How to Run Payroll Yourself

Back in the day—say, three or four decades ago—payroll was done completely by hand with nothing more than a calculator, a sheet of paper, and a pencil.

Luckily, today’s small business owners have more options, including outsourcing to a payroll provider, running payroll software in-house (or doing payroll online), or using a spreadsheet program like Excel to calculate payroll.

If you don’t have enough employees for outsourcing and aren’t interested in paying for software, using an Excel payroll spreadsheet isn’t hard. Plus, the only cost is the amount you pay for your spreadsheet software, like Microsoft Office Suite.

There are definitely reasons to skip doing payroll yourself, especially potential inaccuracies. But if you only have a handful of employees and want to give by-hand Excel payroll a shot, we’re here for you.

Step 1: Get an EIN

An Employer Identification Number (EIN) is basically the business equivalent of a Social Security number. It’s a unique nine-digit number the government (specifically the IRS, or Internal Revenue Service) uses to identify your business for tax purposes.

If your business began as a solo venture, you might not have an EIN yet; as the business owner and sole employee, you could get by with just your Social Security number. However, once you’ve hired an employee, you need an EIN—otherwise, you can’t pay employee taxes or get proper tax identification for your expanding business. So if you need to pay employees, request an EIN today.

How to get an Employer Identification Number

Visit the IRS’s (Internet Revenue Service’s) website to file an online application. You’ll supply this information on the form:

  • Your business type (e.g., a corporation, LLC, or sole proprietorship)
  • Your business address
  • Your reason for requesting an EIN (e.g., hiring a new employee)
  • Any additional details about your business

You’ll receive your EIN immediately after submitting your request.

If you don’t want to get an EIN online, you can register by fax or mail. The IRS’s website lists fax numbers, mailing addresses, and other options.

Step 2: Gather your employees’ tax information

Right when you hire your employees, you need to have them fill out a W-4 form, otherwise known as an Employee’s Withholding Allowance Certificate.

As the employer, you’re responsible for withholding the right amount in taxes from your employees’ gross pay. A W-4 gives you important employee tax information so you can do just that:

  • Whether the employee is married, single, or married but filing at the higher single rate
  • Whether the employee has any tax allowances that exempt them from certain taxes
  • Whether the employee wants you to withhold extra money to help ensure they won’t owe money in taxes at the end of the year
Heads up

If an employee gets married or divorced, has a child, or acquires a dependent, they need to submit a new W-4 to update their tax withholding status. As an employer, you’re responsible for updating tax information as soon as an employee gets you their new W-4.

Employees also need to submit I-9 forms that verify they can work in the United States. And you, the employer, need to report all new hires to your state’s new hire bureau. If you plan to use direct deposit, you’ll need a routing number or canceled check from the employee to connect with their bank.

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Step 3: Set your pay schedule

A U.S. Department of Labor survey shows that most businesses pay employees bi-weekly, meaning every other week.1 The next-most-common pay schedule is every week, followed by once a month and twice a month.2

Those are the most common pay schedules, but what schedule makes sense for your business? The answer probably depends on your cash flow. Figure out how often you can afford to pay employees based on your profits, and don’t forget to add up payroll expenses, including postage fees for mailing checks and fees for direct deposit.

Make sure to check your state’s paycheck requirements too. For instance, Arizona requires you to pay employees at least twice a month, and it’s also illegal to go more than 16 days without paying your workers.3

Heads up

If an employee gets married or divorced, has a child, or acquires a dependent, they need to submit a new W-4 to update their tax withholding status. As an employer, you’re responsible for updating tax information as soon as an employee gets you their new W-4.

Employees also need to submit I-9 forms that verify they can work in the United States. And you, the employer, need to report all new hires to your state’s new hire bureau. If you plan to use direct deposit, you’ll need a routing number or canceled check from the employee to connect with their bank.

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Step 4: Run the numbers

Once you’ve collected all the information, you’re ready to process payroll. Open an Excel spreadsheet and get to work logging the data.

Start with an employee’s time worked. For salaried workers, this number likely won’t change from pay period to pay period. For hourly workers, the number will vary slightly based on exactly how much time the employee clocked during the period.

You’ll also want to calculate overtime and holiday pay, if applicable, plus sick leave and vacation days. Multiply the employee’s wage by their salaried hours or their exact hours and minutes worked, and voila: you have the gross pay.

Next, calculate federal and state taxes. This number and percentage will vary based on the information you gathered from your employee’s W-4 form. You can use the IRS’s (Internal Revenue Service’s) withholding calculator to determine what to deduct from the gross wage and hold in trust for the government.

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Along with state and federal income tax deductions, you’ll need to deduct these common withholdings from your employees’ gross pay:

  • FICA taxes, or Medicare and Social Security taxes (also known as payroll taxes or employment taxes)
  • Court-ordered wage garnishments for child or spousal support
  • Premiums for your company’s medical, dental, and vision plans
  • Voluntary donations to charitable organizations
  • Retirement fund contributions

Don’t forget about your taxes either. Employers are responsible for paying FUTA taxes, or unemployment taxes. These taxes don’t come out of your employees’ paychecks; instead, they’re a percentage you pay based on how many employees you have and how much they make.

