How To Do Payroll for a Small Business in 9 Steps

Learning how to do payroll for a small business is undeniably one of the most important things for a small business owner to master. And as your business grows, you’ll need to hire more employees, which means more payroll. 

From deciding what your payroll strategy will be to learning to set up a payroll system, it can seem like more payroll means more problems.

But you have options! You can learn how to do payroll yourself or hire an HR manager to take care of it in-house each pay period. Or you can outsource the tedious task of doing payroll for a small business through either an accountant or online payroll software. 

How to do payroll yourself.

If you don’t want to pay the fees that come with the help of an accountant or online payroll service, you may prefer to learn how to do payroll yourself. Doing your own payroll can be challenging, but with the right preparation and payroll software like a time clock and employee scheduling app, you can take the pain out of payroll.

Let’s dive into setting up, calculating, and managing  payroll for your small business.

How to set up payroll for a small business.

Does setting up payroll for your small business sound time-consuming? Here are nine steps you can follow to keep it simple. Make sure you complete each one to avoid any future problems and consult a professional for experienced guidance.

The great news is once you learn how to do small business payroll right at the start, you’ll have a smooth payroll process to follow each time you hire someone new. Just set it and forget it.

1. Get an Employer Identification Number (EIN).

In order for the IRS to track your business’s payroll tax forms and payments, they require you to obtain a Federal Employer Identification Number (EIN or FEIN). You can apply for one for free on the IRS website. 

Note: You will also need to register with your state as an employer, but the steps are different for each state. Visit your state’s Department of Revenue and Department of Labor to learn more about what you need to do.  

2. Register with the Electronic Federal Tax Payment System (EFTPS).

If you’re giving employees paychecks and running payroll, you’re required to pay taxes. You can do so online by registering with the Electronic Federal Tax Payment System (EFTPS), a free online tool you can use to pay your federal payroll taxes and federal unemployment taxes. 

You can sign up for your EFTPS account here. 

3. Learn the laws on how to do payroll records for small businesses.

Probably the most tedious aspect of learning payroll for small business is making sure you are up to date on every law you must follow in terms of paying employees. Here are a few laws you absolutely need to know before your first pay period: 

• Your local minimum wage
• Overtime laws 
• Payday requirements
• Final paycheck laws
• Withholding requirements
• State disability insurance requirements
• Local income tax requirements 
• Required breaks 
• Workers’ compensation insurance requirements
• Additional tax withholding requirements by state 

4. Determine your payroll schedule. 

After you learn your state laws on how often you need to pay your employees, you can set a payroll schedule for your team that keeps you compliant and works for your business. Common payroll schedules consist of a pay period (how long people work) and a pay date (when people get paid). The most popular pay period used in the United States is a biweekly period.

5. Collect new hire paperwork and payroll information.

Your employees need to complete new hire paperwork after they accept a job offer. The required forms give you the information you need to run payroll, including employment eligibility, tax withholding, and direct deposit information. 

You’ll also need their bank account information if you’re offering direct deposit. Don’t forget to document their salary or hourly wage, as well as any additional compensation like bonuses or commissions. 

Ensuring you have accurate and complete information will help you avoid payroll errors and ensure your team gets paid on time, every time.

Tip: Homebase hiring and onboarding will send a packet to each of your new hires with all the required forms they need to complete. New team members can even fill out the paperwork online and have it ready to go before their first day. 

6. Report new hires to your state.  

Before running payroll, you need to submit your new employees to your state’s new hire reporting agency. However, if you outsource your payroll process to a service like Homebase, your provider will typically complete this step for you.

Before you start running payroll manually, learning how to put someone on payroll requires the following information: 

• Your employees’ W-4 form to determine how much you’ll withhold in taxes.
• The federal payroll tax withholding rates, which you can find here. 
• Any state and local tax withholding rates you are subject to. 
• Your state unemployment tax rate.

7. Calculate gross pay. 

Your employee’s gross pay is the total amount of money your employee earns each pay period before payroll tax withholdings, retirement contributions, and health benefits are deducted—what is left is known as net pay.

If you employ hourly workers, time tracking is important. Start by multiplying the employee’s hours worked by their hourly wage.

Here’s an example: If the employee’s hourly rate is $10 an hour, and they worked 40 hours for the weekly pay period, then their gross pay would be $400. 

If you employ salaried workers, divide the salary by however many pay periods are in your payroll schedule for the year.

Here’s an example: If your employee’s salary is $50,000, and you run payroll 24 times each year, then their gross pay for each pay period would be $2,083. 

If your employee receives any of the following during each pay period, you’ll have to add them in as well: 

• Tips 
• Overtime pay
• Bonuses
• Sick and vacation pay
• Commissions

8. Calculate pre-tax deductions and federal tax withholdings.

A pre-tax deduction is a deduction from an employee’s gross wages. Health insurance is a pre tax deduction, as are retirement contributions and disability insurance. Before payroll taxes are calculated, you’ll need to subtract these deductions from the gross wages. 

For example, if an employee contributes $100 per pay period to their health insurance premium, you would deduct $100 from their gross pay. 

After pre-tax deductions are made, you have the employee’s taxable gross pay. Now you have to withhold employee payroll taxes mandated by the federal government. Small business payroll taxes can range across states, but they include: 

FICA tax 

Your employee’s FICA payroll taxes are their contribution to Social Security and Medicare. The Social Security tax rate for an employee is 6.2%, and the Medicare tax rate is 1.45%. 

