How to Do Payroll Yourself: A Step-By-Step Guide for Small Businesses

Running payroll can be overwhelming when you’re just getting started as a small business owner. But it doesn’t have to be! Learning how to do payroll yourself is an essential skill, and mastering it will help you ensure your employees are paid accurately and on time. Plus, the more you do it, the easier it gets!

Whether you’re processing payroll manually or setting up an automated system, knowing the right steps to follow can help avoid any payroll errors, compliance issues, or penalties. That’s why we put together this guide!

In this article, we’ll break down the basics of how to do payroll for a small business, including gathering the necessary payroll information and understanding how payroll taxes work. This step-by-step approach will give you the tools you need to run payroll smoothly, accurately, and efficiently, whether you’re a manual payroll champion or an automated payroll maven.

Let’s dig in!

What is payroll?

Payroll is the process of calculating and distributing wages to your employees for the hours they’ve worked. This process includes recording work hours, calculating gross pay, withholding deductions like taxes and benefits, and issuing paychecks or direct deposits. 

Payroll is essential for keeping your team compensated and happy—but that’s not all. An essential part of running a business, payroll involves tracking and managing important details like overtime, bonuses, and paid time off. 

Accurate payroll records help your business stay compliant with state and federal laws, ensuring you pay the right amount of taxes and file the necessary reports on time. In short, a comprehensive payroll process is how you maintain your business’s financial health.

How does payroll work?

Payroll works when you track the hours your employees work, calculate their gross pay, apply necessary tax withholdings and deductions, and deliver the remaining net pay to the employee. The employer is responsible for ensuring payroll taxes are withheld correctly and that pay is processed according to the payroll schedule.

Once payroll is processed, you’ll also need to submit tax payments to the IRS and other local tax authorities. This includes paying your share of Social Security and Medicare taxes. Payroll software can help automate some of this process, but if you’re handling DIY payroll for your small business, you’ll want to make sure you meet all tax deadlines and keep accurate records.

Is it possible to do payroll yourself?

Yes, it is very possible to do payroll yourself! Many small business owners choose to handle their own payroll manually, especially when they’re just getting started. Doing payroll yourself can save you money on payroll services or software.

On the other hand, doing payroll yourself requires attention to detail and a solid understanding of payroll laws. If you decide to handle payroll on your own, be prepared to manage all aspects of the process, from tracking employee hours to calculating deductions and filing tax reports. 

Business owners running their own payroll can use  manual methods, like spreadsheets, or opt for DIY payroll software to automate some steps. No matter your chosen method, make sure you’re familiar with local, state, and federal regulations to avoid costly mistakes.

Payroll information: key terms to know

Gross pay

Gross pay is the total amount of money an employee earns before any deductions, such as taxes or benefits, are taken out. This includes regular wages, overtime, bonuses, and any other compensation.

Net pay

Net pay is the amount of money an employee takes home after all deductions and withholdings are subtracted from the gross pay. It’s often referred to as "take-home pay."

Deductions

Deductions are amounts subtracted from an employee’s gross pay. These can include taxes, retirement contributions, health insurance premiums, and other benefit costs.

Withholding

Withholding refers to the portion of an employee’s paycheck that an employer deducts for taxes, including federal, state, and sometimes local taxes. These amounts are sent directly to the government on the employee’s behalf.

FICA

FICA (Federal Insurance Contributions Act) is a U.S. law requiring employers to withhold a portion of an employee’s wages for Social Security and Medicare taxes.

W-2 form

The W-2 form is a tax form that employers send to employees and the IRS. It details the employee's total earnings and tax withholdings for the year and is used for filing personal income taxes.

W-4 form

The W-4 form is filled out by employees and tells their employer how much federal income tax to withhold from their paycheck based on their filing status and exemptions.

Pay period

A pay period is the recurring schedule on which employees are paid. Common pay periods include weekly, biweekly, and monthly.

Overtime

Overtime is the extra pay employees receive for working more than their regular hours—typically anything over 40 hours in a week. Overtime pay is usually calculated at 1.5 times the regular hourly rate.

Exempt vs. non-exempt

Exempt employees are usually salaried and not entitled to overtime pay under federal law. Non-exempt employees are usually paid by the hour and are generally eligible for overtime pay when they work more than 40 hours per week.

Direct deposit

Direct deposit is a method of payment where an employee’s earnings are transferred directly into their bank account without the business issuing a paper check.

Payroll tax

Payroll taxes are withheld by employers from an employee’s paycheck to contribute to federal programs like Social Security and Medicare.

Accruals

Accruals refer to earned benefits, such as paid time off or vacation days, that accumulate over time and can be used by employees at a later date.

Garnishment

Garnishment occurs when a portion of an employee’s earnings is legally withheld to pay off debts like unpaid child support or student loans.

Benefits

Benefits include additional compensation provided to employees, such as health insurance, retirement contributions, and paid time off. These are often part of a comprehensive employee compensation package.

