How to Do Payroll Yourself: A Money-Saving Guide for Small Business

Small business owners have a choice that can mean the difference between losing or saving thousands of dollars a year: You can work on your company’s payroll yourself, or you can pay someone else to do it. With 35 percent of retailers planning to use algorithms to automate payroll and benefits away from the hands-on aspect, it’s looking ever more like outsourcing is in. But for founders of lean operations with 10 or fewer employees, learning how to process payroll yourself can be a viable stopgap before committing to paying for software or a service.

The numbers tell the story. Small business payroll services can run up to $150 a month. That’s $1,800 a year money that could be used for promotions, new equipment, or an emergency fund. Manual payroll can be a detail-oriented thing, but the cost savings can be substantial when you’re starting from scratch.

Handling tax liabilities alone is also a big challenge. Social Security and Medicare taxes, miss these calculations, and you’re flirting with penalties that could quickly make a mockery of the savings promised by DIY.

Manual payroll carries real risks. Mistakes can lead to heavy tax and labor fines. The I.R.S. rules require businesses to keep tax forms for three years, and a single miscalculation or misfiling can spiral out of control into expensive compliance issues. But by maintaining good records and executing thoughtfully, business owners can successfully handle this important aspect of their enterprise without relinquishing control over their financial interests.

This guide will dissect the important components, tools and strategies for processing your own payroll in a way that’s easy to understand while keeping you in compliance with federal and state regulations.

Why Small Business Owners Choose to Do Payroll Themselves

It’s a choice that every entrepreneur faces at some point. It’s 11 p.m. and you’re sitting in your office, looking at an employee time sheet and tax tables, weighing a decision that will help define the financial future of your business: Do I try to do payroll myself, or do I give it to someone else? The answer will depend on whether money complexity is something you can tolerate, whether it makes sense for the size of your business, and how many resources you’re willing to invest in that.

Cost savings vs hiring a service

In the case of bootstrapped startups, manually managing payroll is the only viable processing alternative that’s truly free. Beyond basic tools such as spreadsheets or calculators, the up-front investment is close to zero. No subscription fees, no per-employee charges, no unexpected bills.

The alternatives suggest another truth. The majority of payroll vendors charge a base monthly fee of between $20 and $180, plus per-employee fees from $4 to $20 a month. Even some of the more affordable services usually charge something like $20 a month for the base price plus $4 an employee. Step up to the level of a full-time accountant, and you’re talking about around $79,880 a year, based on median annual income data from the Bureau of Labor Statistics.

But free isn’t always cheap. Running payroll manually saves money upfront, but it costs a lot of time that could be used to make money. That is the hidden cost that most entrepreneurs come to realize too late.

Greater control over the payroll process

Control appeals to business owners who have grown their businesses from the ground up. When you do your own payroll, there is no waiting for two weeks to view payroll information or the ability to make ‘on the fly’ changes as necessary. You can instantly adjust when cash flow gets tight or an employee requires special consideration.

Providers work on standardized procedures from a third party. Manual payroll means you can tailor everything, pay schedules, tax withholdings, and bonus structures directly to your business. No waiting for support tickets, no explaining your unique situation to service agents who have never heard of your industry.

This is especially useful in times of financial uncertainty or employee situations that need a personal touch.

Risks of manual payroll

The numbers paint a stark picture. Nearly 40% of small businesses pay an average of $850 a year in penalties because of payroll errors. According to I.R.S. data, small businesses are hit for billions of dollars a year in penalties on payroll taxes, typically for errors in data or filings.

Time is the enemy when you go from a small business to a large one. The figure is, of course, even higher for others: 20% devote in excess of six hours a month to payroll taxes, and some small business owners spend an astonishing ten hours each around, that’s three work weeks every year. Dot it for 100 employees, and the complexity and potential errors just went up by a factor of 2.

Those pitfalls can compound quickly: mistakes in tax withholdings, misclassifying employees, missed filing deadlines, and problems with record-keeping. Manual payroll process also makes it more susceptible to internal fraud schemes such as altered timesheets and even embezzlement.

And keeping with dynamic tax laws and regulations makes things even more complicated. Without expertise like this, you would be left open to expensive compliance breaches that could have dire consequences on your business finances as well as credibility.

