does your business plan to pay employees via payroll

How To Pay Yourself & Your Employees From an LLC Business

Making sure everyone gets paid is an important part of operating any limited liability company (LLC). Regardless of whether you’re running a small business or a larger company, there are important legal guidelines and tax considerations to take into account. You’ll also need to decide which pay structure is best for your LLC and how you want to get paid.  

How Do I Pay Myself From My LLC?

Owner’s draw.

A common way to pay yourself as an LLC owner is by taking what is called a “draw.” A draw is simply when you take money out of your business account for your personal use. An owner’s draw can be done at any time and there is no set amount that you have to take out. The owner’s draw method is popular with single-member LLC businesses. Often, these LLCs are considered pass-through entities, meaning the business income is passed directly onto the LLC owners or investors. At tax time, the business income will be reported on your personal tax return with Schedule C instead of on a separate return for the business.

Wages and Salaries

Another way to pay yourself from your LLC is to take a salary or give yourself a wage. This is similar to how traditional employees are paid, and it can be a good option if you want to keep your personal bank account separate from your business bank account. To do this, you will need to add yourself to your payroll system and withhold taxes from your paycheck, just like you do for your employees. Your LLC will report your earnings as a deduction and you will pay income tax on the salary you receive. Keep in mind that the IRS will only allow what it considers to be a “reasonable salary” as a deduction for your LLC.

Independent Contractor

You can also consider counting yourself as an independent contractor for your LLC. This method means you will receive payments from the LLC just like any independent contractor would. Likewise, you won’t have to take payroll taxes out of your earnings but will still owe that amount in self-employment taxes when you file your personal tax return. Paying yourself with his method may be a good option if you are part of an LLC with more than one member where you are not very active, but is probably not the best option for single-member LLCs or situations where you have a leading role in business management.

Distributions

Lastly, you can choose to pay yourself through distributions. This means that you will take money out of your business profits and pay taxes on that money as personal income. Often, the distribution method is used in multi-member LLC, pass-through entities where each member of the LLC receives a percentage of the company’s profits earned in a year. The amount each member of the LLC receives is usually defined in the operating agreement . In this situation, the LLC members each report how much of the profit they received when they file taxes and pay full income tax on that number. For a single-member LLC using the distribution method, business owners will still pay income taxes on the distribution amount they are owed and will also report the LLC’s profits and losses on their personal income taxes using Schedule C. You will also be required to pay self-employment taxes on your distribution.

Paying Yourself in a Single-Member LLC vs. Multi-Member LLC

As you can see above, an important factor to consider in how you pay yourself is whether you are part of a single-member LLC or a multi-member LLC. If you own a single-member LLC, then you may have more freedom in choosing how you get paid. A single-member LLC owner often elects to take a draw, which may be a more difficult system to manage with a multi-member LLC. If you are partnered with other people in a multi-member LLC, you may be required to take a salary or a distribution as these methods are easier to track among multiple LLC members.

No matter which method you choose, be sure to keep good records so that you can stay organized and compliant with all applicable laws.  

Other Key Considerations

1099 vs. payroll.

If you opt for distribution or independent contractor payments, you must issue a 1099 for the money you receive. The 1099 methods are simpler than setting up payroll for yourself but can be trickier when it’s time to file your personal income tax return. You will also be required to pay self-employment tax when you file.

Establishing a payroll system and giving yourself a wage or a salary may require more setup and require you to withhold taxes from your pay, but can be beneficial in the long run. This is especially true for multi-member LLCs and may be an easier way for you to remain compliant.

The bottom line is that paying yourself through payroll is generally the best option if you have more than one LLC member. If you are the only LLC owner, then you can choose either payroll or a 1099 method, but payroll is almost always the safest option.

Setup & Licenses Required To Process Payroll

If you decide to pay yourself through payroll, then there are a few things that you will need to do in order to set up your system. First, you will need to obtain an Employer Identification Number (EIN) from the IRS . You can apply for this online, and it is free to obtain.

Once you have your EIN, you will need to set up a payroll system. This can be done through a number of different software programs, or you can outsource it to a third-party provider.

You will also need to obtain the necessary licenses and permits from your state in order to process payroll. Each state has different requirements, so be sure to check with your state’s labor department to find out what you need.

Employment Taxes

In addition to obtaining the necessary licenses and permits, you will also need to withhold certain employment taxes from your paycheck if you opt for the payroll method. The most common employment taxes withheld as payroll tax include federal income tax, Social Security tax, and Medicare tax. LLC owners should also be aware of self-employment taxes.

If you aren’t sure which taxes you need to withhold, it might be best to chat with an accountant or tax advisor. They can help you understand how to pay taxes that you owe and whether you are required to pay self-employment tax in your situation.  

How Much Should You Pay Yourself as the Owner of the LLC?

There is no one-size-fits-all answer to this question and no average salary range that works for every LLC business owner. The amount that you pay yourself should be based on a number of factors, including LLC profits, the amount of money you need to live on, and the amount of money you want to reinvest back into the business.

As a general rule, you should pay yourself reasonable compensation to cover your living expenses and then reinvest the rest back into the business. This will help you to grow your LLC while still being able to cover your personal bills. Remember that if you are paying yourself a salary from the LLC, the IRS will only allow what it defines as a “reasonable salary.”

If you are unsure of how much to pay yourself, consult with an accountant or financial advisor. They will be able to help you determine the best way to structure your pay so that you can meet your business goals. A business advisor may also be able to help you manage your personal assets and expenses and help you make better financial decisions when running your own business.  

How Do I Pay My Employees From My LLC?

If you have employees working for your LLC, then you will need to pay them through payroll. Just like paying yourself through payroll, you will need an EIN from the IRS, have access to a payroll system or third-party payroll service, and withhold the applicable taxes from your employees. Be sure to check federal and state guidelines to find out which employment taxes you need to withhold from your employees’ paychecks.

Choosing a payment structure for yourself and understanding the laws regarding how you pay employees can be confusing at first, especially if you are a small business owner. But by considering your LLC’s structure and the tax implications of each payment method, you can make an informed decision about your payment systems.

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How to Do Payroll: The Small Business Owner’s Guide

Kat Boogaard

There are plenty of reasons that you started your small business. You have a passion for what you do. You wanted more flexibility and control over your career. You saw a need that you could fill. 

For the most part, small business ownership is everything you hoped it would be. But, that doesn’t change the fact that it comes with some not-so-fun responsibilities as well.

One of those dreaded tasks? Bookkeeping. In fact, nearly half of small business owners say that bookkeeping is the to-do that they loathe the most. Combine that with all of the other things that business owners have on their plates, and it’s no wonder that a staggering 72% of them admit to feeling overwhelmed by their responsibilities. 

Here’s the good news: We’re here to help you tackle one of your major accounting tasks with ease and confidence. This article breaks down how to do payroll, and answers some of the most common questions that business owners have. 

What exactly is payroll?

You’ve likely heard the term payroll before, but it’s often used in a variety of contexts. That isn’t a mistake—payroll really does have two parts to its definition.

In its simplest form, payroll refers to the total amount of money that a company pays to its employees (for example, your company has a payroll of $80,000). However, it can also be used to represent the actual process a company goes through to calculate and process payment for employees (for example, your company runs payroll every two weeks). 

From calculating wages to paying payroll taxes, there’s quite a bit involved in the payroll process—and we’ll break that all down in later sections. But, if you want to think about payroll in terms of a straightforward framework, it can be separated into three main components:

• Preparation: First, you need to lay the groundwork. This is when you’ll ensure that you have the necessary forms and information from employees, determine your payroll schedule, and get set up with a payroll provider, payroll service, or payroll system.
• Payment: Here’s when you’re actually paying employees, whether it’s through direct deposit or traditional paychecks.
• Post-payment: Your work isn’t over just because your employees have their money in-hand. The IRS requires that small businesses handle a number of logistics, including paying payroll taxes and maintaining a payroll register. 

That’s the gist of how to do payroll. With that broad context in mind, let’s sink our teeth into more of the nitty gritty details that you need to know. 

Laying the groundwork: What you need to run payroll 

It’s easy to think that the payroll process starts when it’s time for you to actually dish out your employees’ wages. 

However, in order for you to run payroll correctly , there’s quite a bit that needs to happen before employees ever get that money in their bank accounts—and it all starts when you hire a new employee. 

Here are some upfront tasks you’ll need to take care of before you can pay your employees’ wages:

1. Decide on an accounting and payroll system

Attempting to handle all of your accounting tasks manually will only add to your stress. It’s better to proactively get accounting and payroll software in place, so that you can keep all of that information centralized and organized to begin with. 

Want a simple way to run payroll? Hourly is a great option. 

2. Collect the necessary information and paperwork from employees

Whenever you have a new employee join the team, you’ll need to ensure that you collect the appropriate information from them. This includes:

• IRS W-4 Form : Employees will fill this out so that you can calculate how much federal income tax you should withhold from their pay.
• State W-4 Form : A large chunk of states also require that employees fill out a state W-4 form to help employers calculate local tax withholding.
• U.S. Citizenship and Immigration Services (USCIS) Form I-9 : This form proves that an employee is eligible to work within the United States.
• Direct Deposit Enrollment: If you plan to pay employees via direct deposit (rather than printed paychecks), you’ll need them to fill out a direct deposit application so that you have their authorization and necessary bank account information. 

Of course, there’s other new hire information you’ll need to get as well—such as their emergency contacts, their benefits enrollment (if you’re offering health insurance, retirement savings plans, etc.), and their employment application. 

It’s smart to create a simple checklist for yourself so that you can make sure you get all of these details right away and don’t need to chase them down at a later date. 

3. Determine your payroll schedule

How often do you intend to pay your employees? In this step, you’ll figure out your pay period —which is the recurring schedule you’ll use to run payroll. Some of the most common options are:

• Weekly pay: Employees are paid every week .
• Bi-weekly pay: Employees are paid once every two weeks, with payday on the same day of the week (such as a Friday).
• Semi-monthly pay: Employees are paid twice per month on specific dates (such as on the 15th and last day of the month).

There isn’t one option that’s inherently better than the other. However, you’ll want to check if there are any mandated payment frequencies within your state to confirm you’re complying with any laws about pay periods. 

4. Establish a payroll bank account

Maybe you already have a business bank account set up. That’s a great first step, but you’ll likely want a separate bank account that you use just for paying employees. 

This will help you keep payroll separate from any of your other business expenses, which allows for easier and more accurate record keeping. It can also prevent account overdrafts. 

5. Set up direct deposit (if necessary)

If you plan to offer direct deposit for employees, you’ll need to use the information they listed on their direct deposit enrollment form to get them set up for deposits through your accounting or payroll system. 

How to do payroll: 5 simple steps to follow

You have the foundation laid, and now your small business is ready to start actually paying employees. Let’s cover a few simple steps for payroll processing. 

1. Figure out the employee’s gross pay

You’ll start by determining the gross pay for each employee. This is the total amount of money that you owe them (without any withholdings or deductions). 

So, if the employee is hourly, you’ll calculate the number of hours worked in the pay period and multiply that by their hourly rate, whether for regular hours or for overtime hours. If they’re a salaried employee, you’ll determine the total amount owed for that pay period.  If you pay yourself as an employee , be sure to include your salary.

2. Calculate withholding and deductions

Employees don’t actually get to collect their gross pay. As the employer, there are a number of deductions you’ll need to calculate, including federal income taxes, state and local income taxes (if applicable), and payroll tax. 

Payroll tax is a broader bucket that includes Social Security and Medicare taxes (known as FICA taxes), federal unemployment taxes (FUTA), and state unemployment taxes (SUTA). 

This is why it’s important that you collect those initial forms when you bring on a new hire, as you’ll use that information to inform this process and determine how much you need to withhold. 

Additionally, if employees contribute toward their health insurance, retirement savings plan, or any other benefits you offer, that will need to be deducted from their paycheck as well.

Garnishments, such as child support or a federal tax levy may sometimes also have to be deducted.  

3. Distribute payments

It’s time for your employees to get the money they’re owed. In this step, you’ll write their paychecks or issue their direct deposits. 

4. Make payroll tax deposits

Once you’ve paid your employees, you’ll need to make your payroll tax deposits to the IRS. 

These deposits will cover the amount you withheld from employees for their federal income tax, the amounts you withheld for Social Security and Medicare, and the amounts you owe for your own Social Security and Medicare taxes.

You’ll make these payments on a semi-weekly or monthly basis, depending on the size of your payroll. Don’t panic—it’s relatively easy to do by using the IRS’ electronic filing system . 

Previously, employers could also use Form 8109. However, be aware that was discontinued by the IRS in 2011 and all business owners are now required to make federal tax deposits electronically. 

In addition, you will need to make your state income tax deposit based on that state’s requirements. 

5. Update your payroll register 

You need to keep accurate records for your payroll processing , and this is where your payroll register comes into play. This is a document that displays the following for each employee:

• Total gross pay
• Total and type of each deduction
• Total net pay

If you’re using a payroll system (like Hourly ) or accounting software, your payroll register will likely be part of that solution—and might even get updated automatically. 

Don’t let payroll stress you out

Business owners have a lot on their plates. But, payroll shouldn’t be something that adds even more stress and headaches. 

One surefire way to make managing payroll way more straightforward is to find a payroll service or payroll system that can do most of the hard work for you. 

Hourly makes it easy to set your pay schedule, automatically calculate payroll taxes, provide direct deposits and pay stubs, and keep adequate payroll reports. So, you can avoid going cross-eyed while looking at spreadsheets and IRS forms and get back to what matters most: running your business. 

Ready to take the pain out of payroll processing? Get started with a free trial of Hourly . 

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How Long Do You Have To Keep Payroll Records?

How Pay On Demand Benefits You and Your Employees

The Small Business Guide To Payroll Deductions

Human Resources | How To

How to Do Payroll for Small Businesses (+ Video Guide & Template)

Published November 13, 2023

Published Nov 13, 2023

REVIEWED BY: Heather Landau

WRITTEN BY: Genevieve Que

This article is part of a larger series on How to Do Payroll .

• What is Payroll Processing?

Step 1: Set Up Your Business as an Employer

Step 2: establish your payroll process, step 3: collect your employees’ payroll forms when hired.

• Step 4: Collect Time Sheets, Review & Approve

Step 5: Payroll Calculations

• Step 6: Pay Employees, Tax Agencies & Benefits Providers

Step 7: Do Year-end Payroll Tax Reports

• Step 8: Document & Store Your Payroll Records
• Options and Alternatives

Unpaid Payroll Tax Penalties

Bottom line.

Handling small business payroll includes having to consider everything, from setting up your business as an employer to paying your employees, tax agencies, and other applicable entities. When learning how to do payroll, there are several steps you must follow to ensure that you’re fully compliant with federal and state laws.

While small business owners tend to be well-versed in the product or service they offer, not everyone has the knowledge or time to tackle all payroll operations. For those small business owners, we recommend trying QuickBooks. It is an all-in-one payroll service that calculates payroll, generates reports, pays bills, and files taxes and forms. Click below to start a 30-day free trial.

Visit QuickBooks

If you’d rather learn how to do payroll yourself, follow our eight steps below. We’ve also prepared an instructional video and a free downloadable checklist to help you.

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Payroll software like QuickBooks can set up a direct deposit for your employees. In addition, it provides a self-service option, so they can edit their payment options, view subscription details, and many more. Your employees can use the mobile-optimized, self-service option to download the documents themselves.

What Is Payroll Processing?

Payroll processing refers to the steps and activities involved in calculating, distributing, and managing employee compensation within an organization. It is a critical function in human resources and finance departments, ensuring that employees are paid accurately and on time. It can be done manually, but having an automated process in place ensures an accurate and efficient payroll processing. Read our guide to learn more about what payroll is and what it entails.

