How to Deal With the Payroll Process On Your Own
If you’re a small business owner with only a few employees, it may be worth processing payroll on your own instead of hiring a payroll company or an accountant. However, processing your own payroll can be challenging if you don’t know every component of the process and errors to watch for. If you ensure that you are comfortable with the payroll process before you begin, you are less likely to make mistakes and save some costs.
By following a few simple steps, dealing with the payroll process on your own becomes easier over time.
How to Deal With Payroll
What you Need
- Employer Identification Number
- State Tax Information
- Employee Information (including pay rate)
- Records Keeping System (reliable storage)
Step 1: Sign up for Employer Identification Numbers
Make sure that you have set up an employer identification number (EIN) with the IRS so that they may identify your business, much like an SSN. If you don’t have an EIN, you can easily apply for one on the IRS website. You cannot process payroll yourself without it.
Step 2: Collect the Necessary Information from Your Employees
The second step in dealing with payroll is to collect all of the relevant information from your employees. Each employee will need to fill out a W-4 form to confirm their filing status and personal allowances. Every new employee that you hire should receive this form to fill out as soon as possible. This form is important. You cannot process payroll without the details that it provides.
Step 3: Choose a Payroll Schedule
Once you’ve collected the relevant information from your employees and set up tax information for your business, you will want to decide when and how you want to pay your employees. The four different types of pay schedules are:
Most companies pay their employees bi-weekly, but the payroll period that you choose will largely depend on how you want to approach your business’s yearly schedule.
Step 4: Calculate Gross Wages and Withhold Income Taxes
It is important to track your employee’s hours to calculate their pay, and the easiest way to do that is to keep them in a spreadsheet. To calculate an employee’s gross wages, multiply the number of hours the employee has worked during that pay period by their hourly rate.
From there, you will have to calculate payroll deductions and allowances (or exemptions). Your employees’ allowances are specified on their W-4. A deduction is what can be deducted on your income when you do your taxes, and you will have to pay close attention to your employees’ tax-related forms to make proper withholdings.
Step 5: Pay Taxes and Benefits
You must also factor in other aspects of payroll processing on top of deductions and allowances, such as federal tax and employee benefits. This step can be time-consuming, so it is important to have all of the information organized on a spreadsheet.
You may have to consider:
- Federal taxes
- Local taxes
- Social Security
- Workers’ compensation contribution
- 401(k) contribution.
Step 6: Calculate Net Pay
To calculate net pay, you must subtract withholdings from the employee’s gross pay. Net pay is the amount that each employee receives at the end of each pay period, based on the payment schedule you had chosen.
Step 7: Pay Your Employees
Once you calculate everything and the numbers look right, proceed to pay your employees by the payment schedule and use their preferred payment method, if applicable. Make pay stubs for each employee to track payments and have both you and the employee keep records.
A situation may arise when there is an employee believes their paycheck is incorrect based on their hours worked. You will want to correct these mistakes immediately, and keeping records makes this even easier to do.
Tax Season Payroll Forms
Come tax season in January, you will have to provide some additional forms for workers detailing how much you paid them the previous year.
You must issue all employees a W-2 form, which details their gross pay and all of their tax withholdings for the year.
If you paid any contractors or freelancers for your business throughout the year but did add them to payroll, you will need to use a 1099-NEC form to report any payments made to such workers. There will be three copies of this form: one that you send to the IRS, one that you send to the respective contractor so that they may use it for their tax calculations, and one copy to keep for your records.
Tips for Processing Payroll
- Don’t forget that you must file your federal business taxes on a quarterly and annual basis.
- Calculating payroll without automation (by hand) can be a tedious task and, unfortunately, take hours. Even if you do payroll yourself, it may be beneficial to invest in payroll software to help speed up the process. Some online calculators can help you crunch your tax numbers.
- Excel is a simple but excellent tool to use to keep track and process payroll.
- If you are still struggling to get payroll right, consider hiring an expert. Hiring an accountant may be expensive, but the payroll process can be complicated, and it is better to have an expert handle it than to mess up an employee’s pay or face penalties from the IRS.
Saving Time Processing Payroll
Processing payroll on your own can save you a lot of money in the long run. The process may be complex and present challenges from time to time, but having the proper documentation, understanding taxes, and neatly keeping your payroll records organized makes it easier. If you find that you are having trouble dealing with payroll on your own, consider hiring a payroll service of a reliable accountant to help ensure that your employees are always paid accurately and on time.
Using FormPros can save you ample time and money when it comes to processing payroll for your small business. Form Pros can help you create pay stubs, W-4 forms for new employees, and tax forms such as W-2 forms in a matter of minutes.
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