If you’re using an Excel spreadsheet for payroll, make sure to check, double-check, and triple-check your numbers. If you don’t pay your employees the right amount, you’ll be out more than just some unhappy workers—you could also be in hot water with the IRS and your state and local governments.

Step 5: Distribute paychecks

Once you’ve determined how much each employee earned and how much you need to deduct, you can distribute employees’ take-home pay through a few different means.

Direct deposit is one of the most popular forms of payment today. It’s more secure than handing out checks or cash and ensures employees with bank accounts can get their funds immediately.

If you decide to do direct deposit, you’ll go through the Automated Clearing House (ACH), a US institution that monitors and manages all electronic, automated transfers from one bank to another. Your bank can talk you through the process and help you set up automatic payments. Usually, you’ll make the payment on payday using your bank’s website or payroll software that syncs with your bank.

Heads up

The cost to set up direct deposit varies from bank to bank—according to the National Federation of Independent Businesses (NFIB), starting fees vary from $50 to $150.4 After that, you’ll pay a transaction or processing fee every time for every check you deposit.5

Simplifying direct deposit is another reason to try accounting software instead of doing payroll by hand. Lots of software brands help you automate direct deposit or at least sync with your bank accounts so you can monitor deposits closely.

Most states require you to offer your employees at least two payment options—not everyone has a bank account or wants direct deposit, so make sure you include options like these:

Step 6: Submit documents and prepare taxes

Once you’ve deducted income, Medicare, and Social Security taxes from your employees’ paychecks and figured out what you owe in FUTA taxes, you’re responsible for making tax deposits to the IRS. You might do this weekly, bi-monthly, monthly, or quarterly—the timing depends on your business’s size and profits.

Each January, you’ll prepare W-2 forms, or Wage and Tax Statements, for each employee, including your 1099 (or freelance) employees. W-2s aren’t the only tax forms you’re responsible for, though. You also need to regularly submit these forms directly to the IRS:

  • Form 940, which you use to report federal unemployment tax payments (FUTA taxes)
  • Form 941, which you use to report Social Security and Medicare tax deductions (FICA taxes)
  • Form W-3, which is a transmittal, or summary, form that you submit to the federal government along with all your employee W-2 forms

It’s essential that you create a tax deadline calendar to stay on top of these forms and submissions. If you miss a date, you’ll be subject to financial penalties, fines, and interest payments—none of which are a treat for your bottom line. As an employer, calculating taxes correctly, submitting them on time, and preparing the right forms must top your to-do list every month, not just during tax season.

Frequently asked questions

Do I need payroll software to do my own payroll?

If you’re perfectly comfortable with Excel and just want to follow the steps we listed here, then no, you don’t need payroll software to do your own payroll. But even if you have only one other employee or you’re a freelancer working for yourself, payroll software can dramatically simplify your life.

Even if you’re not overly worried about miscalculating a pay stub or withholding the wrong amount, payroll software can automatically generate all the tax forms you need, on time. Honestly, almost any price is worth being free from tax stress—but you can download some payroll software for free, including Wave. Even brands like QuickBooks, FreshBooks, and Xero start you with a free 30-day trial; just cancel on day 29.

What is a payroll calculator?

A payroll calculator (also known as a paycheck calculator) is another way to make payroll easier without investing in software. All you need is your employee’s salary information and tax withholding status. The paycheck calculator crunches the numbers based on federal and state tax rates, including FICA taxes, and gives you the right net take-home pay.

What is a payroll journal entry?

A payroll journal entry is how you record and list payroll costs for your own books, meaning your own ledger and overall financial reports. A typical payroll entry includes a thorough record of your employees’ gross wages, tax deductions, and your own payroll taxes (typically FUTA taxes).

Payroll journal entries can be broken down to three key parts:

  • Initial recordings include your employees’ wages and salaries, the amount deducted, and any payroll taxes you owe based on your employees’ salaries.
  • Accrued wages are wages you haven’t yet paid an employee but will eventually turn into an initial recording.
  • Manual payments are reserved for special circumstances like giving an employee a final paycheck.

To get a more in-depth look at payroll journals, take a look at our guide breaking down the topic. For now, just know that recording all payments made to employees in your general ledger is necessary for keeping your business in the black.

And while you can do payroll entries by hand, you can also use affordable online payroll software to simplify the process, minimize errors, and streamline your books.

The takeaway

Doing payroll by hand can seem daunting if you’re new to the business or unfamiliar with spreadsheets, but practicing the steps above—plus frequently checking calculations and cell formulas—will get you as close to payroll perfection as possible.

Tired of doing payroll by hand or interested in learning more about payroll software options? Our piece on the year’s best payroll software can help you find affordable software for your small business.

Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.

Sources

1. Bureau of Labor Statistics, “How frequently do private businesses pay workers?
2.Bureau of Labor Statistics, “How frequently do private businesses pay workers?
3. U.S. Department of Labor, “Wage and Hour Division State Payday Requirements
3. National Federation of Independent Businesses, “The Benefits of Direct Deposit for Salary Checks
4. National Federation of Independent Businesses,“The Benefits of Direct Deposit for Salary Checks