Assuming you’ve already established your business and applied for any required licenses, the first step in doing payroll is ensuring that your business has met all the legal requirements to operate as an employer. Consider any industry-specific payroll rules you may have to follow as well.

• Apply for a Federal Employer ID Number (EIN).
• Verify your state tax identification number is the same as your federal one; if not, determine whether you need to apply for one or if it’s automatically assigned.
• Sign up for an account with the Electronic Federal Tax Payment System .
• Start a bank account solely for payroll transactions (separate from your main business account).
• Sign up for any applicable state electronic tax payment accounts.
• Purchase workers’ comp insurance ; most states require it.

Now, you will need to make some decisions that will impact how you run payroll each period. You’ll need to determine what will work for your business so you can ensure your team is trained on the process properly.

Looking to make your payroll process management more efficient? Check out our top tips for effectively managing your payroll .

Explore the “why” behind each area. Be sure to consider the needs of both your employees and your business, in addition to any legal requirements.

• Pay schedule : Will you pay weekly, biweekly, or semimonthly?
• Types of employees (not contractors) : Full time vs part time? Exempt vs nonexempt?
• Tracking work time : Will you need to track work hours? If so, how will you do it, and when will they need to be reported to you?
• Benefits : Will you be offering benefits? Who will pay for them? If employees are paying for them partially or in full, how will you manage the payroll deductions?
• Taxes : How often will you need to pay taxes, and which ones are you subject to? Will you need to pay state taxes? Local? Find out the rates in advance so you know how much to withhold.
• Payroll processing and calculations : Will you calculate and process payroll using Excel, by hand, with a calculator, or with a payroll service?
• Paychecks : Will you be cutting checks or paying via direct deposit? Pay cards? Cash?

You should also consider whether you want to use a payroll solution to help make the process easier; the right provider can be the difference between investing three days to run payroll vs an hour. To learn how easy it is to do payroll with some of our recommended software, check out provider-specific payroll guides below:

• How to do payroll with QuickBooks
• How to do payroll with Gusto
• How to do payroll with Patriot
• How to do payroll with OnPay

You’ll need some important payroll documents from your employees to run payroll properly—and these are best collected during their onboarding. These include tax and work authorization forms, which the employees need to sign.

You’ll use the data on the forms described below to add the employee to your HR or payroll system if you have one. It’s a good idea to store this information as a paper document or an electronic personnel file.

• Federal W-4
• State W-4 (or equivalent)
• Other Payroll Forms

A W-4 is the federal tax withholding document that tells you what tax rate to use for the employee. Collect a signed Federal W-4 form for tax withholding. You don’t need to submit this to the IRS, but you should store it in a paper personnel file or electronically.

For more in-depth information about W4, here’s a layman’s guide to W4 and how it compares with the W2.

The state tax withholding document is similar to the federal form and may be called by a different name in your state. Collect a signed State W-4 form for tax withholding and store it in a paper personnel file or electronically.

Collect a signed I-9 Form for work eligibility verification (within three days of the employee’s start date). You’ll want to make sure the employee can verify their identity and eligibility to work in the US with a passport or two forms of identification.

Get direct deposit information from employees via a voided check (if applicable).

Also, you’ll need to register your employee in your state’s New Hire Reporting Program (generally within 20 days). Make sure that you report all new or rehired employees to your state. Payroll software, like QuickBooks, often files these reports automatically.

For more state-specific details on forms and employee onboarding, check out our state payroll guides—just click on your state in the map below and you’ll be redirected to our state payroll guide.

State Payroll Directory

Step 4: collect time sheets, review & approve.

Now you’re ready to start collecting data on your employees’ work time to help determine how much you need to pay them. You’ll need to find the total hours worked for the period if you’re paying hourly employees. Salaried employees typically receive the same pay each period, but you can still track their work hours for visibility if needed. Calculating hours worked is as simple as having the employee write down their start and end times each day and counting up the hours—lunch breaks are not counted in the total.

Most businesses start with a simple time sheet. As they grow, they often move up to a time and attendance system or time clock to manage employee schedules, break time, and hours worked. Here’s an example of an electronic time sheet from one of our top-recommended free timekeeping vendors , Homebase.

Homebase Digital Timecard (Source: Homebase)

Once you know how much an employee has worked for the pay period, you can start figuring out the important payroll calculations. That includes gross pay, taxes due, deductions for insurance premiums and other benefits, and final net pay.

Calculating Gross Pay

Calculating gross pay is as simple as adding up the straight time hours (up to 40 hours within a week) and multiplying by the employee’s hourly rate. Then, add up the overtime hours worked in the pay period and apply the employees’ overtime pay rate to those hours. Straight time is paid at the employee’s regular pay rate, while overtime is generally calculated at 1.5 times the regular rate of pay.

Calculating Payroll Deductions & Taxes

Doing payroll requires you to know in advance what payroll deductions you’re going to make. Deductions include federal and state payroll taxes , benefits you might offer, and things like unemployment insurance or Social Security.

Here’s a list of potential deductions with links to more information to calculate your payroll. If you use payroll software like Gusto, deductions are processed automatically.

Examples are:

• Social Security and Medicare (FICA)
• Federal unemployment tax (FUTA)
• Benefits you offer employees, like health insurance
• Tax deductions based on employee tips
• Miscellaneous deductions such as a uniform expense

To process those deductions, add up all the deductions for each employee to get a total; then subtract that total from the employee’s gross pay. Alternatively, you can list each deduction as a line item and subtract them one by one from the employee’s gross pay until you come up with a net pay amount.

If you’re primarily struggling with the numbers side of payroll, our article on payroll calculations may be a better fit. Just be sure you also have a good grasp of the general steps you should take to run payroll.

Free Payroll Calculators

Use our calculators in the articles below to make doing payroll yourself even easier.

Gross Pay Calculator | Overtime Pay Calculator | FICA Tax Calculator

FUTA Tax Calculator | Time Card Calculator | PTO Accrual Calculator

Employee Mileage Reimbursement Calculator

For more help, check out our payroll calculation guide.

Step 6: Pay Employees, Tax Agencies & Benefits Providers

Once you subtract deductions from gross pay, you’ll know the net amount you need to pay each employee, including totals for employment taxes and benefits you need to pay out. Be sure to follow the pay schedule you initially set so employees always know what to expect (if you committed to paying wages every Friday, give yourself enough time to process).

Taxes and benefit providers have their own due dates. Many employers are required to pay these expenses monthly, but it can vary. You’ll need to pay out the amounts you withheld from your employees’ paychecks in addition to any employer payroll tax and premium amounts your business owes.

Always check before making any payments to determine whether you have enough funds in your payroll bank account. Spending more money than you have can result in unnecessary fees and litigation. If you are unsure of what to do, here’s a guide on how to go about paying your employees .

As the end of the year draws near, you’ll need to prepare to distribute year-end payroll tax reports. Employees must receive their W-2 forms by Jan. 31 of the following year, and the forms must show their total earnings and taxes paid. If you’re paying independent contractors, you’ll need to prepare 1099-NEC forms instead; this will show earnings but no taxes.

You can download these forms by clicking on the images.

Form 1099-NEC: Nonemployee Compensation

Step 8: Document & Store Your Payroll Records

To remain compliant with federal labor laws, you’ll need to document specific data for each pay period. Retain payroll documents —like timecards, pay stubs, and any information regarding pay increases.

If you’re using software like QuickBooks, the documents are already online or can be uploaded and attached to the employee record. If you’re maintaining documents manually, you’ll want to ensure they’re stored securely.

If you’re still unsure about what payroll is, check out our guide to payroll for more information.

Payroll Processing Options and Alternatives

Processing payroll in-house can be complex and time-consuming, especially for larger organizations or those with more intricate payroll needs. There are several alternatives to handling payroll processing yourself:

• Payroll Software : Consider using dedicated payroll software solutions. These tools are designed to streamline the payroll process, automate calculations, and ensure compliance with tax laws and labor regulations. Popular payroll software options include Gusto, ADP, Paychex, and QuickBooks Payroll. For more options and information, read the 9 Best Payroll Software .
• Professional Employer Organization (PEO): PEOs are organizations that provide comprehensive HR services, including payroll processing, benefits administration, and compliance management. By partnering with a PEO, you can outsource many HR functions, allowing you to focus on your core business operations. Read our Top 8 Best PEO to help you get started.
• Bookkeeping or Accounting Firms : Some accounting firms offer payroll processing as part of their services. They can handle payroll calculations, tax compliance, and reporting on your behalf, ensuring accuracy and legal compliance.
• Outsourcing to a Payroll Provider: There are numerous payroll service providers that offer outsourcing services, where they take care of all aspects of payroll processing, from data entry to tax compliance. This can be a cost-effective solution, especially for small to medium-sized businesses.

Unpaid payroll tax penalties can vary depending on the jurisdiction and the specific circumstances of the non-compliance. Payroll taxes typically include Social Security, Medicare, and federal income tax withholdings, as well as state and local payroll taxes where applicable.

Penalties for unpaid payroll taxes can be assessed by both federal and state tax authorities. Here are some common penalties associated with unpaid payroll taxes:

• Failure to Deposit: Employers are required to deposit withheld income taxes and payroll taxes periodically, such as monthly or semiweekly, depending on the size of their payroll. Failing to make these timely deposits can result in penalties. The amount of the penalty depends on how late the deposits are and the amount owed.
• Late Filing: Failing to file required payroll tax forms, such as Form 941 (Employer’s Quarterly Federal Tax Return) or Form 940 (Employer’s Annual Federal Unemployment Tax Return), by the due date can lead to penalties. The penalty amount can increase the longer the filing is delayed.
• Failure to Pay: This penalty is imposed when employers don’t pay the full amount of payroll taxes owed by the due date. The penalty is typically a percentage of the unpaid amount and can increase the longer the taxes go unpaid.

In addition to penalties, interest charges can accrue on unpaid payroll taxes. The interest rate is typically determined by the tax agency and can compound over time.

Learning how to do payroll can be a pain. You have to make sure your business registers with all the right agencies. You’ll also need to fill out forms for each employee and purchase workers’ compensation coverage, all on a tight deadline (less than 20 days for most states by law). Even seasoned business owners can get overwhelmed by the complexities of payroll compliance . That is why simple software solutions are the easiest and most time-saving options for business owners overall.

About the Author

Find Genevieve On LinkedIn

Genevieve Que

Genevieve has more than 13 years of writing experience, working with different clients in various industries. Genevieve also worked as an HR Head of a local manufacturing company, and has helped small businesses set up their business and HR processes.

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How to do payroll yourself for small business.

Bringing new employees on board is a sign of growth. Yet, as a business grows, so do the admin responsibilities. Processing payroll is undoubtedly among the crucial tasks in that regard.

While you need plenty of time and energy to run payroll, the task is manageable if you understand it. With the proper knowledge and a thorough approach, you can pay employees on time, take care of taxes, and get everything in order.

Continue reading to learn all about doing your own payroll.

Table of Contents

How to Process Payroll Yourself

Easy alternatives you should try, key takeaways, faq on payroll.

The first thing a business owner needs to run payroll is proper organization. This aspect relates to every other step in the payroll process. 

Everything else will depend on performing the precise steps at the right time. This includes completing the proper forms and paying payroll taxes. You’ll also need to know the necessary payroll deductions.

Here’s a list of tasks necessary to run payroll:

• Form W-4 completion
• Employer identification number signup
• Choosing a schedule
• Calculating the income tax
• Paying payroll taxes
• Filing tax forms
• Form W-2 completion

Have All Employees Complete a W-4 Form

The W-4 form helps determine state and local taxes withheld from an employee’s gross pay. If employees haven’t changed jobs since completing the form, they don’t need to complete it again. It’s worth noting that the IRS revised the W-4 in 2020.

The updated form doesn’t ask for personal or dependency exemptions. This information isn’t relevant for tax withholding purposes. Employees need to state if they claim any dependents. Plus, they can adjust the withholding amount if they’re eligible for tax deductions or hold a second job.

Getting precise W-4 information is crucial for business owners. This info helps determine tax withholding. Employees benefit from W-4 revisions, too, as they can use the form strategically. 

In particular, completing the new W-4 form may exempt employees from extra taxes. Alternatively, it could make them eligible for year-end tax returns.

Find or Sign Up for Employer Identification Numbers

Every business with salaried employees needs an employer identification number (EIN). The EIN is for businesses what a social security number is for individuals. Using this 9-digit number, the IRS can perform business identification. This helps them determine tax payments.

If a business is paying employees, the law requires them to apply for an EIN. The number is necessary for payroll tax purposes even if there’s only one employee in the company. 

Sole proprietors don’t need to file for an EIN. They can use their social security number instead. However, an EIN can be helpful even in those cases, as it helps business owners separate personal and business finances.

Rules about EINs apply to household employers as well. For instance, an EIN is necessary for paying employees like house assistants or nannies.

Getting an EIN isn’t complicated. Employers can complete the process online using the IRS website. The necessary information includes the following:

• Business type (whether it’s a sole proprietorship, LLC, corporation, or other)
• The business address
• The reason for the EIN request (it’s usually to hire an employee)
• Additional business details

Registering an EIN via the website is the fastest option. There are alternative ways to register through mail or fax, although they might take more time.

Choose Your Payroll Schedule

You can manage payroll following a particular schedule. The schedule refers to the frequency of the given pay period. This can be weekly, biweekly, or twice or once monthly. Every employer is free to choose the pay schedule for their business.

The schedule will depend on payroll calculations relative to the business’s cash flow. Simply put, a particular plan will work well for one company and be incompatible with another. It will come down to how often the business can afford to pay employees monthly.

Determining the pay period will depend on the following factors:

• Federal income taxes
• State income tax
• Social Security and Medicare (FICA) taxes
• FUTA tax payments
• State unemployment tax (SUTA)
• Contractor payments
• Direct deposit fees
• Expenses for mailing employee paychecks

Some states may have particular requirements regarding the pay period. For example, California, Massachusetts, New York, and several others mandate minimum weekly payments.

You should keep the payroll records up to date with all details. Federal, state, and local requirements may apply depending on how long you need to hold on to payroll records.

Calculate and Withhold Income Taxes

Calculating payroll taxes is undoubtedly the most complex part of the payroll process. Business owners must calculate each employee’s gross pay and federal income tax. They also have to account for tax deductions and withhold the exact payroll tax.

Federal and state income taxes are easier to calculate using the W-4 form. This form reveals important information that impacts the total tax payments and withholds:

• Marital status: Payroll taxes will differ for single, married, and widowed employees.
• The number of jobs the employee and their partner hold: This information will impact tax withholds.
• Dependants: If the employee has dependents, their payroll tax liability may be smaller.
• Additional payroll tax: The employee might want the business to withhold an extra amount, which is optional.

The W-4 form has a helpful table for calculating payroll tax. The table is on the last page of the document and can clarify the tax situation. Still, manually calculating taxes for payroll is a complicated process. Many employers will use payroll software to ease the process.

With the appropriate payroll software, the employer needs only enter the correct data. The software will calculate the exact amount automatically. This way, covering your federal, state, and local income taxes becomes easier.

Pay Payroll Taxes

The federal income tax isn’t the only obligation of the employer. FICA taxes—Social Security tax and Medicare tax—count as well. FICA stands for Federal Insurance Contributions Act. Fortunately, these components of the total payroll tax are flat. In other words, they’re the same for all employees.

FICA taxes for 2022 amount to 7.65% of an employee’s paycheck. The precise amount may change, so it’s best to keep up with yearly trends.

Once the business withholds the payroll tax, it must deposit it according to the IRS schedule. Businesses that file payroll taxes up to $50,000 must deposit monthly. Deposits are semiweekly for filed taxes over $50,000.