Most business owners who handle payroll manually find that the excess time and risk are not worth it once they grow.

How to Do Your Own Payroll in 5 Steps

You’re at your desk with a pile of employee timesheets, and the sheer volume of payroll processing stares you in the face. However, successful business owners have been handling this manually for years. The magic is in treating payroll as just another systematic business process, one that becomes second nature once you master the mechanics of doing it.

When entrepreneurs spend time on setup, payroll becomes a manageable task despite the complex learning curve. There are five critical phases of payroll you can break down for your business to remain competitive.

Get your EIN and register with EFTPS

Before you can even process one single payroll, your business will need an Employer Identification Number (EIN). Consider it the company’s Social Security Number, necessary for filing tax reports with the IRS and opening business bank accounts. The process to apply is simple: just fill out Form SS-4 at IRS.gov for free.

The Electronic Federal Tax Payment System (EFTPS) enrollment follows. All tax deposits must be made by electronic transfer according to federal law, so EFTPS enrollment is not a choice. This registration process will take around 5 business days, so make sure to do this well before your first payroll run.

A key note: EFTPS payments have to be scheduled by 8 p.m. ET the day before your due date in order to arrive on time. Nut, miss it by a few days and your on-time payment for this becomes late, along with added penalties.

Collect employee tax and payment info

You’ll need additional materials, some of which you should collect from employees individually before running your first payroll:

• Full legal name and address
• Date of birth
• Social Security Number
• Start date
• Compensation details

In addition to basic identity data, employees are required to fill out certain federal forms. The tax withholding worksheet is Form W-4 (Employee’s Withholding Certificate), and the one for work authorization is Form I-9 (Employment Eligibility Verification). Some states also require extra withholding certificates.

If the employee does not turn in a W-4, you are required to withhold taxes as though the individual were single or married filing separately with no other information. Such defaults frequently lead to over-withholding and unhappy employees, as well as additional administrative burdens come tax time.

Calculate gross pay and deductions

The numbers on payroll are routine. Bills charge hourly employees the number of hours worked multiplied by their pay rate. Salaried workers receive their annual salaries, divided by the number of pay periods in a calendar year.

So deductions come in a certain order:

• The debt that applies to pre-tax reductions (i.e Health insurance, Retirement plans)
• Federal Income Tax (W-4)
• Social security tax (6.2 percent of wages)
• Medicare tax (1.45% of wages)
• State and local income taxes (rates differ for everyone)
• Post-tax deductions (wage garnishments, etc.)

And don’t forget: Employers have to match employees’ contributions for Social Security and Medicare. These matches are an additional cost of doing business beyond the salary paid to employees.

Pay employees and submit taxes

Employees can be paid through direct deposit or paper check, based on the decision of your employees and what you prefer. Tax payments are subject to different rules. Federal deposits must be made using the EFTPS system, your financial institution, or another approved third party.

The frequency of your deposits is based on your reported tax liability during a lookback period. Monthly depositors are required to make payments through the 15th day of the month following the reporting period, whereas semi-weekly depositors have deadlines that depend on their payroll assumptions. New employers usually make monthly payments for the first time.

File required tax forms

There is paperwork galore throughout the year with payroll. Form 941 (Employer’s Quarterly Federal Tax Return) is for income taxes and FICA taxes during each quarter. Form 940 (Employer’s Annual Federal Unemployment Tax Return) is the form that processes FUTA taxes each year.

Employee-specific forms would be: Form W-2 given to each employee by January 31, as well as Form W-3 (Transmittal of Wage and Tax Statements) sent to the Social Security Administration.

Beginning in tax year 2023, businesses are required to file these returns electronically if they are submitting 10 or more information returns. This requirement eliminates paper filings for most start-up businesses.

Manual payroll works with precise timing and a great deal of attention to deadlines. Start on the Right Foot. These are your five steps as a guide, but they only work if they are consistently applied and recorded at each pay period along the way.

Tools to Simplify Manual Payroll

The proper tools can make a cumbersome payroll situation manageable. As smart business owners know, you don’t need to reinvent the wheel; not when there are reliable solutions that can streamline, minimize mistakes, and stay on track without breaking your budget.

