How to Do Payroll: A Guide for Small Businesses

According to the National Small Business Association, 36% of small businesses across the United States spend $500 monthly to service their payroll.

For many small businesses, that’s money they can better spend in growing their operations. Thus, it is not unusual to find small firms taking a do-it-yourself (DIY) approach to handling payroll.

Here’s a guide to help you learn how to do payroll for your firm.

How to Do Payroll for Your Small Business

When you go the DIY route on small business payroll, there are several steps you will need to take. These include:

Preparation: You will have to collect all the pertinent information before you can begin processing the funds. That starts even before you hire employees, and it includes deciding who will handle the process.

Paying the staff: Once you have all the necessary information, you can craft a schedule to disburse the payments. Here, you’ll have to manually compute the amounts and arrive at gross and net pay per worker.

Post-payment follow up: After your staff has received their salaries, the process doesn’t end for you just yet. At this point, you’ll need to make records for the period’s payroll and store it. If there are any mistakes or miscalculations, this is the juncture you document them and in preparation for alerting the Internal Revenue Service (IRS).

Let’s look at this process more closely.

1. Set up to Operate as an Employer

After setting up your firm’s legal structure and acquiring all the necessary licenses, you need to make your firm legally qualify as an employer.

Start by setting up an employment ID number (EIN) with the federal government if you’re a new business. It’s at this juncture that you’ll also need to verify your state tax identification number. If you don’t have one yet, consider applying or checking if you’ve been assigned one automatically.

Additionally, you’ll need to sign up for the Electronic Federal Transfer System. You’ll also need a separate payroll account that’s not your existing business account.

Since many states require you to purchase workers’ comp insurance, you’ll need to look for a policy.

2. Design Your Payroll Process

When looking at each aspect of the payroll system you already have or want to adopt, consider your firm’s needs. Furthermore, you also need to factor in what can best serve your employees.

As you design the process, ensure you correctly classify the type of employees you have. Have you identified all the taxes you’ll need to pay? How often will you be submitting them?

How you deploy the process is also critical. Since you opt to do it on your own, you’ll need to identify programs like Genie Payroll Plus that can help you deploy an efficient process.

Don’t forget to determine how your staff would prefer to receive their salaries. Options include a direct deposit, checks, pay cards, cash, or a combination of these.

3. Collect Payroll Forms

For every new employee (or those whose forms you hadn’t collected), you’ll need to get these authorization forms that your staff need to sing.

First up is the federal W-4 form, which informs you of the tax rate to use per employee. While you won’t need to file this with the IRS, you’ll have to store a signed copy electronically or in a paper file.

Next up is a state W-4 or it’s equivalent. It’s similar to the federal one, and you should keep a signed copy in your paper file or electronically.

Don’t forget to ask for a signed I-9 form. Every employee has to deliver this document within three days of their starting work. A signed I-9 form is essential in that it verifies an employee’s identity and their eligibility to work in the United States.

If you pay your team through direct deposit, you’ll need them to give you a voided check with their information.

To round out these documents, you’ll need to register any new employee in your state’s New Hire Reporting Program. That should be done within 20 days of them starting to work for you.

4. Receive, Assess and Approve Time Sheets

Before you begin paying the team, you will have to collect accurate data on their work performance.

You can install a simple timesheet system to track when each employee clocked in and out. As you progress, you will have the capacity to invest in a more advanced system to manage that.

For any hourly workers you employ, you will need to track the total number of hours they have worked to compute their pay. Employees on a salary tend to receive a fixed amount each period, but you can track their hours to gain visibility into productivity.

To calculate the hours an employee has worked, you add up the hours between their clocking in and out. Remember to exclude lunch breaks from the total number of hours you arrive at.

5. Calculate Payroll and Taxes

With the amount of time an employee has worked in hand, you can use their hourly rate to arrive at gross pay.

Multiply the total number of hours by the hourly rate at which an employee receives. If there are any overtime hours (beyond 40 hours a week), then use the overtime rate to get the total gross pay. Typically, employers pay 1.5 times the regular hourly rate for overtime.

Next, you need to make state and federal deductions from the gross pay. These deductions should also include any benefits you offer and other miscellaneous deductions.

Add up the total deductions per employee and subtract the total from their gross pay to get the net income for the period.

You can then forward the net pay to your staff and the deductions to the relevant authorities and benefit providers.

Don’t forget to document your payroll for the period and store it in a paper file or electronically.

Make Payroll Cost-Effective

Many small businesses find that doing payroll on their own is cost-effective. If you choose to go this route, you should first research deeply on how to do payroll to make it cost-effective and ensure you serve your employees’ and business needs adequately.

Are you thirsty for knowledge that can help you streamline your small businesses’ operations? Check out more of our content for insights and lessons that can help make your business more agile.