Per tax filing deadlines, deposits are due on workdays, excluding holidays and weekends. The deadline for semiweekly deposits is three business days. Monthly deposits are due every 15th of the month.

Federal unemployment taxes are different. Businesses need to pay federal unemployment tax quarterly. The deadlines are April 30, July 31, October 31, and January 31.

File Tax Forms & Employee W-2s

If you successfully find your way through the payroll system, you’ll need to file appropriate tax forms. This process won’t make doing your own payroll any easier. But it’s necessary for large and small business owners alike.

The good news is that, as the payroll provider, you can access the necessary files relatively quickly. The documentation is available online from the IRS website. The IRS updates most forms every year. Even if you’ve been processing payroll and taxes for a long time, you’ll need a fresh copy of the documents.

The easiest way to file for federal and state taxes is to do so online. You can fill out the IRS host forms on the website. It would be best to download the document instead of completing it on the page. That way, you won’t lose any changes if your browser crashes.

Moreover, when filing taxes, it’s crucial to be aware of potential tax deductions for W-2 employees . Understanding these deductions can optimize the filing process and help both the employer and employees save on taxes.

The W-2 form will be among the most important documents you’ll need to file. This form is critical because it contains vital information about:

The W-2 form is important for everyone—the company, business owner, and individual employees. It’s a summary of each employees’ gross pay, received income, and taxes. There are other forms employees might have, but the W-2 is the most common.

In fact, many resources may refer to a traditional worker as a “W-2 employee.” Employers hire W-2 employees to work under specified conditions. The employer provides the means of work like tools, software, computers, and office space.

Besides the employees’ paychecks, W-2 workers enjoy other benefits. These may include overtime pay, vacation days, insurance, and more. The employer is usually responsible for issuing the W-2 form and monitoring its filing status.

It’s no surprise that doing your payroll manually sounds like a headache. You need to mind the gross pay of your employees and Social Security and Medicare tax forms. And you have to keep each pay period on track. Plus, if you have hourly employees in addition to regular workers, everything gets more complex. 

And that’s not all.

Payroll processing might be too much for someone running a small business. Luckily, you don’t have to handle it yourself. There are alternatives that make the payroll system less daunting. The most popular options are to use a payroll service or hire an accountant.

Use a Payroll Service

Payroll services handle payroll processing and several other financial aspects. The service works as a partner to a small business. It can often save precious resources like time and money. Besides leaving you free to run your business, a good service will make your payroll accurate and on time.

This kind of service can do more than handle payroll. Other processes these services may cover include:

• Tax withholding
• Wage garnishments

Plus, a quality service may provide additional technologies. For instance, specialized tools make employee hourly reports easier. Other services can organize payroll reports.

A professional employer organization (PEO) can be an excellent partner for small businesses. These services can process payroll and provide additional benefits like HR support.

Saving the resources you’d spend on processing payroll is a massive benefit. But even if you can afford the time and money, you likely aren’t an expert. Professionals working for payroll companies are just that. They can ensure complete federal and state law compliance.

You can also grant your employees access to payroll direct deposit and online tools. As a result, they can manage their finances easier. Finally, you can take care of your employees’ pay with absolute certainty. This will significantly reduce the everyday stress of running a business.

Before hiring a payroll company, you’ll want to ensure their services align with your needs. It would be best to list the areas that the service needs to cover. You might need a payroll-only service or a more substantial solution. The latter could be a PEO with HR support, employee benefits, safety, and/or workers’ compensation.

Hire An Accountant

Of course, hiring an accountant comes at a cost. But the benefits can easily outweigh the expense. The accountant can track your profits and losses, handle owed and received payments, and do the payroll.

Your accountant can also file taxes efficiently. They might maximize deductions and minimize your cost. In addition, they can handle the company’s assets, allowing you to get the most out of them.

Accountants can make onboarding easier, too. They can help you in classifying new employees or contractors according to IRS guidelines. Your accountant will also ensure everyone signs the right paperwork.

Finally, an accountant can perform sales charts and income report analysis. They can provide valuable insight into your business model and its effectiveness.

The most important aspect of doing payroll yourself is to be organized. Collect all of the paperwork and get informed on proper procedures.

You’ll need to ensure all W-4, W-2, and tax forms are present. You and your employees should fill out the respective forms and get them ready for tax submissions. You’ll also have to get your EIN ready to ensure compliance.

Pay particular attention on calculating and paying taxes. If you have any doubts about the process or regulations, don’t hesitate to get professional help.

Is It Hard to Do Payroll Yourself?

Doing payroll yourself is complex and takes up resources. If you’re exceptionally good at organization and paperwork, the process might seem straightforward. However, it will be hard for most.

Do I Need Payroll For One Employee?

If that one employee is you, there’s less payroll work involved. But if you’re hiring another person, you’ll need to do payroll for them.

How Much Does Payroll Cost For a Small Business?

The average payroll for small businesses can cost up to $150 per month.

Do I Need a Payroll Service to Pay Myself?

You’ll have fewer payroll tasks if you aren’t covering other employees’ wages.

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How to do payroll

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• How to Do Payroll

Trusha Palkhiwala Divisional Vice President, Global HR Shared Services, ADP Trusha ensures Global HR Shared Services delivers service excellence through digital transformation, focus on client service excellence, continuous improvement programs and global simplification projects.

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Knowing how to do payroll  is essential to the survival of any small business , even those with only a handful of employees. There are several ways to accomplish this task, but the one that’s right for you will depend on several factors. You’ll need to carefully weigh the size of your organization, your budget and how much time you have. A thorough understanding of what goes into payroll is also necessary to make a strategic decision. This guide covers:

• How payroll works

Process of setting up payroll

• Do it yourself payroll
• Payroll service providers
• Helpful payroll tools

Common payroll mistakes

Although there are many steps involved in doing payroll yourself, they are not indicative of the process when working with ADP. We use automation to simplify manual labor and free up your time.

How does payroll work?

Running payroll consists of many calculations. You need to account for wages, hours, benefits, tax deductions and garnishments, as well as comply with federal and state regulations throughout every step. The key to success is to set up a process from the beginning that helps address compliance issues. Otherwise, you could face costly penalties for filing payroll taxes incorrectly or missing a deadline. Bottom line – there’s a lot more to payroll than just cutting a check every few weeks.

No matter how you choose to run payroll, the setup is basically the same. To get started, you’ll need to provide federal and local authorities with information about your business and your employees. Creating a payroll schedule  and deciding what benefits to offer are also important, as are purchasing workers’ compensation insurance and opening a bank account dedicated to payroll.

Step 1 – Apply for an EIN

In the eyes of the government, individuals are identified by their Social Security Number. The same is true for businesses, except it’s known as an employer identification number (EIN) or federal tax identification number. Your organization will need one in order to file payroll taxes. Obtaining an EIN is free and can easily be done online or via mail using Form SS-4, Application for Employer Identification Number . Once approved, it’s permanent and can’t be cancelled.

Step 2 – Obtain your local or state business ID

States and local governments that assess income tax also require businesses to have an identification number. The manner in which you obtain one varies so check with the appropriate agency in your area for specific details. In general, you should apply for a federal EIN first because some states may use that same number to identify your business.

Additionally, many states require a state unemployment ID number, which must be different from the state income tax number. You will use this number to file state unemployment taxes on behalf of your employees.

And if your business is based out of New Mexico, Washington or Wyoming, you’ll need a separate ID number to apply for workers’ compensation insurance.

Step 3 – Collect employee documents

Once you have your business details squared away, your employees must fill out some paperwork for government agencies. Most of these documents are usually completed on a new hire’s first day on the job:

• Form I-9, Employment Eligibility Verification In the United States, use Form I-9 to verify the identity and employment authorization of individuals hired for employment.
• Form W-4, Employee’s Withholding Certificate To determine how much federal income tax to withhold from employee wages, each worker needs to complete a Form W-4 . It includes several steps for entering personal information and filing status, multiple jobs or spouses who work, dependents claimed, and other adjustments, if necessary.
• State withholding allowance certificates In most states, you’re required to withhold state taxes, as well as federal income taxes, from employee wages. Your employees will need to complete a state withholding certificate or the IRS Form W-4 for this purpose. Note that Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not impose a state income tax on wages.

In addition to completing government documentation, your employees must supply their home addresses and Social Security numbers so you can prepare and deliver their annual Form W-2, Wage and Tax Statement . And if you offer benefits, you’ll need their selections to make the proper payroll deductions.

Step 4 – Choose pay periods

When it comes to selecting a payroll schedule , you have four common options – weekly, bi-weekly, semi-monthly and monthly. The choice, however, may not be entirely up to you because certain jurisdictions require specific pay frequencies for different types of employees, employers or circumstances.

For example, manufacturing employers or those that are covered by a collective bargaining agreement may mandate a more frequent pay schedule than the general jurisdiction provision. These regulations also typically include requirements for how soon employees must be paid after the end of the pay period.

As you narrow your options, keep in mind that the more often you run payroll, the more you incur accounting and processing fees. Try to strike a balance between cost-effectiveness and convenience, while complying with jurisdiction requirements.

Common in the manufacturing, construction and restaurant industries, weekly pay suits manual labor jobs with low wages. These types of workers need to be paid more often to meet their living situations.

Biweekly pay

This method of pay may be best for hourly workers because overtime is typically charged by the workweek. Retail employees are sometimes paid in this manner.

Semi-monthly pay

Salaried workers often prefer semi-monthly pay due to its consistency and cash flow predictability. Many industries, including financial services and health care, use this pay model.

Monthly pay

Since it’s processed less frequently, monthly pay is the least expensive payroll option and is usually reserved for executives with high salaries.

Step 5 – Purchase workers’ compensation insurance

Workers’ compensation is a state-regulated program that pays for medical care, rehabilitation and a portion of lost income for employees who become sick or injured on the job. Additionally, dependents may be entitled to benefits in the event that an employee dies from a work-related injury.

In some areas of the country, you’re required to carry workers’ compensation insurance even if you only have one employee. You can purchase policies through private insurers, the state or both.

Workers’ compensation is not deducted from payroll, but when a claim is made, you must file reports with your state.

Step 6 – Offer optional benefits to employees

Benefits – such as health insurance, dental care, life insurance and retirement plans – can make your business an attractive place to work. Employees typically pay a portion of the cost, which is deducted from their paycheck. How much depends on the types of plans you offer and the level of coverage the individual chooses. Some benefits, such as those offered under a cafeteria plan that meets the specific requirements and regulations of section 125 of the Internal Revenue code, may be offered on a pretax basis. Others, like Roth IRA retirement plans, are deducted on a post-tax basis.

Step 7 – Open a payroll bank account

Many businesses choose to open a bank account separate from their business account just for the purpose of payroll. If you do so, use this account only for paying employees and fulfilling tax obligations. This will allow you to keep more accurate records of your payroll transactions.

How to calculate and do payroll on your own

Many small businesses begin doing payroll on their own  and if you only have a handful of employees, this may be a cost-effective option. Whether you can do it correctly, however, will depend on your individual skills and experience. Any miscalculations can result in costly fines that could impact your bottom line. To help avoid this, you’ll need to meticulously maintain all your payroll records , double check your data entry and meet all tax filing deadlines.

Step 1 – Calculate hours worked and gross pay

The first step in processing payroll manually is to calculate the total number of hours each of your employees  worked during a given pay period. Paper time sheets, spreadsheets and punch clocks are all ways to track this information. The total hours worked is then multiplied by each worker’s pay rate, or at least the applicable minimum wage, to determine the gross pay.

If your employees are nonexempt, remember to account for any tips they receive and overtime hours. To calculate overtime pay in accordance with the Fair Labor Standard Act (FLSA) , multiply each hour worked over 40 in a workweek by no less than one-and-a-half times the employee’s regular rate of pay. Although you can define when your workweeks begin and end, they must consist of seven consecutive 24-hour periods. Also note that certain states have different requirements for when overtime pay is due. For example, some require overtime payment after eight hours of work in a day.

Step 2 – Process payroll deductions

Once you’ve calculated gross pay, begin processing payroll deductions based on the employee information you gathered earlier.

First, make your pre-tax deductions. If you offer your employees qualified health benefits, 401(k) retirement plans or group-term life insurance, this is when you’ll withhold those contributions.

Next, calculate the statutory deductions, including federal and state income tax and Social Security and Medicare tax, also known as Federal Insurance Contribution Act (FICA) taxes. A portion of every employee’s paycheck goes to both FICA taxes (until the Social Security wage base is met), which you must match as the employer. You’re also required to pay federal unemployment tax (FUTA), but this is not deducted from employee wages and is solely your responsibility. Note that certain states and local jurisdictions have additional taxes that must be withheld from employees and/or paid by employers.

Lastly, subtract the post-tax deductions. Employees with court-ordered wage garnishments , Roth IRA retirement plans and union dues are subject to these withholdings.

Step 3 – Calculate net pay and pay employees

When all the pre-tax and post-tax deductions are subtracted from an employee’s gross pay, you’re left with net pay or take home pay. You have several options to distribute net pay, as long as you adhere to the various federal and state laws that govern wage payments.

If you’re using electronic delivery, you should be familiar with the specific requirements for each jurisdiction where you have employees. Most states also require employers to include a pay statement with each payment of wages. State laws vary as to how the pay statement may be delivered to employees.

In addition to compliance, flexibility and cost are top of mind today. Many employers are moving away from traditional checks because paper, materials and postage increase payroll operating expenses. Alternative options, such as direct deposit  and paycards , are less expensive, more convenient and can help attract prospective talent to your business.

Step 4 – File tax reports

Deducting taxes from your employees’ pay is only half the battle. You also have to file them with various agencies, including the federal government.

Generally, you can use Form 941, Employer’s Quarterly Federal Tax Return to pay your share of FICA taxes and report the amount of income tax, Social Security tax and Medicare tax you withheld from employee wages.

You may also have to file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return . Remember that only employers pay FUTA tax, so don’t deduct this from employee wages.

In addition to FUTA, most employers pay state unemployment taxes. These should be filed according to local guidelines.

Step 5 – Document and store payroll records

Aside from getting your payroll calculations correct, the best way to avoid compliance headaches is to take recordkeeping seriously. For each employee, payroll records 1 should include:

• Name and occupation
• Social Security number
• Day and time when an employee's workweek began
• Number of hours worked each day and workweek
• The basis on which the employee’s wages were paid
• Regular hourly pay rate
• Total daily or weekly straight-time earnings
• Overtime earnings for each workweek
• Gross wages
• Payroll deductions
• Allowances claimed
• Date of each payment and the pay period that it covered
• Taxes withheld

Records required for tax purposes must be kept on file for at least four years. All others should be saved in accordance with federal or jurisdiction requirements, whichever is greater. If in doubt, check with the appropriate federal, state or local agency to make sure you’re keeping the right documents for the correct length of time.

Additionally, many states have wage theft prevention laws, which require you to provide your employees with specific information in writing about their pay and other benefits. This generally must be done on the date of hire and whenever there are updates. You have to retain these notices for the period of time designated by the state.

Step 6 – Report new hires

New hire reports are shared with the National Directory of New Hires (NDNH) and matched against child support records at the state and federal levels to locate parents. For this reason, you’re required by federal law to collect and report seven data elements within 20 days of hiring a new employee to a designated state agency. Some states require additional data or have shorter deadlines, so check with local authorities.

How to do payroll using professional services

As your small business grows and you hire more employees, DIY payroll may become too difficult and time consuming. Or, you may decide that your efforts would be better spent on improving your products and services instead of administrative tasks. At that point, it makes sense to outsource payroll.

You have several options in this regard – work with a payroll service provider , outsource your entire HR department  with a professional employer organization (PEO)  or hire an accountant. Of the three, payroll service providers tend to be the most cost effective and offer a host of benefits, including accuracy, compliance support and data security.