Free payroll spreadsheet templates

Microsoft Excel and Google Sheets templates save you from having to invest time into designing payroll systems from the ground up. Microsoft offers a variety of Word templates for creating payroll sheets that can include hourly rates, overtime, wages, and taxes. These templates are flexible to respond to thousands of pay cycles, based on changes in remuneration, tax rates, and employee benefits. Alternatively, there are sites such as Freepayslip.com that have payslip templates, or you can create one yourself.

Smartsheet’s template approach has even more choices:

• Payroll Registers – record employee information from salary schedules to vacation balances and deduction details
• Graphical payroll data views for fast financial summaries in dashboard templates
• Employee vacation trackers track leave hours consumed and accumulated
• Daily, weekly, and monthly timesheet templates

The real benefit is the pre-built formulas. Input employee pay rates and tax details, and the spreadsheet does all the math for you. No prior computer skills or programming knowledge are necessary, and no monthly subscription fees.

Online paycheck calculators

Free calculators take away the math barrier that causes many entrepreneurs to stumble. ADP offers a paycheck calculator that allows you to calculate your gross-to-net computation for all 50 states, federal income tax withholding, state income tax withholding, FICA (just the Social Security and Medicare payroll taxes), and any other deductions or payroll contributions to be withheld from their pay.

Click on PaycheckCity’s similar functions, including pay, hourly, bonus, and net to gross calculators. “These are tools that can help employers review payroll accuracy, but they also can be helpful for employees who want to know what their take-home pay is. State and local payroll taxes based on location are also included in the calculators.

Calculations for hourly employees are especially useful when working with different pay rates. Most platforms accept:

• Hourly rates or annual salaries
• Pay frequency preferences
• Filing status details
• Allowance and withholding specifications
• Voluntary deduction amounts

IRS and state tax resources

Payroll Compliance The IRS Small Business and Self-Employed Tax Center is the official resource for payroll compliance help. The tool is for taxpayers who file Form 1040 or 1040-SR with a Schedule C, E, F or Form 2106, plus small businesses with assets under $10 million.

There are similar resources available from your state tax jurisdiction’s local compliance. Free calculators, filing instructions, and deadline alerts help manage different state rules that can be quite disparate from federal requirements.

These retail tools are more than just calculator aids; they also educate on tax needs, filing deadlines, and payment schedules, crucial information for avoiding fines that could easily outweigh any cost savings from handling payroll by hand.

When to Consider Payroll Software or an Accountant

Even the most stubborn DIY business owners succumb to a reality check at some point. Something that begins as a fairly reasonable amount of time once per week can become an albatross of distraction and writer’s block, steering you away from making money. Knowing when you have hit that wall can mitigate a lot of agony and avoid costly missteps.

Signs you’ve outgrown manual payroll

The warning signs are usually slow, and then suddenly impossible to ignore:

Exponential complexity arises as the headcount grows. Operating in different states compounds compliance on top of what is already required. Ironically, the best signal is the time the average small business owner spends five hours per week on payroll tasks or 260 hours a year.

Frequent errors signal system breakdown. Approximately 40% of small businesses pay an average annual penalty of $845 to the IRS due to payroll errors. High payroll turnover makes things worse, as HR departments report turnover percentages over 14%.

The bigger trend is quite clear: 83% of HR leaders report greater demands than they faced three years ago. Once payroll begins taking time away from more productive core business activities, options become a must, not a luxury.

Benefits of using payroll software

Automation has clear benefits over manual handling. Roughly 75 percent of the companies that use a payroll application collect data and process it in 15 minutes or less a 90 percent cost reduction compared with those using manual methods.

Better compliance is another huge plus. Federal, state, and local taxes are automatically calculated and deducted by payroll software. The protection matters: Businesses are subject, collectively, to $6 billion in penalties annually for failure to comply with payroll tax laws.

Employee self-service portals let employees update their info, see their pay stubs, and track benefits on their own. This capability reduces administrative overhead and allows employees to be responsible for their own data.

Bank-grade encryption, secure cloud-based servers, and role-based access controls provide superior security for any sensitive employee data.