Federal income tax

If your employee’s gross pay equals less than $100,000 per year, you will use the wage bracket method to calculate federal income tax withholding. Use the IRS income tax withholding tables to find your employee’s wage range. 

If your employee earns more than $100,000 per year, you need to use the percentage method, which is a bit more complicated. Learn more about this method using the IRS income tax tables linked above.

State taxes 

Your state may require you to withhold more in taxes from your team’s paychecks. Be sure to check with your state’s department of revenue website to learn more. 

Subtract other mandatory or voluntary deductions 

You may need to withhold other taxes from your employee’s paycheck, including voluntary deductions like union dues or mandatory wage garnishments that might be deducted to cover things like unpaid child support or delinquent student loans. This is done using a W-4 form.

If your employee has a wage garnishment requirement, the government will let you know how much you need to withhold and where to send the wages. 

9. Disperse paychecks and maintain records. 

Once all aspects of payroll are calculated, you need to pay your employees. Most states require you to provide a pay stub, so make sure to include one that includes all the requirements your state mandates. 

Next, record the payroll totals for all employees so that when you are submitting payroll taxes and quarterly and annual reports, you’ll have the information ready to go. 

Keep a record of the following for each employee: 

• Gross pay
• Voluntary deductions
• FICA payroll taxes
• Federal, state, and local withholdings
• Wage garnishment totals

Calculating federal employer taxes 

You are responsible for FICA payroll taxes, which are the same as an employee’s rates (Social Security 6.2% and Medicare 1.45%).

Also, you’re responsible for FUTA payroll taxes, which contribute to federal unemployment insurance. You are responsible for paying 6% of each employee’s first $7,000 in wages. Once your employee earns that $7,000, you are no longer responsible for FUTA taxes.

State employer taxes 

You are required to pay State Unemployment Insurance Taxes, no matter which state you operate in. Each state’s payroll tax rate varies, and you will receive the rate when you register as an employer with the state Department of Labor. Your rate can change year-to-year, and the state will inform you of any changes.

And that’s how to run payroll. But small company payroll can involve other taxes that you should keep in mind.

How to manage payroll taxes for a small business.

Federal taxes 

Your tax deposit schedule depends on what type of schedule you have, which is based on your payroll tax liability for the previous quarter—or the 12-month period that ends on June 30, which is called a “look-back” period. 

Take a look at the IRS’s guidelines on deposit schedules to determine which one you need to follow. 

FUTA taxes 

If you owe more than $500 in FUTA taxes, you need to pay them on the last day of the month at the end of each quarter. However, if you owe less than $500 in a quarter, you don’t need to make a deposit—the amount will roll over to the next quarter and you’ll owe a deposit once the total is at least $500. 

If you never reach $500, the total amount you owe is due by January 31 of the following year. 

What tax forms do small businesses need to run payroll?

Form 941

You are responsible for filing Form 941, Employer’s Quarterly Federal Tax Return, every quarter. From this form, the IRS learns how much money was withheld from each employee’s paycheck, as well as how much you paid in employer taxes for the quarter. 

You must submit this by the last day of the month after the end of every quarter; you can do so online here. 

Form 940 

You must file Form 940, Employers’ Annual FUTA Tax Return, if you: 

• paid at least $1,500 during the year in wages for your team.
• employed someone for at least 20 weeks during 1 year. 

This form is due January 31, but if your FUTA payments were on time, you have until February 10. You can also submit this form online here. 

Form W-2 

The Form W-2 needs to be completed for every employee as part of your annual year-end payroll. The form is used to report yearly wages for your team, as well as deductions and tax withholdings. You will need to send a copy to each employee, the Social Security Agency, and your local tax department by January 31 annually. 

You can purchase the forms from your local office supply store and prepare and file them yourself, or you can use an online service that files the forms for you electronically and sends copies to your team. 

How to manage payroll for a small business (with some help).

As you can see, there are a lot of steps involved in learning how to do payroll for a small business yourself. So it might make sense for you to use the help of online software or accountants. 

Accountants 

Hiring an accountant might be an option for you if you want to be entirely hands-off throughout the payroll process. Your accountant would handle all aspects of small business payroll processing for you. However, be prepared to pay more in fees than you would if you used online software instead. 

Online payroll software 

Setting up your small business online payroll solutions allow the software to handle all of the payroll heavy lifting by doing calculations, tax filings, and quarterly and annual reports for you.

If you use an app or online system, your only responsibility is to enter the hours worked for each employee. However, if you use Homebase, your timesheets turn into hours and wages in payroll automatically, so your only job is to approve the payroll. Get started with us today to learn more about how easy running payroll can be each pay period.

Run payroll from anywhere, anytime.

No matter how many employees you have, how to start  payroll for a small business follows the same steps. It’s the small details that can eat up your valuable time and keep you from focussing on your business.

Small business payroll management is easier with help. Whether you  hire an accountant or use payroll software, remember to work smarter, not harder. Homebase automatically handles your tax calculations, direct deposits, and payroll taxes for you, so you can grow your team without stress. And with our tools for time tracking, scheduling, and compliance, our all-in-one app helps you  manage your team in one place. 

So next pay period, you can say goodbye to paperwork and focus on growing your business.