Step 1 – Provide tax info and documentation

When you’ve decided on a payroll service provider, you’ll need to provide them with all your payroll records. These may include:

• Employee personal information Now is a good time to have your employees verify that all of their details are correct. A vendor that offers self-service will make future updates easier. Also remember to provide information on employees who may have left the organization in the previous year so they receive a Form W-2.
• Job information Among other details, you’ll need worker classification, exempt status, compensation, hire date, Form W-4 details and garnishment orders for every employee.
• Company information Your federal and state tax ID numbers and year-to-date and quarter-to-date tax payment totals will be necessary for your provider to file payroll taxes on your behalf.
• Applicable regulations Notify your new provider of all the government regulations that apply to your business.

Step 2 – Report agent authorization

The IRS requires that you notify them if you choose to work with a payroll service provider. This is done via Form 8655, Reporting Agent Authorization Form . It permits your provider to perform payroll tasks on your behalf, such as:

• Pay employees
• Prepare and deliver Forms W-2
• File certain tax returns (e.g., Forms 940 and 941)
• Receive payroll and tax deposit correspondence
• Pay the federal government on behalf of your business

Step 3 – Process your payroll

Thanks to automation, payroll software  makes running payroll much less labor intensive. In most cases, all you have to do is enter your employee and business data into the system once and update only as needed. The software then handles the calculations, employee payments and tax filings on your behalf.

To get maximum value from your purchase, consider integrating payroll  with other HR functions . Many providers can sync their payroll software with time clocks, general accounting ledgers and benefits administration. Such integrations  can improve efficiency and make tasks easier for both you and your employees.

Helpful payroll tools to get payroll done

Whether you’re running payroll manually or working with a service provider, you’re not in this alone. ADP offers a host of tools that can help both you and your employees manage payroll-related finances:

• Payroll calculators Estimate salary wages, hourly wages and the value of stock options.
• Retirement calculators See how much you should contribute to a 401(k), plan a withdrawal rate and more.
• Glossary of terms Get easy-to-understand definitions of common tax lingo and acronyms.
• Tax guides and forms Find copies of the latest documents you need for tax compliance.

Automating payroll is the best way to help help eliminate payroll mistakes . Short of that, you can save money and headaches by avoiding these common payroll errors:

• Misclassified worker status Misclassifying workers as independent contractors  when they are actually employees may result in penalties.
• Inaccurate payroll records There are both federal and state mandates for how long you must keep payroll records. Know what’s required of your business before destroying documentation.
• Late tax payments If you’re using a payroll calendar, track your payment dates and create tax deadline reminders to avoid late filings.
• Misprocessed garnishments You can be fined for failing to deduct garnishments or withholding them incorrectly.
• Underreported taxable compensation If you offer stock options or employee discounts, this must be reported to the government.
• Payroll fraud Updates to employee bank accounts and Forms W-4 should be done in person, instead of email, to prevent payroll phishing scams.

Payroll FAQs

For as much as advancements in technology have made payroll easier, an evolving workforce and compliance regulations continue to make it complex. Our frequently asked questions  can help you understand the basics of payroll.

What is payroll?

The term payroll can mean different things to different people. An employee might think of it in terms of how often and how much they are paid. While you, as the employer, may see the bigger picture of the process – the calculations, worker classifications and tax deductions – that goes into creating a paycheck. In reality, payroll is all of these things.

How do I start and do payroll?

To begin processing payroll , you will need to gather information about each of your employees and your company. This includes worker classifications, tax withholding details , Social Security numbers, business tax ID numbers and more. You’ll also have to determine your payroll frequency and the sort of benefits you’ll offer employees, since these are usually deducted from their wages. If you’re switching from  a manual payroll process to a payroll service provider, you may need training so you can become proficient using the product.

What are the benefits of using a payroll system?

One of the main benefits of partnering with a payroll service provider is that it gives you more time to focus on your small business operations instead of burdensome administrative tasks. It can also save you money because you’ll be less likely to make miscalculations or miss tax filing deadlines, which can result in expensive penalties. All of this is possible through automation. Payroll software pays employees and files taxes on your behalf and can help you keep pace with evolving compliance regulations.

How are payroll taxes calculated?

Payroll taxes are typically calculated by deducting the following from the employee’s gross pay:

• Federal income tax, based on Form W-4 details
• Social Security tax (6.2% of wages)
• Medicare tax (1.45% of wages)
• State and local taxes

As an employer, you’re required to match the Social Security and Medicare tax contributions and pay an additional 6% to federal unemployment tax, although this rate may be less if state unemployment tax applies.

This guide is intended to be used as a starting point in analyzing an employer’s payroll obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.

Tax figures provided are as of the 2020 tax year.

1 There are additional requirements for the basic records that an employer must maintain under various federal and state laws. Remember to check each jurisdiction’s requirements for compliance.

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Table of Contents

Mandatory payroll deductions

Voluntary payroll deductions, tips for small-business owners.

Payroll deductions are the specific amounts that you withhold from an employee’s paycheck each pay period. There are two types of deductions: voluntary deductions, such as health insurance and 401(k) deductions, and mandatory deductions (those required by law), such as federal income taxes and FICA taxes.

Although you’ll withhold payroll deductions from each employee, the specific deductions and amounts vary based on your employee’s withholding allowances, state or local taxes and the benefits your business offers.

Payroll processing is significant for the tax implications it has — for both you and your employees. Not only does your business have to pay payroll taxes, but as an employer, you’re also responsible for payroll deductions, or withholding specific amounts from your employees’ paychecks. It’s important to understand the different types of payroll deductions and how to take the steps necessary to process your payroll accurately and efficiently — as well as ensure you’re in compliance with government payroll regulations.

» MORE: NerdWallet's picks for best payroll software

When you run payroll, you’re responsible for ensuring that the proper payroll deductions are taken from each employee paycheck. Payroll deductions are specific to employees — meaning you’re not responsible for payroll deductions for independent contractors, only your employees.

When an employee receives their paycheck, they’re getting their net pay, as opposed to their gross pay. Gross pay is the total amount before payroll deductions, whereas net pay (also called take-home pay) is the pay the employee actually “takes home” after deductions. Your employees should see a break-out of their payroll deductions for each pay period on their paystubs, which is typically generated automatically if you use payroll software.

There are two types of payroll deductions: mandatory and voluntary.

Mandatory payroll deductions are required by law, like federal and state income taxes.

Voluntary payroll deductions , on the other hand, are payroll deductions your employees can elect to have, such as insurance or retirement plans.

Considering the two different types of deductions and the specifics involved with each, payroll deductions will vary from employee to employee and business to business.

Mandatory payroll deductions are those that are required by law, whether by federal, state or local government. These deductions are for tax purposes — as the employer, you withhold these mandatory payroll deductions from your employees’ paychecks and submit them to the IRS (or appropriate local agency) for payroll taxes.

Because these deductions are related to your payroll tax liability, it’s important to ensure that you consistently withhold the correct amounts when you run payroll. If you neglect to withhold these deductions, you’re responsible for the error, and failure to comply with the law can lead to fines and penalties.

Federal income tax

As an employer, you’re responsible for deducting federal income taxes from each of your employees’ paychecks every pay period. Federal income taxes are regulated by the federal government and are used for national programs like defense, education and community development.

The payroll deduction amount that you withhold from an employee’s paycheck depends on their gross pay, as well as the allowances they claim on their W-4 . Overall, the amount of federal income tax ranges from 10% to 37% of their taxable income.

If you use an automatic payroll service, the system will calculate the appropriate federal income tax payroll deductions per pay period based on the relevant employee information (W-4, pay period, gross pay). However, if you need to calculate this deduction manually, IRS Publication 15 has the details.

The next mandatory payroll deductions you must withhold from employees’ pay are FICA taxes. Like federal income taxes, FICA taxes are regulated by the federal government.

FICA includes Social Security taxes, Medicare taxes and, if applicable, the Medicare surtax. With this payroll deduction, you’re responsible for withholding the appropriate amount from your employees and paying an employer portion as well.

Unlike federal income tax, FICA tax payroll deductions are calculated using a flat rate that’s designated by the government.

For the Social Security tax portion, you must withhold 6.2% of an employee’s annual wages, up to $147,000 in 2022.

For the Medicare tax, you must withhold 1.45% of an employee’s annual wages.

The Medicare surcharge tax only applies once an employee’s wages reach $200,000 ($250,000 for employees who are married and filing jointly). You must withhold 0.9% of the wages that exceed this amount.

Therefore, excluding the Medicare surcharge, you’re responsible for withholding a total of at least 7.65% of your employees’ pay each pay period to comply with the FICA tax mandatory payroll deduction.

State and local taxes

Similar to federal taxes, individual states and municipalities might also require that employees pay income or other specific taxes and that you, as the employer, withhold the appropriate payroll deductions from their wages.

These requirements will vary based on the state or local government. Only nine of the 50 states do not have a state income tax, so this is the state-mandated payroll deduction that you’ll most often see.

The way you calculate a state income tax payroll deduction will also depend on the state. Some states have a flat income tax (like the FICA taxes), and others have a progressive income tax system (with brackets based on income, like the federal system).

With the large variation in this type of mandatory payroll deduction, you’ll want to consult your state or local tax agency to ensure that you’re complying appropriately with their regulations.

Court-ordered deductions

The last types of mandatory payroll deductions are court-ordered. These deductions will not apply to every employee. Typically, these deductions are withheld for employees who are court-ordered to pay child support or pay back a debt they owe.

If either of these scenarios applies to one of your employees, you’ll be responsible for withholding the proper amount from their wages, according to the specific requirements laid out in the court order.

Voluntary payroll deductions are not required by law, but are based on the fringe benefits your business offers and whether your employees opt into these benefits. Therefore, when it comes to voluntary payroll deductions, you only are responsible for withholding a certain amount from an employee’s paycheck if they’ve authorized you to do so. As an example, if an employee opts into a commuter benefits plan with a $100 per month deduction, you’ll withhold this amount from their paycheck to cover the cost of that plan. Not all employees will use the different voluntary payroll deductions that your business offers, making it important to properly organize and manage your payroll process.

It’s worth noting that there are pre-tax and after-tax deductions, depending on the specific benefit. With pre-tax benefits — typically health insurance, life insurance, certain 401(k) plans — you withhold the appropriate amount from your employee’s pay before withholding federal employment taxes.

With pre-tax benefits — typically health insurance, some life insurance, certain 401(k) plans — you withhold the appropriate amount from your employee’s pay before withholding federal employment taxes.

With after-tax benefits (Roth 401(k) plans, disability insurance, some life insurance), you deduct the appropriate amount after withholding government payroll taxes.

Let’s explore some of the most common voluntary payroll deductions.

Health insurance premiums and FSA accounts: Depending on the business health insurance options you offer (medical, dental, vision) and the specific plan your employee chooses, employees may elect to make payroll contributions to their health insurance or FSA accounts.

Retirement plans: If your business provides retirement plans, such as401(k)s or IRAs, an employee can make payroll contributions to those accounts.

Life insurance: Although many businesses offer standard life insurance that they pay for, an employee may decide to increase their coverage, in which case, you would deduct the appropriate amount from their pay.

Disability insurance: Similar to life insurance, some companies cover a standard disability insurance policy. However, if you don’t, or if your employee elects for greater coverage, you would deduct the funds for this benefit from their paychecks.

Commuter benefits: For employees who commute to work, you might offer a plan that allows them to deduct their commuting costs directly from their paycheck. If your employee opts into this type of plan, you’ll withhold a specific amount based on the details of the employee’s commute.

Stock plans: If you give your employees the ability to purchase stock in your business, you can withhold the corresponding deduction from their pay.

Job-related expenses: Job-related expenses may include union dues, meals or uniforms — and employees may elect to have these costs deducted directly from their paycheck.

Tuition or professional certification: If you have a program for your employees to take classes or receive professional certifications, they may also choose to have the respective costs taken from their pay.

Once again, the voluntary payroll deductions you’re responsible for are entirely dependent on the benefits you offer and the elections your employees make. Similarly, the specific amount you deduct from an employee’s paycheck per pay period will also depend on the specific benefit (IRA vs. job-related expenses, for example), as well as which of the voluntary deductions the employee has authorized.

Here are five things you can do to help your business manage payroll compliance.

1. Use payroll software

Using payroll software or working with a payroll service is a good way to streamline your payroll deductions and ensure your processes comply with the law.

With payroll software, you’ll be able to input all of your employee information, including tax withholdings, benefit elections, pay amount and frequency — and each time you run payroll, the system will automatically calculate the proper deductions and issue employee paychecks accordingly.

Payroll software is also beneficial in that it can generate employee pay stubs, allowing employees to see their breakdown of pay and payroll deductions, without you needing to create these documents yourself.

Moreover, many payroll software systems include payroll tax capabilities, helping you calculate and pay the payroll taxes that your business is responsible for.

2. Optimize your onboarding process

The majority of the information you’ll need to accurately complete payroll deductions for your employees is based on the information they provide — from W-4 tax withholdings to elections for health insurance and commuter benefits.

To ensure you’re withholding the correct amount from your employees’ paychecks from the beginning, create a clear and detailed onboarding process — allowing you to collect the necessary details from your employees’ new- hire paperwork as soon as they join your company.

Payroll software may offer another benefit here, as some systems provide an employee portal that allows your employees to input their tax and benefits information directly into the platform.

3. Make organization a top priority

Payroll deductions vary based on a number of factors — mandatory vs. voluntary deductions, state and local laws, employee elections and more — and it can be easy to make an error or miss an important step in this process.

Ensure you stay as organized as possible throughout your onboarding, payroll and the whole of your HR operations. Establish a process for each step involved in setting up your payroll, adding employee information, calculating paychecks and adjusting deductions as necessary.

Additionally, have a secure and standardized way to store employee information and data, so you can refer back to tax forms or deduction authorizations if needed. Although this may seem like a simple tip, with a process as involved and detailed as payroll, it’s nevertheless something to keep in mind.

4. Don’t forget payroll taxes

Payroll taxes are tied directly to payroll deductions, for your employees and for your business. Remember that in addition to the taxes you must withhold from your employees’ paychecks, you have your own business payroll tax responsibilities as well.

You’ll need to report payroll taxes on a quarterly basis. FICA and income taxes are reported to the IRS using Form 941. FUTA taxes are reported using Form 940 .

One of the most common payroll mistakes that small businesses make is missing payroll tax deadlines, as they’re due quarterly , instead of annually. Ensure that part of your payroll process involves managing your business’s payroll tax responsibility, as well as the payroll deductions you must withhold from your employees.

Once again, using a payroll software program with tax functionality is a great way to help you streamline and stay on top of this process.

» MORE: NerdWallet's picks for best accounting software

5. Take time to review your procedures

Remember to take time, whether on a quarterly (when you file your payroll taxes, perhaps), semi-annual or annual basis to review your payroll processes and make sure everything is accurate and working properly. Look for areas for improvement.

Even if you use payroll software, don't assume that everything is running automatically and that you never need to look through the system again. Payroll deduction errors can lead to fines and penalties from the IRS, it’s important to monitor your processes.

If through your review processes you find an error, are unsure of something or simply think you could benefit from outside input, you should never hesitate to ask for help. You can consult a payroll or HR expert, business accountant or tax advisor, depending on the kind of assistance you need. When in doubt, these professionals will be able to answer your questions or point you in the right direction to ensure your payroll deductions are in the best shape possible.

A version of this article was first published on Fundera, a subsidiary of NerdWallet.

On a similar note...

Home > Finance > Accounting

How to Do Payroll Yourself

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Hiring an employee is an exciting step in growing your business, but running payroll requires a significant investment of time, money, and energy—and the penalty for mistakes is quite high. 