How an accountant can assist with compliance

CPAs offer software another layer of specialization:

With strategic compliance planning, a company can identify instances when bringing on new employees may suddenly prompt new regulatory requirements (or alter an existing minimum wage requirement). Multi-state know-how is essential as accountants navigate the multijurisdictional employer remote worker rules.

Compliance audits nip potential issues in the bud before they become costly problems. Tax specialisation means correct reporting and on-time payment to the relevant bodies.

Which Provident payment method you choose, carry on with manual payroll, invest in Provident software, or hire a professional accountant, is entirely up to your individual situation. Each one offers a different tradeoff between how much time you want to spend, what you want to pay, and how worried waiting for the other shoe to drop over your head makes you.

How to Avoid Payroll Mistakes and Penalties

Payroll is a business process with mistakes that can happen lightning quick. It’s that attention to detail and constant watchfulness that can protect your business against expensive penalties, not to mention compliance nightmares.

Double-check tax rates and deadlines

Small business owners face IRS penalties of $845 per year for on average, for payroll mistakes. The penalty schedule climbs fast 2 percent on payments that are 1-5 days late, and up to 15% for payments severely past due.

Create a dedicated payroll calendar. The Quarterly Tax Reminder can track filing due dates for quarterly tax returns, as well as remind you when to distribute your W-2 forms (due by January 31) and match the deposit schedule that applies to you. The frequency of your deposits, monthly or semi-weekly, is based on how high your tax liability was due to be in the lookback period; missing deadlines results in automatic penalties.

Tax rates change. State requirements shift. What was effective last year could be harmful this year.

Keep accurate records

And the Fair Labor Standards Act requires employers to keep payroll records for at least three years. Your documentation needs include:

• Information of employee (legal name, SSN, address, birth date)
• Hourly wage, OT, and Total Compensation Information (2 comma-separated sets of values)
• Tax forms and payment receipts
• Leave documentation and PTO balances

Good record-keeping is your friend in an audit or dispute. Secure archives, access to which is restricted to authorized personnel. Think of this as your insurance against problems down the road.

Review pay stubs and statements periodically

Mistakes are frequently not noticed until workers come across discrepancies when preparing tax returns. Creating a regular review routine also means catching errors before they impact workers themselves or put the company at regulatory risk.

Certainly, savvy organizations have HR technology that allows employees to find and correct issues prior to payroll runs. This ability is estimated to help about 70% of workers feel better about their finances and at work.

Paying employees correctly creates confidence in your staff and protects your business from possible fines. Spending time on a thorough review is a great investment in avoiding trouble.

Conclusion

Ultimately, doing your own payroll is a simple equation:

time versus money. The result is that for small-business owners working on a shoestring, there are clear financial incentives in the D.I.Y. route when contrasted with services charging monthly fees plus per-employee costs. Having your hands on the gear stick with scheduling, withholding taxes, and every aspect of the payroll process can be a godsend when you’re building up a new business. But the power does mean great responsibility.

The guiding five-step method discussed here reveals a plan that you can follow, but your success will be based on how dedicated you are to not falsifying any information and keeping it Nadcompliant. Tax deadlines stop for no one, and crunching the numbers wrong can prompt fines that wipe out any savings. The IRS takes no interest in the fact that you are instead a startup hoping to bootstrap its way into profit.

Free tools can automate a lot of the manual labor. You’ll minimize the risk of error and ensure you remain compliant with ever-changing regulations using spreadsheet templates, online calculators, or government resources that can do the work for you. These tools empower many small outfits to do it themselves, and it gets more complicated as you scale your business.

The more people a company hires, the longer it takes to do the math. Operations across several states also create compliance overlays. Frequent mistakes mean you may have outgrown manual handling. These warning signs signal the need for payroll software or professional accounting services, changes that many thriving businesses eventually outgrow.

Savvy business owners know that you’re going to be ahead of the game no matter what if you understand those few basic payroll concepts very well. Whether you ultimately stick with manual or migrate to automation, knowing tax liabilities, what’s required for compliance, and how to keep records keeps your business secure and employees resistant. The skills you acquire by doing your own payroll form the foundation that is good for any growing business.

The decision is yours to make and remake, as your business changes.