Payroll register

A payroll register is a detailed report that shows all the payroll information for each employee for a specific pay period, including hours worked, gross pay, deductions, and net pay.

Employee classification

Employee classification refers to whether a worker is classified as full-time, part-time, exempt, or non-exempt. This classification affects how they are paid and what benefits they receive.

Timesheet

A timesheet is a document or digital record where employees log their work hours. Employers use it to calculate payroll and ensure accurate payment.

Taxable income

Taxable income is the portion of an employee’s income that is subject to federal, state, and local taxes after deductions and exemptions are applied.

How long does payroll take to process?

Payroll processing typically takes 2 to 5 business days from the time payroll is submitted to the time employees receive their paychecks. The exact duration depends on several factors, including the payroll schedule your business follows (weekly, biweekly, or monthly), the method of payment (direct deposit or paper checks), and the payroll provider you use.

If you're handling payroll manually, the process may take longer as you'll need time to gather employee timesheets, calculate gross and net pay, and withhold the appropriate taxes and deductions. 

If you're using payroll software, it can automate many of these steps and reduce processing time, but you still need to account for banking transfer times and any potential errors that need correcting before finalizing the payroll.

How to do payroll yourself in 5 steps

Running payroll on your own can feel like a big task, but breaking it down into manageable steps makes it much more achievable. We’ll guide you through the process from start to finish, whether you're using a manual method or payroll software so you can confidently manage your payroll and pay your employees accurately.

1. Prepare for payroll.

Before you can run payroll, set up everything you need to get started. Here’s how to prepare:

• Get an Employer Identification Number (EIN). To run payroll, you need an EIN from the IRS. This number allows the government to track your business's payroll tax filings.
• Set up a payroll system. Choose between manual payroll using a spreadsheet or opting for payroll software. Payroll software can automate calculations, but many small businesses start by running payroll themselves manually.
• Collect employee details. You’ll need all relevant information from your employees, including their W-4 forms, which tell you how much to withhold for federal taxes. For contractors, collect W-9 forms.
• Set your pay periods. Decide how often you’ll pay employees: weekly, biweekly, semimonthly, or monthly. Your chosen pay period should align with your business needs and local labor laws.
• Determine pay rates. Set your employees’ pay rates, which can be hourly or salaried. Make sure to account for overtime pay for non-exempt employees, which is typically 1.5 times their regular rate for any hours worked over 40 in a week.

2. Run payroll.

Once you're set up, you can start running payroll. Here’s what you need to do:

• Track hours worked. For hourly employees, you can use timesheets, a time clock, or a time tracking system to log this information. Just make sure your chosen method is tracking hours accurately!
• Calculate gross pay. Gross pay is the total amount earned before deductions. For hourly workers, multiply hours worked by their pay rate. For salaried employees, divide the annual salary by the number of pay periods in the year.
• Apply deductions. Calculate and subtract deductions such as federal/state taxes, Social Security, Medicare, retirement contributions, and insurance premiums. These amounts are withheld from an employee’s paycheck and sent to the appropriate tax authorities or benefit providers.
• Calculate net pay. Net pay is the final amount your employees take home after all deductions. This is the money they will receive in their paycheck or direct deposit.
• Pay your employees. Issue payment through paychecks or direct deposits. If you choose direct deposit, make sure you have the necessary banking information and set up your payroll system to handle it.

3. Finish the payroll process.

Your work doesn’t end once your employees are paid. After each payroll cycle, you’ll need to complete a few important tasks:

• Update accounting records. Record payroll expenses in your accounting system to ensure your books stay accurate.
• File payroll taxes. Submit payroll taxes to the IRS and your state or local tax agencies. These include federal income tax, Social Security, Medicare, and unemployment taxes. Keep a close eye on deadlines, as missing them can result in fines.

4. Remember end-of-year tasks.

At the end of the year, payroll requires additional attention. Here’s what you need to handle:

• Prepare W-2 forms. W-2 forms report your employees’ annual earnings and taxes withheld. You need to send a copy to each employee and file a copy with the IRS.
• File annual payroll taxes. Some payroll taxes are reported quarterly, but others, like FUTA (Federal Unemployment Tax), are filed annually.
• Review compliance. Ensure that your payroll system is compliant with federal and state regulations. This includes reviewing employee classifications (exempt vs. non-exempt), overtime rules, and benefits compliance.
• Reconcile payroll records. Double-check that all payroll figures are accurate and match what you’ve paid out over the course of the year.

5. Manage your payroll on a regular basis.

Once you have a system in place, payroll management becomes an ongoing task. Here’s what you should be keeping up with over time:

• Monitor labor laws. Payroll laws change frequently. It’s crucial to stay up-to-date with the latest regulations, particularly with regard to minimum wage, overtime, and tax rates.
• Finesse your payroll system: As your business grows, you may need to adjust your payroll process, upgrade to payroll software, or fine-tune how you track employee hours and process payments.

How to run payroll manually

It is entirely possible to run payroll manually, and many small business owners take this approach when they're just starting out. However, while this method can save you money in the short term, it can come with complications that make it more challenging over time. 