Payroll software can take on most payroll tasks for you, and it can cost as little as $0 if you use free payroll software . But if you have above-average organizational skills and time to spare, you can also do payroll yourself with a payroll spreadsheet template and payroll calculator to ensure accuracy.

Gusto’s friendly design and full-service payroll system with HR features make it the best overall payroll software provider.

How to do payroll yourself in 7 steps

• Apply for an EIN
• Set a pay schedule
• Calculate gross wages
• Calculate tax deductions
• Make other paycheck deductions
• Distribute paychecks
• Remit taxes and file end-of-year tax paperwork

1. Apply for an EIN

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

Some sole proprietors—a tax designation for business owners who attach Schedule C forms to their 1040 tax forms—simply use their Social Security number as their business identification number. (Sole proprietors can apply for an EIN, and it’s a useful way to ensure your business and personal finances stay separate , but it’s not legally required.)

However, once you’ve hired an employee, you must apply for 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. (Heads up: household employers , such as parents who hire nannies, also need an employee identification number to pay employees.)

How to get an EIN

To get an EIN, visit the IRS’s website and file an online application . You’ll need to enter the following information:

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

You can also register for an EIN by fax or mail, though registering online is faster. The IRS’s website lists fax numbers, mailing addresses, and other application options.

By signing up I agree to the Terms of Use and Privacy Policy .

2. Set a pay schedule

Once you have an EIN, you can start programming your payroll software to pay employees on a regular basis. Of course, to do so, you first need to decide how often you plan to pay employees.

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. 1 So which schedule makes the most sense for your business?

The answer depends on your cash flow. Figure out how often you can afford to pay employees based on your profits—and don’t forget to include payroll expenses like direct deposit fees and stamps for mailing checks.

Before you finalize your pay schedule, check your state’s paycheck requirements too . For instance, Arizona requires you to pay employees at least twice a month, and it’s illegal to go more than 16 days without paying your workers. 2

3. Calculate gross wages

Your hourly employees probably likely submit timecards to you or clock their hours via an app or time-tracking system like Square . Once you have your employees' hours for the pay period, convert minutes into wages to calculate each employee's gross pay amount.

Salaried employees typically earn the same amount each pay period. If you pay an employee a bonus, you need to use a separate bonus tax calculator , not a regular salary paycheck calculator, to calculate the right tax withholding amount—bonuses have slightly different tax requirements than typical paychecks.

Most paycheck calculators have you enter the employee’s gross wages YTD (year to date) before you can enter their gross wage for a specific pay period. Make sure you have that information on hand before you start calculating paychecks.

Finally, don’t forget about changes to employees’ typical work schedules, such as sick leave, paid time off (PTO), holidays, or discretionary time off (DTO).

While you're calculating your taxes and employee wages, remember to claim the ERC (Employee Retention Credit) to regain up to $26,000 per employee during COVID-19. Read more about how to claim this credit in our article: How to Claim the Employee Retention Credit (ERC) and Put Real Money Back in Your Business .

4. Calculate tax deductions

Now for the hardest part of running payroll: calculating payroll taxes , withholding those taxes from employee paychecks, and remitting that money to the federal government.

Federal and state income tax

To figure out income tax withholding amounts for each employee, you need the tax information they submit via Tax Form W-4 .  Your employees should fill out Form W-4 as soon as they're hired.

On the W-4, the employee lists information that determines their income tax payments:

• Whether they’re single, widowed, married and filing separately, or married filing jointly
• Whether the employee has multiple jobs, which impacts the percentage of tax withheld from each job
• Whether the employee’s partner works one or more jobs, which also impacts the amount of taxes withheld from the household as a whole
• Whether the employee has dependents, which qualifies them for certain tax benefits
• Whether the employee wants you to withhold additional taxes on their behalf

The final page of Form W-4 includes tax calculation tables that show you (and your employee) exactly how much will be withheld from their taxes based on allowances, income, and filing status.

While you can use the IRS’s tax withholding tables to calculate taxes by hand, we strongly recommend using a payroll calculator instead . With a payroll calculator or free payroll template, you don't have to do any math yourself—the calculator determines the right amount for you. As long as you've entered the data correctly, you don't need to worry about messing up a calculation.

If an employee gets married or divorced, has a child, or acquires a dependent (for instance, via marriage or adoption), they need to submit a new W-4 to update their tax withholding status. Business owners are legally required to update an employee’s tax information as soon as they submit their new W-4 .

Along with federal income tax, you need to withhold state income tax (if your state has an income tax—some don't). Paycheck calculators can take care of these calculations too: just select the state in which your employee works from the calculator's drop-down menu. From there, the calculator should set the correct income tax withholding rate.

If you’re not using a paycheck calculator or a payroll system, visit the IRS’s list of state government websites . The state site will tell if your employee’s state has an income tax and, if so, how much.

FICA taxes (Medicare and Social Security deductions)

Along with income taxes, you need to withhold Social Security and Medicare taxes. Collectively , these are called FICA taxes, or Federal Insurance Contributions Act taxes. These taxes are charged a flat rate that applies equally to each employee.

For the 2023 tax year, the Social Security rate is 6.2%, and the Medicare rate is 1.45%, which totals 7.65% overall, with no increases since 2022 .

Some employees are exempt from FICA taxes, such as foreign nonresident students working for a college or university. For the most part, though, employees are required to pay FICA payroll taxes.

If you’re not sure if any of your employees are exempt, speak with an accountant or other tax professional.

The total FICA tax rate is actually 15.3% of an employee’s gross wages, but employees only pay 7.65% of that amount. Employers, including household employers , pay the other half from the business's revenue. In other words, as an employer, you must match an employee’s FICA tax contributions dollar for dollar.

Don't want to calculate wages yourself (or be held responsible for withholding the right amount in tax deductions)? Payroll software can tackle the hardest parts of running payroll for you, including filing payroll taxes—and if you have fewer than 25 employees, you might be able to use completely free payroll software.

Interested? Enter some basic information about your payroll needs and business type, and we'll send you up to five customized payroll software quotes.

5. Make other common paycheck deductions

Taxes might not be the only thing you need to withhold from your employee’s paycheck. If your employees contribute to company benefits (for instance, if employees pay for their own insurance premium to use the health care provided by your company), you’ll withhold that amount directly from each paycheck.

Along with standard health insurance premiums, you might deduct other common withholdings from your employees’ gross pay:

• 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

Try a free payroll calculator

To use a paycheck calculator, you simply enter the information on your employee’s W-4. You then list the employee’s gross wages and select which state you’re filing from to calculate state income tax (if your state has one, which some don’t). The calculator automatically calculates the amount to deduct.

6. 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 paying employees. It tends to be more secure than handing out checks or cash, and it ensures employees with bank accounts can get their funds immediately.

If you decide to offer 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 small-business bank can talk you through the process and help you set up automatic payments.

Usually, you’ll make direct deposit payments using your bank’s website (or with payroll software that syncs with your bank, like Gusto ).

Not all banks or payroll systems offer next-day direct deposit, so you’ll usually need to schedule the payment before payday . Otherwise, your employees won’t get paid on time. Check with your bank on their direct deposit turnaround time before you run payroll the first time.

If you can, consider offering at least one payment option besides direct deposit:

• Checks, including mailed checks
• Payroll cards
• Cash apps, such as the Square Cash App

7. Remit taxes and file end-of-year tax paperwork

Once you’ve deducted income, Medicare, and Social Security taxes from your employees’ paychecks, you’re responsible for making tax deposits to the IRS. You must also file the correct tax paperwork on time—though paperwork filing deadlines don’t always correspond to tax deposit deadlines.

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. To stay on top of tax deadlines, we recommend talking to an accountant and creating a tax deadline calendar . If you miss a date, you’ll be subject to financial penalties, fines, and interest payments—none of which are great for your bottom line.

If you’re overwhelmed at the thought of tracking tax deadlines yourself, accounting software like QuickBooks Online usually includes quarterly tax payment reminders. Full-service payroll software automatically files taxes for you on the correct schedule, including pre-filled tax paperwork. And free or self-service payroll plans , which calculate paychecks and deductions for you but leave the actual filing up to you, often include perks like pre-filled W-2 forms and 1099 form filing .

Finally, a word to the wise: the general tax information we provide below doesn’t cover every tax form or filing deadline. To get in-depth, comprehensive information on your business’s tax obligations, consult IRS Notice 931 and read through the IRS’s list of employment tax due dates . You should also meet with an accountant to review your business’s specific tax obligations and filing due dates .

Federal income and FICA tax deposit schedules

Businesses can deposit income taxes either monthly or semi-weekly. You must decide on a tax-filing schedule before the calendar year starts . The type of deposit schedule you can choose depends on information you provide on IRS Form 941 , which you use to report income taxes and submit your half of your employees’ FICA taxes.

If you’ve just launched your business and have never filed Form 941 before, you’ll automatically start out on a monthly tax-filing schedule. And as for how to deposit your employees’ taxes, the federal government requires you to use its electronic federal tax payment system (EFTPS) to file income taxes.

Quarterly tax forms

At the end of every quarter, employers need to submit Form 941 , which summarizes your quarterly payroll tax deposits. These forms are due on the final day of the month directly following the quarter’s end . (The first quarter ends on March 31, so Form 941 is due April 30. The second quarter ends June 30, so Form 941 is due July 31.) If the last day of the month is a holiday or weekend, you can usually make the payment on the next business day.

The federal unemployment (FUTA) tax is a payroll tax on any business with employees, and it’s paid only by employers, not employees. You need to make your FUTA tax payments quarterly . Like Form 941, your FUTA tax deposits for the quarter must be made by the last day of the first month that follows the quarter’s end. By January 31 each year, you need to file Form 940, which summarizes your FUTA tax payments over the preceding tax year.

Other deadlines

Along with the forms and payments above, you also need to prepare W-2 forms for your employees, or Wage and Tax Statements, and distribute them no later than January 31. (You also need to prepare tax forms for most 1099 freelance contractors you’ve worked with, per IRS 1099 employee guidelines .)

Additionally, you likely need to submit employee W-2 forms to the Social Security Administration . You’ll include Form W-3 alongside your employee W-2 submissions to summarize employee wages and other key wage information.

To get a truly comprehensive look at when business taxes are due, review the IRS’s tax information hub for businesses. It breaks down tax deadlines by business type and size, lists all necessary forms and filing deadlines, and explains unique tax situations that apply only to niche industries like agricultural businesses.

Business income taxes and end-of-year tax write-offs

Along with typical employment and payroll taxes, most businesses need to file an annual income tax return . (Partnerships file information returns, not income statements.) Some aspects of payroll impact your business’s income-tax filing—especially in terms of deductions business owners can claim on their end-of-year tax forms.

A tax deduction, informally called a tax write-off , is an amount of money the government legally allows you to subtract (deduct) from your overall taxable income. If you have a lower taxable income, you pay less in taxes—which makes tax write-offs crucial to most small businesses’ financial stability.

How does this relate to payroll? Well, businesses can usually deduct their employees’ pay from their end-of-year taxes . Along with claiming employee wages on your end-of-year tax forms, you can deduct expenses related to retirement savings plans, like the cost of offering 401(K) plans for employees.

Health insurance costs for employees are generally deductible as well. And if you’re self-employed, you can write off 50% of the self-employment tax or the employer half of FICA taxes (self-employed business owners must pay both halves themselves.)

You can (and should!) read through the IRS’s full list of deductible business expenses to find other ways to save money on your end-of-year tax return. And, as always, speak with an accountant or other tax professional to maximize your write-offs.

Additional tax-filing information

To learn more about tax-filing deadlines for multiple business types, including LLCs, C corporations, and S corporations, read our page on how to file small-business taxes . You can also read through our list of this tax year’s filing deadlines for businesses .

Remember, the information above is far from an exhaustive list of your tax responsibilities as an employer. Like we said, it’s essential to read Notice 931 yourself and meet with a tax professional to talk through your business’s unique situation .

How to set up payroll for one employee

Business owners with just one employee are perfect candidates for free payroll software, payroll templates, and payroll calculators. With just one employee, you don't necessarily need the thorough payroll services you'd need with 50 or 100 employees.

However, the number of employees you hire affects how much time you spend on payroll, but it doesn't change the steps you take to run payroll. You'll need to follow the same steps listed above:

• Determine a pay schedule
• Calculate gross pay
• Calculate taxes
• Calculate other payroll deductions
• Give your employee their paycheck
• Keep detailed records and file taxes quarterly

Compare the best payroll software costs and features

Data as of 3/9/23. Offers and availability may vary by location and are subject to change.

The takeaway

Running payroll by hand is tricky—but it’s possible, especially for business owners on a budget and without too many employees to keep track of.

However, calculating payroll taxes and other deductions, filing the right amount in taxes, and getting your end-of-year tax forms filed on time are all complicated processes. And the stakes are high: your employees’ livelihood depends on correct payroll processing, and so does the IRS’s happiness with your business.

If you can, we strongly recommend investing in payroll software. If you have 25 or fewer employees, Payroll4Free lets you calculate paychecks and payroll tax deductions at no charge. (It even lets you print checks or set up direct deposit.) TimeTrex’s open-source software lets you calculate paychecks for an unlimited number of employees, and eSmart Paychecks enables check printing and unlimited paycheck calculations.

Self-service payroll plans start with monthly base fees as low as $10.00 ( Patriot Software ) or $19.99 ( SurePayroll ). And payroll companies like Square Payroll and Gusto offer contractor-only plans with no monthly base fee, just a $5 fee for each contractor paid per month.

Whether you use payroll software or calculate payroll by hand, accounting software can help you track the amount of money you spend on employee wages, tax payments, and other payroll-related fees. Read about some of our favorite accounting software solutions—including free accounting software, like Wave—on our list of the year’s best accounting companies for small-business owners .

Related reading

• The Ultimate Guide to Payroll
• How to Convert Minutes for Payroll
• 7 Reasons Business Owners Prefer QuickBooks Payroll
• How to Choose Payroll Software

How to do payroll yourself FAQ

Yes, you can run payroll yourself by hand. The easiest way to run payroll yourself is with a payroll calculator, spreadsheet software, and a free payroll template with pre-filled cell formulas. 

No, you don’t necessarily need a payroll service to do payroll. If you have no more than 25 employees, are confident in your ability to stay on top of tax deadlines, and have thorough organizational skills, you can likely do your own payroll.

Even if you have only one employee, payroll software from providers like Gusto and SurePayroll can dramatically simplify your life. An online payroll service will calculate paycheck amounts, deposit them directly into your employee’s bank account, and draw up tax forms for you to submit on time.

Plus, free payroll software performs the same tasks you do when you run payroll manually—they just do it faster, with more automation, and usually with a tax calculation guarantee that ensures your tax deductions are correct. Payroll software can save you money in the form of costly payroll mistakes—but perhaps more importantly, it can help you save the time you’d otherwise spend running payroll.

What is the best payroll software for small businesses?

Gusto is one of the best payroll software services for small businesses. It automatically calculates paychecks, withdraws taxes and makes other deductions, and pre-fills tax forms to submit at the end of the year. Gusto also has human resource management features like health benefits administration and workers comp insurance.

If Gusto doesn't seem like a good fit for you, there are dozens of other payroll solutions. SurePayroll is the most fully featured budget option, and it includes two free months for all new customers. ADP or Paychex are good options if you need HR benefits.  

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.

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. US Bureau of Labor Statistics, “ Length of Pay Periods in the Current Employment Statistics Survey ,” January 1, 2022. Accessed December 8, 2022. 2. US Department of Labor, Wage and Hour Division, “ State Payday Requirements ,” January 1, 2021. Accessed December 8, 2022.

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How to Do Payroll for a Small Business

Table of Contents

Processing payroll by yourself can be complex, and if you’re doing it for the first time, it’s crucial to consult an expert before you get started.

