on any taxable gross income over $200,000. This threshold increases to $250,000 if the employee is married and filing jointly. Be sure to track the employee’s total income earned with you throughout the year and adjust the tax amount accordingly.

How to calculate net pay

The last step is calculating the employee’s net pay, which is the employee’s gross pay minus all deductions and tax withholdings. The net pay represents the actual amount of their paycheck.

So, let’s see what Mikhail takes home:

1. Employee’s gross pay	$1,290
2. Total deductions (outside taxes)	$435
3. Total taxes ($10 + $27.94 + $65.72 + $15.37)	$119.03
Net pay [$1,290 – ($435 + $119.03)]	$735.97

Save time and effort

If this seems too much to do by hand, our downloadable payroll template can do the calculations for you. It will even provide you with basic payroll summaries as a starting point for creating your own paystubs.

For example, this is how Mikhail’s paycheck looks:

5. Calculate your tax contributions

As an employer, you are responsible for withholding and remitting all employee-specific payroll taxes on their behalf. However, you must also calculate and remit employer-specific federal, state, and local payroll taxes.

Federally, you must pay FUTA plus match your employees’ FICA contributions. As of 2024, the FUTA tax rate is 6% with a $7,000 taxable wage base, but you can get a 5.4% tax credit if you pay your state unemployment insurance (SUTA) on time. This means you only pay 0.06%.

FICA is easy to determine since your Social Security (6.2%) and Medicare (1.45%) tax rates match what your employee pays. Like your employee, you also stop paying the Social Security portion of FICA once they hit the taxable wage base for the year.

You’re also responsible for paying SUTA. You’ll receive your SUTA rates from your respective state agencies. Most states base their rates on your unemployment history, so the fewer employees you have claiming unemployment benefits historically, the lower your unemployment rate. Some states also take your industry into account.

For other state or local taxes, research the employer tax requirements in each state you have employees and remit these amounts accordingly.

Continuing the Mikhail Scotch example above, assume we’re in a low-risk industry — paper sales. Our FUTA rate is 6% and our SUTA rate for Pennsylvania is 3.82%. Let’s figure out our portion of taxes for Mikhail below.

*Double-check what the employee’s state considers taxable income for SUTA purposes. Generally, it is the same as gross pay, without pre-tax deductions.

6. Distribute paychecks

Once you’ve processed payroll, you must distribute everyone’s paychecks via the payment method they chose during onboarding. Remember to send positive pay information to your financial institution if you issue live checks.

Employees should also receive their pay by their scheduled payday. In some states, like California, you may incur waiting time penalties for every day late. You must also present a paystub to the employee as proof of payment, even if they receive it electronically.

Although payroll processing times differ for each company, direct deposits generally take at least one to three days to reach employee bank accounts. While you can print and hand-deliver checks to your on-site staff, you must ensure you mail checks early enough to reach your off-site employees by payday.

Learn more about how long it takes to process payroll from start to finish:

7. File paperwork and remit payroll taxes

Keep tabs on how much you owe in payroll taxes for each employee. Depending on the tax, you must remit these payments to various agencies on different schedules. Usually, the schedule for filing payroll tax returns differs from when you remit payments. Check with your employee’s state treasury department for information on these schedules.

As for depositing federal payroll taxes, FIT and FICA taxes are due to the IRS semi-weekly or monthly, depending on your tax liability. FUTA deposits also depend on your tax liability but generally occur only once a quarter or longer. You must submit all payments through the Department of the Treasury’s EFTPS.

In addition, you must submit tax returns at the appropriate time. Form 940 details your FUTA payments and is due annually on January 31 for the previous year’s data. Meanwhile, Form 941 shows your FIT and FICA payments. You’ll file these quarterly by the last day of the month following the end of each quarter.

8. Store payroll records

The FLSA requires you to keep employee wage information for at least three years, while the IRS requires you to keep income tax records for at least four. Other payroll records have longer or shorter storage requirements, depending on state and local jurisdictions.

You’ll also need to keep payroll records for the year to send W-3 forms to the IRS and Social Security Administration (SSA) and W-2 and 1099-NEC forms to your workers. W-3 forms summarize the information on W-2 forms and are due to the IRS and the SSA on January 31. Similarly, W-2s and 1099-NECs are due to your employees and contractors on January 31.

Thorough payroll recordkeeping simplifies year-end payroll paperwork and minimizes compliance issues in case the IRS audits you. In fact, periodic payroll audits are a great way to improve your payroll process efficiency while proactively addressing issues before they become major problems.

Advantages of doing your own payroll

In some cases, calculating your own payroll is the most affordable and practical option.

Cost

Processing your own payroll means you don’t have to budget for software or third-party services. Although it requires more time and energy, running payroll on your own allows you to prioritize other operating expenses that might be more important.

Practicality

If you know the basic calculations, manual payroll processing means you don’t need to spend time learning how to use new software. Similarly, outsourcing your payroll or leveraging advanced technology may be impractical if you only need to pay a handful of employees.

Disadvantages of doing your own payroll

Running payroll by yourself can be time-consuming, prone to human error, and legally risky.

Time constraints

Running payroll by hand takes a lot of time, especially if you have more than one or two employees. Besides how long it takes to process paychecks, you also spend valuable time researching payroll laws and complying with tax deposit and filing schedules. 

Payroll software simplifies the whole process and allows you to spend your time on more valuable tasks. Some solutions can even run payroll and issue direct deposits automatically, so you don’t have to worry about remembering your payroll schedule.

Rippling, for example, includes an auto-approve payroll feature that processes payroll automatically as long as you’re not missing any important information.

Human error

Processing payroll on your own also significantly increases the chances of errors compared to using software. You might enter the data incorrectly or make a mistake while calculating wage garnishments by hand.

You must also account for any updates each pay period, such as new state or federal income tax rates or increased employee withholding allowances. Such frequent changes also increase your chances of making mistakes.

However, most payroll software includes code to minimize errors. Paycor, for example, has in-app warnings for shortfalls, missing employee information, and duplicate Social Security numbers to prevent mistakes before you finalize payroll.

Learn more about Paycor’s payroll solution:

Legal risks

If you don’t check or fix any payroll errors, you expose yourself and your business to the consequences of these compliance issues whenever you process payroll. You may face an audit, penalty, or lawsuit for incorrect employee wages.

If any of these situations arise, the legal fees and penalties will typically far outweigh any money you would have spent on payroll software. In fact, many come with compliance monitoring or in-app HR support.

Gusto, for example, will investigate and pay for any tax problems resulting from its error. Meanwhile, Rippling’s Compliance 360 monitors your pay practices to ensure you comply with federal, state, local, and global laws, like mandated sick leave.

Alternatives to doing payroll yourself

There are several different options that you can pursue if you no longer want to calculate your small business payroll on your own:

Manual payroll processing FAQs

DIY payroll saves money, but not time

Manual payroll might be your small business’s only option as you scour for investors, drum up funding, and funnel what little you have straight into your business operations. Completing payroll yourself may be your reality until your headcount and profit margin grow enough to warrant payroll software or services.

Until then, take advantage of our payroll resources below to better understand the process and perhaps make it just a little less tedious.

• Best Free Payroll Software
• Methods of Conducting Payroll: In-House vs Outsourcing
• How Long Does Payroll Processing Take?
• What is the Best Payroll Schedule for Your Business?
• What Are the Best Methods for Paying Employees?
• How to Avoid These 3 Costly Payroll Mistakes
• Employee Classification: HR’s Guide to Classification Compliance.
• How Much Does HR Software Cost?
• How to Create the Perfect PTO Policy