Small Business Payroll Made Easy: 7 Steps to Do It Yourself

Andrew Moran - Writer for TBR
By Andrew Moran
Kirsty Macdougall - Editor for TBR
Edited by Kirsty Macdougall

Published September 13, 2022.

A woman resting her palms on a large table, crunching numbers on a calculator and holding a pen, while looking at a variety of papers featuring charts which are on the desk.

The do-it-yourself (DIY) trend has made its way to small businesses, especially on the payroll processing front. But while manually completing, filing, and managing payroll information might cut operating costs and save you money, it is always best to consult a relevant professional with financial and legislative experience and knowledge of this arena.

That said, with such heavy workloads and limited time, it's possible to have streamlined, simple payroll management without any headaches. Here are seven time-saving tips for doing it yourself.

1. Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a nine-digit federal tax identification issued by the Internal Revenue Service (IRS) to report employment taxes. The EIN never expires and is never reissued to another company.

The application process is also a straightforward task and consists of these steps:

  • Determine your eligibility, including a valid taxpayer ID number and the business located in the United States.
  • Gather required business information, such as the date the business was started, number of employees, first date wages, and closing month of the fiscal year.
  • Apply for an EIN either online or by mail.

2. Determine Federal & State Business Requirements

When launching and managing a small organization, owners must adhere to many federal and state business requirements. But what rules, regulations, licenses, taxes, and permits are mandated will be determined by a wide range of factors, namely:

  • Business structure Are you a sole proprietor, corporation, Limited Liability Company, or partnership?
  • Industry What a small business needs to operate correctly will be based on the type of industry. For example, the U.S. Department of Agriculture (USDA) will issue permits for firms specializing in agriculture.
  • Business name Entrepreneurs must select a business name and learn if it violates another company's federally protected trademark. This will be done through the U.S. Patent and Trademark Office (USPTO).
  • Intellectual property Should your small business possess any intellectual property, it would be best to register a copyright, patent, or trademark with the USPTO.

3. Employees vs. Independent Contractors: Understanding the Difference

It's important to clarify whether your small business is hiring employees or working with independent contractors.

The former is someone on a company's payroll and earns wages and benefits in exchange. The latter is a professional who maintains autonomy and flexibility without benefits and perks.

It is crucial to understand the difference because misclassifying a worker can trigger fines and penalties, lead to legal disputes, and result in back taxes.

4. Decide on a Payroll Schedule

A payroll schedule outlines how often employees receive their paychecks, be it weekly or monthly. This is usually one of small business owners' first steps when hiring employees.

But how can a company determine the best payroll schedule? Here are some factors to think about:

  • Are there state regulations that require a minimum number of times employees are paid in a month?
  • How does business cash flow synchronize with the payroll schedule?
  • Are job candidates willing to wait an entire month to receive a paycheck?

5. Calculate & Withhold Income Tax

Small business owners must calculate the withholding tax to correctly determine how much money they should deduct from their employees' paychecks. They should then send it to the IRS to make the necessary tax payments.

This is performed by assessing the employee's W-4 form, their gross pay for the pay period, and the agency's income withholding table.

6. Pay Payroll Tax

A payroll tax is a levy imposed by federal or state governments to cover the cost of public programs, be it unemployment insurance or Medicare. Small business owners are mandated to pay all of the payroll taxes outlined by the government.

Payroll taxes vary by government, so entrepreneurs should consult with a licensed tax professional if they are unsure.

These are ordinary taxes small business owners can expect to pay:

  • Federal Insurance Contribution Act (FICA) Tax: A two-part 15.3% tax that covers Social Security and Medicare.
  • Federal Unemployment Tax Act (FUTA) Tax: A 6% levy on the first $7,000 employees make annually, paid only by employers.
  • State Unemployment Tax Act (SUTA) Tax: A tax to cover a state's unemployment programs. (The state stipulates this rate.)

Employers can then withhold the relevant federal payroll taxes from employees' wages and submit payments, other tax liabilities, and related forms and documents to the IRS. This is done using the Electronic Federal Tax Payment System (EFTPS).

7. File Employee W-2 & Tax Forms

A W-2 form is a statement that small business owners must prepare and file for their employees at the end of each tax year. It summarizes an employee's total earnings, federal and state withholding tax, and Social Security or Medicare earnings.

Every employee needs to receive a copy, and all forms must be sent electronically or by mail to the Social Security Administration (SSA).

In addition, there is a treasure trove of other tax information you can send to the IRS. Here are some common forms to consider:

  • Form 1040 (Also known as Schedule C): This form reports how much money your business earned or lost in a tax year.
  • Form 8829 (Also known as Expenses for Business Use of Your Home): This form deducts eligible living costs, including rent and utilities, as business expenses.
  • Form 4562: A document used to report the amortization or depreciation of property or automobile used for the business.
  • Form 8283: A claim for a deduction on non-cash charitable gifts that a small business made exceeding $500.
  • Form 7004: This form requests a deadline extension to file taxes.

Again, these can be filed electronically or sent by mail.

Help Is Available for Small Business Owners

Manual payroll processing can be time-consuming for small business owners, and many are now considering alternatives to manual payroll systems.

In a global marketplace of heightened competition, inflationary pressures, and advancing technologies, it can be challenging for entrepreneurs to take on the task of accounting. This can also result in errors since preparing and filing taxes can be challenging to complete.

While every small business can manage and submit necessary tax information, other options exist, such as leveraging automated software solutions or outsourcing work to a professional and certified accountant.

If you're interested in automation as an alternative, we recommend browsing these payroll software articles and reviews to get you started.

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