The challenge of processing your payroll is what you may miss. For example, entering deductions or filing payroll taxes incorrectly could expose your business to severe liability. However, you can still process payroll manually – in eight steps – and if you’re a small business owner who employs only a few people, it may be worth learning how to do payroll independently.

How to do payroll: 8 easy steps

Step 1: find your employer identification number..

Your first step is to set up an employer identification number (EIN) with the IRS. The IRS issues this number so it can identify your business. If you’re a new business, you must apply for an EIN. You can read about how to apply for an EIN and learn more about the EIN program and process on the IRS website.

Applying is free, and the IRS prefers that you apply online, though you can also apply by fax or mail. International applicants may also apply by phone. Online applications, if approved, result in instant EIN assignment, whereas fax and mail applications take four business days and one month, respectively.

You’ll also need to check with your state and local (city and/or county) tax office for those tax ID numbers.

Editor’s note: Looking for the right online payroll service for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Step 2: Collect employee tax information.

Once you have your EIN, you must collect relevant tax information from your employees. This means having all employees fill out a W-4 and an I-9 . If you have contract or freelance workers, you’ll have to collect 1099s. On these payroll forms, employees provide legal information about their work status, elect to take out certain deductions and fill out other important information.

You can’t process payroll without the details provided on these forms. There are laws on when you must submit this paperwork to the IRS, depending on the information your employees provide. You can read more about submitting W-2s and I-9s to determine what’s required of your business.

Remember that 1099s have a different set of rules for how to prepare them and submit them to the IRS and your employees. Since most of the work done for these forms falls to the employees, your business will spend only a short time – 15 minutes – distributing these forms to your employees and contractors, collecting them, and submitting them to the IRS.

Step 3: Choose a payroll schedule.

Once you’ve established all the relevant tax information for your business and its employees, you must decide how to pay your workers. There are four types of pay schedules: weekly, biweekly, semiweekly and monthly. All four schedules have their advantages and disadvantages. Carefully consider how often you’ll pay employees, but don’t take so long that your employees go without pay for unreasonable periods. You should devote 15 to 30 minutes to reviewing state laws about your payroll schedule.

Step 4: Calculate gross pay.

Calculating gross pay is simple: Just multiply the number of hours an employee has worked in a given pay period by their hourly rate.

The easiest way to track employee hours is via spreadsheet. Once you have the total hours for a pay period, multiply that by the employee’s hourly rate, and you’ll have that employee’s gross pay. You must complete all of the steps discussed here for each employee in your company.

Here’s a quick example: An employee has worked 85 hours in your biweekly pay period and is paid $10 per hour. Your pay period this time around is 80 hours.

• 80 hours x $10/hour = $800
• 5 hours x $15/hour (overtime pay) = $75
• Gross pay = $875

If you use a spreadsheet to determine your employees’ gross pay, you can likely make all the required calculations in just a few minutes with your software. If you plan to calculate all your employees’ gross pay by hand, you may need a few minutes for each calculation, and this time adds up quickly when you have an entire team of workers.

Step 5: Determine deductions, allowances and other withholdings.

One of the most important steps in processing payroll is determining each employee’s deductions and allowances.

As a quick refresher, exemptions and allowances are the same: They refer to how much money is taken out of your paycheck during the year. Allowances are specified on a W-4. Deductions, specified by the employee on a 1040 or 1040-SR form , are the things you can deduct from your income when you do your taxes. This is where you must pay close attention to how employees fill out their tax-related forms and withhold the proper amounts.

On top of deductions and exemptions, factor in other aspects of payroll processing and withholdings from each paycheck. Depending on your business’s situation, you may have to consider the following:

• Federal taxes
• Social Security
• State taxes
• Local taxes
• 401(k) contributions
• Workers’ compensation contribution
• Other benefits

Since the rate by which you must multiply your employees’ paychecks for each of these deductions and allowances varies by category and employee, this step can be quite time-consuming – potentially on the order of hours – if done by hand. However, if you’ve stored and meticulously organized all your information in a spreadsheet, it takes mere minutes.

Step 6: Calculate net pay and pay your employees.

After tallying the deductions, allowances and other taxes, subtract what’s being withheld from each employee’s gross pay. The resulting number is net pay.

Gross pay – deductions = net pay

Net pay is what each employee is paid at the end of each pay period. This is also known as take-home pay. Create a pay stub for each employee and track what you’re withholding. Tracking payment and maintaining the right records benefits your business in the long run. It also helps you track how an employee is progressing at your company.

Once you’ve calculated net pay for each employee, pay each one by their preferred payment method.

Payroll is a big expense for businesses, and while using a payroll solution costs money, it can cut down on the time required to handle all these steps. It also means your employees can receive their paychecks in various forms, including checks, direct deposits and payroll cards .

As the prominence of payroll solutions suggests, calculating net pay – like determining deductions and allowances – can take hours by hand. Even if you can quickly determine net pay using a spreadsheet, delivering your payments to your employees without an automated system can likewise take hours.

Step 7: Keep payroll records and adjust to fix mistakes.

Maintaining honest and organized payroll records is essential. You want to be able to reference your records if there’s ever a discrepancy between an employee’s net pay and what they expect to receive. It’s also important from a tax perspective to have these records on hand in case you have to work with the IRS. Mistakes happen, and as long as you correct them quickly and honestly, you’ll recover quickly.

Recordkeeping is also essential for payroll taxes you have to pay out regularly. Most electronic methods of gross pay, deduction and net pay calculation generate automatic records if you upload the files you used to cloud storage. Save a separate copy of any spreadsheets you used after executing your payroll.

You’ll need to keep written, tangible ledgers and mailing receipts for paper calculations and paychecks delivered by postal mail. While each of these steps can take seconds, the time adds up when you handle these processes for several employees.

Step 8: Withhold, report and pay payroll taxes.

Part of processing your own payroll is calculating the payroll taxes that you have to withhold from employee paychecks. This includes income taxes, Social Security and Medicare taxes. Your business may also need to pay federal unemployment tax (FUTA), state unemployment tax (SUTA) , state unemployment insurance (SUI) and Federal Insurance Contributions Act (FICA) taxes without deducting these funds from your employees’ paychecks.

These are all important aspects of payroll. Luckily, some online calculators let you crunch FUTA, FICA, SUTA and SUI numbers. Find out when you have to issue payroll tax payments in adherence with your state laws. Also, you must report new hires to the IRS and file your federal business taxes quarterly and annually. These steps, combined with the calculations involved in withholding, reporting and paying payroll taxes, can take several hours per pay cycle, especially when the process isn’t automated.

Payroll checklist: What you need to process payroll

With a road map to follow and an overview of the important steps involved, it’s also important to understand exactly what payroll forms you need from each employee. Payroll is complicated, and it’s easy to get lost in the details of how everything works. Use the checklist below to overview the information you should gather before processing each pay period’s payroll.

Tax information

• Employer identification number
• State tax ID information
• I-9 for each employee
• W-4 for each employee
• 1099 for each contractor or freelancer (if applicable)

Employee information

• Hours worked
• Hourly wage
• Overtime hours worked
• Preferred payment delivery method (if applicable)

Recordkeeping system

• Reliable storage for pay stubs and tax information

How to do payroll in Excel 

Processing payroll in Excel may take some time, depending on your knowledge of payroll and your familiarity with the software. Many small business owners use Excel to track budgets and other financial information, and it’s a useful tool for processing payroll as well.

Follow these steps to do payroll in Excel:

Step 1: Download a payroll calculator template. 

Step 2: add tabs for every column needed for your specific payroll calculator..

Once you have your spreadsheet downloaded, begin to customize based on your needs. You can also start with a blank Excel sheet if you prefer to start from scratch. Example tabs include:

Step 3: Enter the payroll data for each employee into the appropriate columns.

Start without formulas and then add calculations after all the initial data has been entered.

A few common payroll calculations include:

• Gross pay = (pay per hour x total hours worked) + (overtime pay per hour x total overtime hours)
• Income tax = (gross pay x income tax percentage)
• Net pay = gross pay – (income tax + other deductibles)

Step 4: Once it’s “processed,” create individual pay stubs by using a pay stubs template.

Pay stubs allow you to track how much each employee is paid each pay period.

How to set up payroll in QuickBooks

QuickBooks provides a full payroll suite to add to your services. Should you add this aspect to your QuickBooks accounting program, you can follow these easy steps to process payroll in QuickBooks and manage your financial information in one place. [Read related article: QuickBooks Payroll review ]

If you are not signed up for QuickBooks payroll, you’ll need to do that first through your QuickBooks account. Once signed up, you must know your software tier (Core, Premium or Elite). 

If you don’t know what tier you have, you can sign in to your account, go to settings, and select subscriptions and billing. The payroll plan tier is in the second box.

Elite users can use a QuickBooks expert to guide you through the setup process, or they can even do it for you. Simply call to schedule an appointment.

Step 1: Gather all the information you need before starting to work with QuickBooks.

You should have access to the following:

• Employees’ individual details
• Employees’ pay rates
• Any payroll deductions
• Completed direct deposit authorization forms and voided checks
• Bank account login ID and password for your business
• Basic business information

Step 2: Select “Get started” and follow the prompts.

• Select if you (or someone else) paid employees in the current year.
• Select the date when you want to start paying your employees through QuickBooks.
• Enter your main business address. Enter a physical address (not a P.O. box).  The work location determines your tax responsibilities. If you have multiple work locations, you can add those later when you add your employees. 
• Enter your main payroll contact info. This is generally the person responsible for paying your employees. The payroll contact will get important notifications from you and may speak with your payroll experts about your account. 
• Select how you’ve run your payroll in the past. Depending on your answer, you may be able to import employee and pay history info instead of entering it manually. 

Step 3: Add your employees by choosing “Add your team.”

When you add your employees, you can pay them immediately with a paper check, or you can opt out and pay them later.

If you pay employees immediately, you are responsible for any payroll taxes due until you complete the payroll setup.

If you have paid employees already this year, you must complete additional tasks through the Payroll/Overview tab in QuickBooks before you can run payroll.

Step 4: Finish setup tasks.

To finish setup, you must finish the last three sections: “Get ready to pay your team,” “Let’s handle your taxes” and “Take care of your team.”

• Add your team.
• Enter your tax info.
• Connect your bank.
• Add your payroll history, if you’ve already paid employees this year.
• Set your tax preferences, if you haven’t paid any employees this year.
• Include which taxes you’ve paid this year. 
• Take care of your team.

Step 5: Add a workers’ comp policy to your QuickBooks account.

If you don’t have a workers’ comp policy, QuickBooks can help you find one, or you can choose to add one later.

Why do you need a payroll system?

The most obvious reason is that you need to pay people who work for your company. It’s easy to pay employees once a job is complete, but having a proper system mitigates risk and vastly improves your business operations.

It may sound counterintuitive, but payroll systems aren’t just about paying employees. Payroll processing is a detailed documentation system that tracks who works for your company, how long they’ve worked for you and how much money you spend on labor. Terms like “payroll processing” and “payroll system” can complicate this, but it’s quite simple.

If you work with a payroll provider, your “system” is automatically set up through the company. If you’re on your own, you’ll have to set up your own system. The point of this system is documentation.

Here’s a list of things your payroll system should do:

• Track employee hours 
• Track employee wages
• Track deductions and other withholdings
• Keep tax documents organized
• Track direct deposits and payments

How to create your own payroll system

Creating a payroll system with steps to follow is all about organization and planning. Once your system is set up, information and documentation will flow through it, and you can report on important business aspects.

Follow these steps as you plan your payroll system and decide how to structure employee payments:

• Find your EIN through the IRS.
• Establish state and local tax ID numbers.
• Collect employee financial information like W-4 and 1099 forms.
• Choose a weekly, biweekly, semiweekly or monthly payroll system.
• Establish payroll tax payment dates.
• Calculate employee hourly schedules and overtime pay.
• Calculate gross pay for each employee.
• Determine deductions and subtract from gross pay.
• Calculate net pay and issue payment.
• Keep and document payroll records.
• Report new hires to the IRS.
• Stay current on any miscalculations or mistakes, which should be documented and eventually reported to the IRS.

This general road map encapsulates how to set up your payroll system and process payroll. If you’ve created a system that addresses all these needs in an organized fashion, you’re on your way to successful payroll.

Alternatives to processing payroll yourself

Use a payroll service to run payroll..

Even if your company is small, processing payroll can be challenging. It takes time to gather employees’ information, calculate their gross and net pay, and ensure you’re withholding the right amount for state and federal taxes each pay period. It also takes a lot of time and effort to track payroll records organizationally and efficiently.

If you’re a small business owner with several employees, investing in the best online payroll provider that can help you manage this whole process may be useful. Payroll providers take the legwork out of paying your employees. Many also have employee access portals so that your workers can view their pay stubs, track their deductions and make tax adjustments when necessary.

Processing payroll manually may make sense if you have a tiny business with only a few employees and feel confident in your ability to calculate pay, deductions and allowances correctly. If you run a rapidly growing and dynamic small business, it’s likely best to partner with a payroll provider, such as Gusto or ADP. [See Gusto review and ADP Payroll review .] Most companies charge a monthly fee or take a small percentage of your payroll. If you are looking for flexible payroll options, read our review of OnPay .

Hire an accountant to manage payroll.

Whether you run a large or small business, keeping track of your payroll can be tedious and overwhelming. Hiring a professional accountant may seem out of reach, but the costs could be worth the return.

An accountant not only keeps your books up to date but can also manage your tax deadlines and compliance responsibilities – and an accountant who specializes in payroll can minimize costly errors. Plus, having an accountant in place as you scale can add value to your company culture, help you exceed industry standards and help you achieve your overall goals.

Julie Thompson and Max Freedman contributed to this article.

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Run » human resources, what is payroll-as-a-service .

Payroll-as-a-service is a convenient way to outsource payroll tax reporting and withholding and ensure that your team is paid on time.

Payroll-as-a-service refers to outsourcing payroll processing tasks to a company to handle all the nitty-gritty aspects of payroll, allowing you to focus on running your business. Payroll services usually offer software that automates the most time-consuming aspects of paying your team, from tracking hours and benefits to storing W-9 forms. Payroll-as-a-service could be a good investment for small business owners who spend a sizable amount of time on tasks that could easily be automated or outsourced.

What do payroll services do?

A payroll service provider falls into one of two main categories. The first is full-service providers who do everything related to payroll on your behalf, including payroll tax filing and payment, worker’s compensation, benefits, year-end reporting, and more. You simply provide the payroll service provider with basic information about your business and your employees, and they do the rest.

The second option is a more feature-by-feature, build-your-own approach. “With a DIY payroll provider, you’re required to perform some of the administrative tasks and the provider conducts the additional tasks of your choosing,” wrote People Managing People .

A DIY payroll provider is usually more affordable than a full-service option, but it does mean you’ll have to do some work yourself.

Payroll services also come in different formats. Some service providers are full-fledged companies with a team of employees to manage your account. Others are software platforms that fall more under the DIY category; you’ll have to input key information to get results. For most merchants, an online payroll-as-a-service platform is the way to go.

[Read more: Choosing the Right Online Payroll Service for Your Business ]

Why should you work with a payroll service?

Payroll service providers can help you navigate the complicated IRS reporting and tax withholding requirements that apply to your business. “The number one reason business owners turn to payroll service providers is to ensure that payroll taxes are withheld properly, tax forms are filled out properly and accurately, and taxes remitted to the appropriate agency on a timely basis,” wrote The Fool .

In addition, payroll software can automate time-consuming payroll functions, such as calculating salaries and wages, generating paychecks or sending direct deposits, and allocating benefits.

It’s essential that your payroll service has top-tier security that can protect your data from potential breaches.

Chad Brooks, Business Strategy Insider Managing Editor, Business News Daily

For small businesses with no dedicated HR team, these payroll service providers can significantly alleviate the administrative burden of managing employees.