Here’s a closer look at the obstacles and considerations you’ll face when choosing to run payroll without the help of payroll software.

1. Manual calculations

When running payroll manually, you’re responsible for calculating wages, hours worked, and all applicable deductions. This includes tax withholdings for federal, state, and local taxes, as well as benefits like retirement contributions and insurance premiums.

In contrast, payroll software can automate these calculations for you, saving you time and ensuring accuracy. Manually entering hours and pay rates increases the chances of human error, which can result in costly mistakes like underpaying employees or incorrectly calculating tax withholdings.

2. Vulnerability to human error

One of the biggest challenges of DIY payroll is that it opens you up to human error. Hand-entering hours worked, pay rates, and deductions leaves plenty of room for mistakes.

Common errors include miscalculating taxes, applying incorrect deductions, or failing to comply with overtime rules. These kinds of mistakes can result in incorrect paychecks, disgruntled employees, and even penalties from tax authorities.

3. Compliance with tax and labor laws

Payroll software is typically updated regularly to reflect the latest tax laws and compliance regulations. If you choose to run payroll manually, you’re responsible for staying on top of changes to federal, state, and local laws. These include monitoring minimum wage updates, overtime rules, and tax rates.

Missing these changes could lead to non-compliance, fines, and audits, so you’ll need to dedicate time to staying informed.

4. Manual recordkeeping and filings

Without payroll software, you’ll need to create and maintain manual records for each pay period. This includes tracking work hours, keeping records of gross and net pay, and maintaining records for tax purposes.

Additionally, manual payroll means you’ll be filing payroll taxes by hand rather than submitting them electronically, which takes more time and effort. Filing taxes late or incorrectly can result in penalties, so you’ll need to be vigilant about meeting all deadlines.

5. Limited access to payroll features

Many payroll systems offer features that make payroll management easier, such as automatically generating reports, managing benefits, and handling direct deposits. When running payroll manually, these tasks fall entirely on you.

Generating payroll reports, managing benefits contributions, and ensuring employees are paid on time through direct deposit will require more effort and organization without a system in place to automate them.

6. Complications with frequent payroll changes

If your business has frequent changes to payroll processes, such as employees being hired or terminated, updating benefits, or modifying pay rates, running payroll manually can quickly become overwhelming. Payroll software is designed to handle these changes efficiently, updating records and calculations automatically.

With a manual system, you’ll need to manually update your spreadsheets or records, which increases the risk of errors.

7. Data security risks

When running payroll manually, you’re responsible for securely storing all sensitive payroll data, including employee information, pay records, and tax documents. Unlike payroll software, which often includes enhanced security features like encryption and secure cloud storage, manual payroll means you’re relying on your own storage solutions. This leaves your data more vulnerable to breaches or accidental loss.

8. Manually calculating and filing taxes

One of the most challenging aspects of running payroll manually is handling payroll taxes. You’ll need to calculate and file federal, state, and local payroll taxes, as well as Social Security and Medicare contributions.

Payroll software typically automates these tax calculations and ensures payments are made on time, but when doing payroll yourself, you’re responsible for manually calculating taxes, withholding the correct amounts, and submitting them before deadlines.

Running payroll manually is feasible, especially for small businesses with few employees, but it requires significant attention to detail and time. As your business grows, it might become more efficient to transition to a payroll system that automates these tasks, reduces errors, and ensures compliance with tax laws.

While DIY payroll can save money upfront, using payroll software can ultimately save time and reduce the risk of costly mistakes.

Run easy payroll with Homebase.

Homebase simplifies the entire payroll process, giving you a streamlined solution that allows you to run payroll quickly and efficiently. With Homebase payroll, you don’t have to worry about manually calculating hours, deductions, and taxes—everything is automated.

Homebase integrates with your time tracking and scheduling tools, so all your employee data is seamlessly transferred into the payroll system. Not only does Homebase calculate gross pay, net pay, and payroll taxes, but it also files payroll taxes on your behalf, generates W-2 forms, and ensures compliance with both state and federal regulations.

Whether you’re processing payroll for salaried or hourly employees, Homebase makes the job easier by offering direct deposit and electronic pay stubs, so your team gets paid on time, every time. Plus, Homebase’s payroll features come bundled with its scheduling, time clock, and team communication tools. That makes it an all-in-one solution for small business owners.

Final thoughts on running payroll yourself

Learning how to do payroll yourself may seem daunting at first, but breaking it down into manageable steps makes the process easier and ensures accuracy. Whether you decide to run DIY payroll manually or use payroll software, it’s important to stay organized, comply with tax laws, and keep your records up to date. 

Manual payroll allows for flexibility but comes with challenges like time consumption, manual calculations, and increased risk of errors. By investing in a tool like Homebase payroll, you can streamline the process, automate tasks like tax filing and direct deposits, and save yourself time and hassle, allowing you to focus on growing your small business and keeping your team happy.