“The benefit of using a payroll service is that it saves you time, letting you focus on business operations and growth instead of crunching numbers and filing payroll taxes,” wrote Business News Daily .

[Read more: 10 Must-Have Payroll System Features for Small Businesses ]

What to look for in a payroll-as-a-service partner

As you explore the options available, consider whether the payroll-as-a-service provider prices its features. Understand whether the capabilities you need are included in the base price or will cost more to add on. Find out if the payroll servicer has worked with similar companies in your industry to learn if they’re equipped to handle your needs.

In addition, check to see if the payroll solution is designed to scale with your business. Does it integrate with your existing tech? Or, does the company you want to work with have a dedicated team that will go the distance with your business?

Potentially the biggest consideration when choosing payroll-as-a-service partner is security. “Your payroll data includes all of your employees’ personal information, your business’s information and access to your business bank accounts. It’s essential that your payroll service has top-tier security that can protect your data from potential breaches,” wrote Business News Daily .

Small businesses are frequently targeted by hackers; as a result, make data security a top priority to protect your employees as you explore your options. Look for a provider that is transparent about its data security practices, issues regular updates, and has a reliable track record against data breaches.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Back to Payroll Management

How to Set Up Payroll for Your Small Business

Written by: Mark Stewart

Mark Stewart is the in-house Certified Public Accountant, an accomplished author and financial media specialist.

Reviewed by: Daniel Eisner

Daniel Eisner is a payroll specialist with over a decade of practical experience in senior accounting positions.

Updated on October 3, 2023

• Employee Tax Information
• Establish Your Payroll Schedule
• Calculate Gross Pay
• Determine Withholdings, Deductions, and Allowances
• Calculate Net Pay
• Pay Employees
• Keep Records
• Pay Federal Payroll Taxes
• Pay State Payroll Taxes

Using a Payroll Service

If you’re just starting a business and expecting to hire employees, you’ll soon tackle the challenge of payroll. Managing payroll is often complicated , and gaining a thorough understanding of key processes before you begin can be a game-changer. 

If you’re processing payroll in your state and want to stay abreast of federal regulations, choose your state from the list below. You will find which payroll taxes and laws your business is required to follow.

Choose Your State

• connecticut
• massachusetts
• mississippi
• new hampshire
• north carolina
• north dakota
• pennsylvania
• rhode island
• south carolina
• south dakota
• west virginia

This guide lays out the steps to take to ensure successful payroll processing. 

1. Get an EIN

Your Employer Identification Number, or EIN, is like a Social Security number for your company, enabling the IRS to identify your business. It’s also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations just Tax Identification Number (TIN). 

An EIN is used to identify US businesses and the taxpayers required to file the relevant tax returns. The EIN also contains information about the state in which the company is registered. 

Employers use their EIN to file taxes, so in order to process payroll and ensure the proper withholdings and tax payments, you’ll need to get an EIN. The application is free and can be found  on the IRS website . 

The application is form SS-4, and it can be printed out and mailed to the IRS or submitted electronically. Once your information on the application has been validated, your EIN is assigned immediately. The EIN will never expire and is never duplicated, even if you go out of business.

You’ll also need to register for state withholdings, for state income taxes and unemployment insurance taxes. 

State income tax withholding registration is generally done through your state’s Department of Taxation, while the Department of Labor often handles unemployment insurance taxes . However, each state is different, so you’ll need to check with your state government.

Your municipality may also require tax registrations, so check with your local government as well.

2. Employee Tax Information

You’ll need to collect several forms from your employees, starting with a W-4 and an I-9 for all W-2 employees. Your state will also have a specific form for employees to fill out to enable state tax withholding .  

Your employees may also need to register with your city and municipality, so again, be sure to check with your local governments. 

These forms are necessary to withhold taxes from payroll checks and must be kept on file. They are not submitted to the IRS or the state. You’ll also need these forms to issue W-2s or, in the case of independent contractors, 1099s. 

To pay your employees via direct deposit, you’ll need to collect their bank information, including account and routing number, bank address, and phone number. You’ll also need an Automated Clearing House (ACH) account with your bank in order to make direct deposits. 

An ACH account allows you to transfer payroll funds to your employees’ accounts.

3. Establish Your Payroll Schedule

Every state has requirements regarding how often you’re required to pay your employees, which is often bi-weekly. You’ll need to check your state’s requirements. 

You can choose to pay your employees more often than required, such as weekly, as long as you meet state requirements. 

4. Calculate Gross Pay

If you have salaried employees, gross pay is simply their contracted fixed pay amount, such as $4,000 per month. For hourly employees, calculating gross pay is easy. 

First, review their timesheets to make sure they have accurately tracked their hours. Then simply multiply their hours for that week, or month, by their hourly rate. 

For example, if Jane works 40 hours in a week at $15 per hour, her gross pay (40 x 15) is $600. 

Keep in mind that state overtime law dictates requirements for paying overtime. If you fail to pay your employees the correct overtime rate, your business could face serious fines and other penalties. 

To calculate overtime pay , take the number of hours worked over the state limit and multiply it by their hourly overtime pay rate, which is usually 1.5 times their regular rate. Be sure to carefully review your state’s overtime rules.

For example, if Jane worked 10 overtime hours at $22.50 ($15 x 1.5) , she would be owed (10 x 22.5) $225. Adding in her normal hours from above, Jane’s total gross pay for that week would be $600 + $225 = $825.

These calculations can be easily done in a spreadsheet, which should then be kept in your records in case any pay disputes arise. 

5. Determine Withholdings, Deductions, and Allowances

Exemptions are the same as allowances — both refer to money taken out of an employee’s paycheck. Allowances are specified on the employee’s W-4. 

Payroll deductions , which are specified by the employee on their tax returns, are amounts that can be deducted from taxable income. When determining withholding amounts, refer to your employees’ tax forms and be sure they filled them out correctly. 

Deductions can include the following:

• Federal taxes
• Social Security
• State taxes
• Local taxes
• 401(k) contributions
• Workers’ compensation contribution
• Unemployment withholding
• Other benefits, such as company-subsidized health insurance

Jane, for instance, might pay $130 in federal taxes, $15 in social security, and $40 in state taxes, in addition to $30 in 401(k). Thus, her total withholdings would be $215. Again, it’s a good idea to use a spreadsheet to record the totals for each employee.

To calculate federal income tax withholdings, refer to IRS Publication 15 . You can find information on withholding state taxes by checking with the relevant department in your state, usually the Department of Taxation.

Be sure to check with your local government about required local withholdings.

6. Calculate Net Pay

To calculate net pay, simply deduct withholdings from the gross pay you previously calculated.

Gross pay – Withholdings = Net pay

So, Jane’s net pay for the week detailed above would be $825 minus $275, which equals $550.

7. Pay Employees

To offer direct deposit, you’ll need to first set up an ACH account with your bank, which will require a business bank account. You can usually set up ACH online following your bank’s instructions. Once your account is set up, just add your employees as payees. 

Then, you’ll process the ACH payments through your bank and provide every employee with a pay stub detailing itemized withholdings. This also applies if you issue paper checks. 

8. Keep Records

It’s important to keep detailed payroll records , which can be used in the event of an error or dispute. You’ll also need these records to calculate your own payroll tax payments. 

If you do your own payroll and tax calculations by hand, you’ll want to keep ledgers of everything you withhold and pay. But keep in mind that most accounting software tools, like QuickBooks and Freshbooks , incorporate payroll accounting capabilities and will do this work for you. 

If you’re just starting your business and planning to do your own accounting and payroll , you may want to consider purchasing some quality accounting software . It will not only save you a great deal of time, but also ensure error-free payroll and tax calculations. 

9. Pay Federal Payroll Taxes

Following IRS guidelines for depositing withheld taxes and paying your payroll taxes is absolutely crucial. Here are the instructions from the IRS website:

Depositing Employment Taxes

In general, you must deposit federal income tax withheld as well as employer and employee social security and Medicare taxes.

There are two deposit schedules, monthly and semi-weekly. Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. To determine your payment schedule, review  Publication 15  for Forms 941, 944 and 945. For Form 943, review  Publication 51 .

Deposits for FUTA Tax (Form 940) are required for the quarter within which the tax due exceeds $500. The tax must be deposited by the end of the month following the end of the quarter.

You must use electronic funds transfer ( EFTPS ) to make all federal tax deposits. See the  Employment Tax Due Dates  page for information on when deposits are due. If you fail to make a timely deposit, then you may be subject to a failure-to-deposit penalty of up to 15 percent.

Reporting Employment Taxes

Generally, employers must report wages, tips and other compensation paid to an employee by filing the required form(s) to the IRS. You must also report taxes you deposit by filing Forms 941, 943, 944, 945, and 940 on paper or through  e-file .

Federal Income Tax and Social Security and Medicare Tax

In general, employers who withhold federal income tax, social security or Medicare taxes must file  Form 941, Employer’s Quarterly Federal Tax Return , each quarter. This includes withholding on sick pay and supplemental unemployment benefits.

File  Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees , if you are filing to report agricultural wages.

File  Form 944, Employer’s Annual Federal Tax Return , if you have received written notification about the Form 944 program.

File  Form 945, Annual Return of Withheld Federal Income Tax , if you are filing to report backup withholding.

Federal Unemployment Tax Act (FUTA)

Only the employer pays FUTA tax and it is not withheld from the employee’s wages. Report your FUTA taxes by filing  Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return .

10. Pay State Payroll Taxes

You’ll need to check your state’s processes for paying state income tax withholding payments as well as unemployment insurance tax payments.

Again, be sure to check with your local government about local payroll taxes. 

Processing payroll can be terribly complex, which is why it’s so important to have a strong understanding before you attempt to do it yourself. This also explains why many business owners turn to a payroll service provider . It’s often less expensive than creating a new staff position for managing payroll. 

Payroll and payroll taxes come with countless laws and restrictions, and a payroll service can ensure your business remains in compliance at the federal, state, and local levels. 

You’ll just send over your digital timesheets and relevant information and the service provider will take care of the calculations, payments and taxes, freeing you to focus on growing your business. We highly recommend hiring a payroll service — as a busy entrepreneur, you won’t regret it!

The basic steps to do simple payroll are to multiply the hours worked by the pay rate to get the gross pay amount, calculate withholdings including federal and state taxes, deduct withholdings from gross pay to get the net pay amount, and send out the payment. Then you’ll need to pay the withheld taxes to the tax authorities as required. A payroll service can handle all this for you, which comes with a cost, but will also save you a lot of time.

You’ll need to obtain an EIN as well as state and local tax ID numbers, collect the appropriate employee payroll documents, register for federal and state unemployment taxes, choose your pay frequency, and open a payroll bank account. Again, a payroll service can handle this process for you. 

Manual payroll can be done in a spreadsheet or in a written ledger. You’ll have to do all your calculations manually, which include gross pay, tax and other withholdings, net pay, and your employer payroll taxes. It’s much easier and less time consuming to use payroll software or a payroll service.

The steps to do payroll in the HR department are to calculate gross pay based on hours worked, calculate tax withholdings and other withholdings, deduct withholdings from gross pay to get net pay, and pay your employees by direct deposit or check. Then you’ll need to pay the withheld taxes to the tax authorities as required, as well as other payroll taxes. A payroll service can handle this function for you, which can save you a lot of time.

The basic steps to do payroll are a series of calculations – gross pay, taxes and other withholdings, and net pay, and then paying employees. Finally, you’ll pay the withheld taxes and other payroll taxes by their due dates. A payroll service can handle this function for you, which can save you a lot of time.

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The 3 Most Common Payroll Mistakes Small Businesses Make

R unning a small business is no easy feat. Not only do you have to oversee all operations, but in the absence of the right help, you may also find yourself tasked with potentially tricky tasks, like payroll.

Unfortunately, payroll may be more complex than you imagined. Here are three common payroll mistakes small businesses tend to make.

1. Classifying employees incorrectly

Are all of your employees W-2 employees, or are some independent contractors? It's really important to know.

W-2 employees may be entitled to certain benefits that contractors are not. At the same time, you may be able to impose certain rules on W-2 employees that you can't rightfully impose on independent contractors.

If employee classification isn't your area of expertise, it could pay to hire a human resources manager to help make those determinations. As an example, generally, with an employee, you have the right to dictate what their hours are and where they can work. You may not have the same rights with a contractor, so these are important details to know.

2. Miscalculating pay

Paying your employees may be a complicated endeavor. Not only do you have to account for the right deductions and tax withholding, but you also need to factor in bonuses and overtime.

The right payroll software can be instrumental in helping you navigate these complexities. But it could also be a good idea to hire an accounting professional to manage your payroll so you don't have to stress over the many small but significant details involved in paying your staff.

3. Failing to send out tax forms in a timely manner

If you've ever been a salaried employee yourself, you may have memories of submitting tax returns along with a W-2 summarizing your annual wages. As a small business owner, it's on you to make sure W-2 forms are given out in a timely manner.

Not only might you create a hardship for your employees by being late with W-2s, but you also risk potential fines. For the 2023 tax year, for example, the penalty for not supplying W-2 forms by the Jan. 31 deadline was $60 or more per late form.

But it's not just W-2s to worry about. If you use independent contractors, you'll need to create 1099 forms summarizing their pay as well.

A good software program can help remind you of deadlines and make it easier to generate the forms you need. But once again, this is a situation where outsourcing payroll to a professional could make a lot of sense. When you're running a business, you've got a lot on your plate, so let that person be the one tasked with getting forms out in a timely fashion.

Delving into the world of payroll could mean getting in over your head. Now that these blunders are on your radar, you may be in a better position to avoid them. But it also pays to seek help as appropriate to avoid payroll-related headaches and focus on what you do best -- overseeing a business.

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The 6 best payroll providers for small businesses [2024]

May 6, 2024

Christina Marfice

Table of contents.

Small business owners are used to wearing a lot of hats, especially when it comes to managing business-critical HR functions. Paying employees, for example, consists of largely manual tasks that eat away at your precious time unless you have a solution to automate them.

Enter payroll software: With the help of payroll software, you can manage, streamline, and automate the process of paying your employees—including tracking their hours and attendance, calculating their deductions, e-filing and paying their taxes, and issuing their payments on your behalf. For small business owners, this comes with big benefits, such as:

• Saving time and money
• Automating tedious, manual tasks
• Reducing errors in calculations and deductions
• Keeping your headcount low

With Rippling , you can manage all of your HR tools, including payroll, in one system. You’ll never have to calculate or manually enter data, like hours and deductions, again.

But before you choose a payroll provider , it’s important to consider your options. Here are some of the best payroll software for small businesses—including their pros and cons, key features, and more—so you can make the best decision based on your business needs.

1. Rippling

Rippling is a full-service payroll provider that offers instant and reliable payroll processing to pay employees and contractors across the US and worldwide.

With Rippling, payroll is fast, easy, and automated, so you can focus on what’s important: running your business. Rippling syncs all your business’s HR data with payroll to automate calculations and deductions for a seamless pay run every time. Compliance work is also automated, so you can rest assured that your tax filings are compliant with the right federal, state, and local laws. Additionally, Rippling ensures your tax payments are made to the IRS and local agencies accurately and on time.

Rippling brings together every tool your payroll system depends on, including employee time tracking, benefits administration, onboarding, recruiting, expense management, and more. How? Because Rippling is built off a single source of truth that unifies HR, IT, and Finance in the same place. You can even integrate Rippling with more than 500 third-party apps and tools, including bookkeeping and accounting software. That means having all the data you need to run your business and manage your employees in one system.

Rippling is built to support businesses of any size. It has all the tools you need to effortlessly onboard, manage, and pay your employees, reducing the time and manual effort of payroll and other HR processes so your small business can thrive. And for small businesses that need extra administrative support with their HR functions, Rippling offers a professional employer organization (PEO) service to automate running payroll, enrolling employees in benefits, managing compliance with labor and employment laws, and more.

Rippling’s G2 score

Rippling’s Capterra score

4.8 out of 5

4.9 out of 5

Rippling is innovative and easy. They get it. Human resources, payroll, and employee management can be challenging for a small business. Rippling has made it easy.

Rippling G2 reviewer

Rippling key features

• Cloud-based, full-service payroll solution that syncs to your HR, IT, and Finance data
• Automated payroll tax compliance, with taxes and payments filed on your behalf
• Easy tracking for employee hours and PTO; both automatically sync to payroll with no manual data entry required
• Mobile app with employee self-service features; employees can clock in and out, submit time off requests, view their pay stubs, and more
• Automatic new-hire onboarding to payroll
• “Pay-as-you-go” workers’ comp insurance
• Employee and contractor payments all in a single pay run
• Support for any wages garnished, paid on your behalf

Rippling pros and cons

Rippling payroll pros

Rippling payroll cons

• Meets much more than just your payroll needs—Rippling syncs  HR, IT, and Finance data across one system.
• Intuitive, user-friendly platform.
• 500+ software integrations.
• Powerful automation tools with “Recipe” templates you can use to quickly set up common workflow automations.
• Customizable and scalable, with role-based permissions to determine data access, the ability to build fully customized alerts and approvals, and more.
• Per-employee pricing can add up quickly, especially if your business has plans to grow.
• While Rippling is intuitive and doesn’t require technical knowledge, it has so many features there may be a learning curve before new users can take full advantage of all its functionalities.

Gusto offers basic payroll plans and other HR features aimed at startups and small businesses. Paying employees with Gusto is simple and straightforward, and you can customize many of its payroll features to suit your business’s needs. For example, you can set salaries or hourly wages and run payroll as often as you want with unlimited pay runs. Gusto even offers automatic payroll run on a schedule you pre-set with its Autopilot feature.

Gusto automatically calculates and remits payroll taxes and files tax forms on your behalf, including W-4s, W-9s, new hire reports, and year-end tax returns.

In addition to its payroll options and HR support, Gusto offers standout benefits management. Through its employer portal, you can find and purchase small-group employee benefits and design custom benefits packages to include health benefits, college savings, wellness stipends, commuter benefits, and more.

While Gusto gets great reviews for its ease of use, setting up your account and onboarding your employees is time-consuming. The platform requires you to manually input each employee’s information, which can be tedious and prone to errors. On top of that, Gusto’s basic payroll features leave much to be desired if you decide to grow your business: The solution is only meant for simple payroll actions on a small scale, meaning you’d likely need to switch payroll solutions as you grow. 

Gusto’s G2 score

Gusto’s Capterra score

4.5 out of 5

4.7 out of 5

Gusto key features

• Manual and automated payroll for employees in all 50 US states
• Customizable payroll options, including unlimited payroll runs and next-day deposits (available on certain plans)
• Automated payroll tax calculations and filing at the federal, state, and local levels
• Robust, customizable benefits offerings, including unique, in-demand benefits
• Online employee portal with self-service tools for document management, signing tax forms, viewing pay stubs, and more
• Integrations with some popular third-party accounting and bookkeeping tools, like Quickbooks Online and Xero

Gusto pros and cons

Gusto payroll pros

Gusto payroll cons

• Customizable, with unlimited payroll runs.
• Transparent pricing plans.
• Simple, intuitive platform.
• Mobile app with employee self-service features.
• Mobile app features may be limited, depending on which plan you purchase.
• No invoicing or accounts receivable.
• Setting up your account is time-consuming and requires a lot of manual data entry.
• Limited automation.
• Only offers basic payroll and HR features for small businesses that have simple needs and can’t scale with you if you grow.

Run payroll in 90 seconds

TriNet now offers multiple payroll options for small businesses:

• A PEO, similar to Rippling PEO , co-employs your workforce, allowing it to take on much of the administrative burden of running HR functions like payroll management, benefits administration, and compliance management. This can help small businesses free up their time and resources for more strategic work.
• An all-in-one, cloud-based HR platform for small businesses that need support to run their HR functions in-house. TriNet HR (formerly Zenefits) is an HR, payroll, and benefits platform aimed at small to mid-sized businesses.

TriNet PEO handles W-2 filing and federal and state tax withholding on your behalf, making tax calculations easier, faster, and less stressful. It also offers a convenient self-service portal for employees to manage their own payroll. They can simply log in and access a wide range of payroll reporting and data, including W-2s, pay stubs, employment confirmation, and more.

However, if your business grows in the future, a PEO like TriNet could end up holding you back. If you reach a point where you’re ready to move your HR functions in-house or consider large-group benefits, you’ll have to rip out and replace the PEO system—a painfully inefficient and costly process requiring you to implement new tools.

TriNet HR is a more scalable option for growing businesses, with multiple tiers at affordable prices (starting at just $8 per employee per month). TriNet HR’s payroll function includes features like unlimited pay runs, multiple payment options (including mobile payments and direct deposit), and customizable payment schedules for different types of workers. Similar to the PEO, the HR platform also handles calculating and filing your payroll taxes, helping you stay compliant with federal, state, and local tax laws.

However, while TriNet HR is supposed to be an all-in-one platform, it doesn’t actually include payroll except for its most expensive tier; you’ll have to purchase payroll as an add-on in all the others. Its other functionalities are also limited compared to other all-in-one HR software platforms. TriNet HR doesn’t offer device, app, or expense management, with few options for customization or automation and limited reporting and analytics capabilities.

Online reviews also say that Trinet HR's customer support is lacking. A common complaint is that incorrect tax filings and other tax-related issues take too long for Trinet HR customer support to resolve.

TriNet’s G2 score

TriNet’s Capterra score

3.8 out of 5

TriNet key features

• Multiple payroll options to meet different business needs, from a PEO to an all-in-one HR platform
• Handles W-2 filing and payroll tax calculation and filing so you stay compliant with federal, state, and local tax laws
• Employee self-service portal that allows employees to manage their own payroll

TriNet pros and cons

TriNet payroll pros

TriNet payroll cons

• Businesses can choose the payroll option that best fits their needs.
• PEO can significantly reduce the administrative burden for your HR team.
• Multiple tiers with transparent pricing.
• Employee self-service portal and tools.
• When you outgrow a PEO, the process to replace it is painful, inefficient, and costly.
• TriNet HR has limited functionality compared to similar all-in-one HR platforms.
• Payroll isn’t included in all plans.
• Online reviews say customer support can be lacking.

4. Justworks

Justworks offers a few solutions that might fit a small business’s payroll needs: a PEO , for businesses that need more full-service HR support and Justworks Payroll , a lightweight payroll solution geared toward small businesses that operate in one or two states (note that Justworks Payroll is only available in certain US states, not nationwide).

No matter which solution you choose, Justworks can help you automate multiple parts of the payroll process, including 1099s and W-2 filing, payroll tax withholding at the federal and state levels, and direct deposit payments for both full- and part-time employees. You can customize your payroll setup, run payroll monthly or bi-weekly, and make payments for both hourly and salaried workers.

Justworks can automate a few payroll processes, but it doesn’t support the same level of automation and integrations as other payroll platforms. This is particularly apparent when you set up your business’s account; it takes a ton of manual work to onboard employees into Justworks’ system, which is both inefficient and time-consuming. Justworks also requires a lot of oversight to ensure all new hires are set up correctly and have access to all the tools they need—something many small business owners just don’t have time to do.

Justworks’ G2 score

Justworks’ Capterra score

4.6 out of 5

Justworks key features

• Multiple solutions for different small business needs: a PEO service and a lightweight, standalone payroll solution
• Filing for tax documents and payroll tax remittance
• Direct deposits
• Modern UI (compared to legacy platforms that can be clunkier and more difficult to use)

Justworks pros and cons

Justworks payroll pros

Justworks payroll cons

• Multiple payroll solutions to meet different business needs.
• Customizable payroll setup.
• Justworks Payroll is only available in some US states.

Automate your least favorite parts of payroll

5. Sequoia One

Sequoia One is another PEO service where small businesses can outsource their payroll and other administrative HR tasks. One of its core offerings is rich benefits packages, which may appeal to small businesses that want to offer perks like high-quality health insurance to their employees.

Like many other PEO providers, Sequoia One makes it difficult to scale if your company outgrows its services. If you decide to bring your HR functions in-house (or just go a different direction than a PEO), you have to rip out the systems you have in place and start over from scratch.

It’s also worth noting that Sequoia One disclosed a data breach last year that compromised some of its customers’ sensitive information, including names, social security numbers, dates of birth, marital statuses, email addresses, and vaccine cards.

Sequoia One’s G2 score

Sequoia One’s Capterra score

4.3 out of 5

Sequoia One key features

• PEO that can help with the administrative burden of running many of your business’s HR functions
• Competitive, high-quality benefits packages at lower rates than small businesses can typically access on their own
• Employee self-service tools on both desktop and mobile app
• Dedicated account managers

Sequoia One pros and cons

Sequoia One payroll pros

Sequoia One payroll cons

• Competitive benefits packages.
• Outdated technology platform that may slow your team down.
• Non-transparent pricing with hidden fees.
• Some customers report overpaying for benefits their employees don’t need or use.
• Moving off the PEO requires ripping out the systems they put in place and starting over from scratch.

ADP is one of the largest and longest-running HR and payroll companies in the world. ADP Run is its smaller, more basic payroll platform for small businesses with fewer than 50 employees.

With ADP Run, you can run payroll online manually or automatically. It automatically calculates, deducts, pays, and files your payroll taxes at the federal, state, and local levels, helping you ensure your business stays compliant with all applicable tax laws.

While ADP Run is a basic payroll provider, you can add on their HR management tools. ADP offers benefits administration, time and attendance tracking, expense management, and more. And they can all be added to your payroll platform, making ADP Run more customizable than many other payroll providers.

With that said, many customers report that support can be lacking with ADP Run. If anything goes wrong, it can be difficult to reach someone to help. Hold times are often long for support specialists, even during setup or when trying to correct problems with initial pay runs.

On top of this, ADP Run’s pricing is quote-based and not transparent. It’s difficult to get an estimate or budget for the software, and prices can change over time as introductory deals end or new offers come out. Costs are generally per employee per pay run (rather than a simple base fee structure), but there are extra fees for implementation, end-of-year tax filing, add-on features, and more.

ADP Run’s G2 score

ADP Run’s Capterra score

ADP Run key features

• Basic, standalone payroll aimed at small businesses, with multiple plans to suit a variety of business needs
• Manual or automatic payroll that you can schedule ahead of time
• Additional HR features, like benefits administration, time and attendance, and expense management, can be added on
• Mobile app with employee self-service features like viewing tax documents and paychecks
• Multiple payment options, including paper checks, deposits, and prepaid debit cards

ADP Run pros and cons

ADP Run payroll pros

ADP Run payroll cons

• Manual or automated payroll.
• You can customize your platform by adding on other HR management tools as needed.
• Mobile app and employee self-service tools are well-reviewed.
• Pricing isn’t transparent.
• Adding HR tools on top of payroll costs extra.
• Payroll isn’t synced to other HR data like time and attendance unless you add on extra features (and pay additional fees).
• Customer support can be subpar, according to reviews.
• Doesn’t support payments for contractor-only employers.

The best payroll software for small businesses

Whether you need a full-service payroll provider, a PEO, or an all-in-one workforce management platform, Rippling has a solution for every small business’s needs.

Rippling’s full-service payroll allows you to pay all your employees and contractors in just 90 seconds. Because Rippling automatically syncs your HR data to payroll, you never have to manually enter employee hours, deductions, benefits information, or any other employee data. And if you’re concerned about compliance work, don’t be: With Rippling, taxes are automatically calculated and filed for you, so your business is always compliant on the local, state, and federal levels. 

Looking for more than just payroll? Rippling gives you HR, IT, and Finance all in one place. It’s the only workforce management system that helps you manage everything from onboarding to employee devices and expenses. On top of that, Rippling offers a modern PEO service , perfect for small businesses looking to provide the best employee benefits (from healthcare to workers’ compensation and retirement plans). The best part is you can move seamlessly from the PEO to any other Rippling service if you ever decide to go in another direction; your HR, payroll, and employee data remains in the system, and all your integrations are preserved.

Regardless of the size of your business, running payroll, administering benefits, onboarding employees, or completing any business-critical function is seamless with Rippling.

Pay employees accurately and on time—all the time

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.

Christina is a writer, editor, and content strategist based in Chicago. Having lived and worked in Argentina, Colombia, Mexico, and Peru, she’s bringing her expertise on hiring in Latin America to Rippling.

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Transforming Payroll Requires a Goal, Data, and Company Support

By Emmanuel Elone

Transforming payroll requires extensive planning, testing, and the cooperation of others within the business organization, three payroll experts said May 7.

Payroll transformation consists of fundamental changes to payroll processes, tools, and professionals to deliver payroll in a different way, said Jon Schausten, Director of Payroll at Group1001. Employers trying to transform their payroll have different reasons for doing so.

“So, where do you start? Well, in any story, you start at the beginning,” he said. “Pick something that you are trying to change, and try to make it better.”

Payroll professionals should use data to identify and measure the problems they are trying to solve, said Charlotte Hodges, Senior Payroll Manager at ECS Federal, LLC. Data must first be organized and measured to make it useful information.

“When data are processed, organized, structured, or presented in a context to make them useful, that’s when you have information,” she said. “Data doesn’t depend on information, but information does depend on data.”

Once data is collected and organized, payroll professionals can use key performance indicators and metrics to measure their progress during the payroll transformation process. KPIs measure progress based on business goals, while metrics measure progress on specific business activities, she said.

“KPIs are strategic, while metrics tend to be operational or tactical,” she added. “While they are both quantitative measurements, they are used for different purposes.”

Payroll professionals should also set specific goals for the payroll transformation, Schausten added. Some examples of possible goals are changing payroll systems, consolidating operations, and streamlining processes to eliminate manual work.

For example, Kohler Co. wanted to determine the cost of giving employees an additional vacation day or holiday each year, said Danny Schulz, Senior Manager of Payroll, Systems, and Taxes at Kohler Co. The company set this goal as part of a broader effort to calculate how much the company pays employees for time not worked.

Once payroll professionals set a goal and create a plan, they must execute, said Schausten. Executing a transformation plan requires having support and resources within the organization.

“If you’ve been in a situation where there’s change and you’re not getting people to buy in and people are struggling to see how this change impacts them and their job, take a step back and ask what the challenge is,” he said. “Pump the breaks and make sure the team is aligned and that everyone is going in the same direction.”

Payroll professionals should also constantly test their systems to identify any failures during the transformation process, he added.

Payroll transformation can fail for several reasons, including a disruption in services or a lack of communication, he said. High costs can also result in the premature termination of payroll transformations.

“Don’t assume everyone knows the cost when you are doing something,” Hodges said. “So, when you are telling somebody how much money they are saving, you [also] need to tell them how much you are spending to start with.”

One of the best ways to persuade company executives to support payroll transformations is to show how they will benefit employees, Schausten added.

“There’s nothing better than trying to sell your vision by showing how it will increase customer satisfaction,” he said. “Everybody that works for the company is our customer. We pay everybody. We touch the lives of everybody who works in the organization. So, making that experience better for the employee or associate is critical to what we do to be successful.”

The three experts spoke at PayrollOrg’s 42nd Payroll Congress in Nashville. Hodges is a member of Bloomberg Tax’s Payroll Advisory Board.

To contact the reporter on this story: Emmanuel Elone in Nashville at [email protected]

To contact the editor responsible for this story: William Dunn at [email protected]

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