How to Manage Payroll for Your Small Business:
A Guide to Do It Yourself

1. Register Your Business

Before starting to manage the payroll, it’s obvious that you must register the business officially. This involves:

• Business Name Registration - You must register your business with the Secretary of State.
• Apply for EIN - Obtain the Taxpayer Identification Number (TIN) for your business. Typically, businesses are provided with an Employer Identification Number (EIN) unless the business type is Sole Proprietor or Single Member LLC.

  In order to obtain an Employer Identification Number for your business, you must submit an application to the IRS. There are two ways for that:

  • You can file Form SS-4, Application for Employer Identification Number (EIN)

  (or)

  • Submit an online application. To learn how, click here.
  

  Note: While the EIN is applicable only to federal identification purposes, you may need to obtain a separate tax ID number from the state agencies as well.

• Registration with DOR and DOL - Then, you must register your business with the Department of Revenue (DOR) and Department of Labor (DOL)
• Registration with EFTPS - In order to deposit the taxes, you must register your business with the EFTPS, i.e., the Electronic Fund Transfer Payment System.
• DBA Name Registration - If you have a separate Trade Name/Doing Business As Name other than the one you registered earlier, you must register
  that as well.

2. Obtain Tax Information from Employees

Once you have the EIN ready, you must obtain the necessary taxpayer information from your employees. This information is necessary not just for identity purposes but also for understanding the withholding requirements for each of your employees. Typically, this is obtained through Form W-4:

Form W-4, Employee's Withholding Certificate - The form W-2 is applicable to all your full-time employees. With this form, you can get to understand the employee’s filing status, whether they are working for multiple businesses, and the applicable voluntary withholdings and adjustments. In 2020, this form underwent a major revision in terms of structure and fields, making it more simple to complete.

It’s recommended that you obtain these forms from your employees as soon as you hire them. Also, make sure the latest version of the forms are used.

3. Determine Your Payroll Schedule

In simple, the payroll schedule is the time frequency with which you pay your employees. To determine the payroll schedule that fits your business, you must clearly understand how each schedule works:

• Daily Payroll Schedule - Your employees will be paid everyday.
• Weekly Payroll Schedule - Your employees will be paid every week.
• Biweekly Payroll Schedule - Your employees will be paid every alternate week.
• Semi-Monthly Payroll Schedule - Your employees will be paid twice a month, typically on the 1st and the 15th of the month.
• Monthly Payroll Schedule - Your employees will be paid every month.
• Quarterly Payroll Schedule - Your employees will be paid every quarter.
• Annual Payroll Schedule - Your employees will be paid every year.

Based on your business type and requirements, choose the payroll schedule applicable to your employees.

4. Calculate Gross Payment

Here comes the calculation part! Generally, gross payments for your employees are calculated by multiplying the number of hours they worked with their
hourly wage rate.

For hourly employees:

Annual Gross payment = No. of hours worked x Hourly rate x No. of pay periods

For salaried employees:

Annual Gross payment = Salary per pay period x No. of pay periods

Before fixing the wage for your employees, it’s essential to make sure that the wage rate you fix stays in line with the federal and state wage laws.

In case the employee has worked overtime, the applicable overtime pay must be included as well. Also, the gross pay will include bonuses and sick/family leave allowances, if any.

5. Determine Necessary Deductions

For each employee, the percentage or the amount of taxes you need to withhold may vary. To determine the withholding requirements for an employee, you can refer to the W-4 shared by them. Based on that, you must determine the amounts that need to be withheld from the gross pay.

Also, it’s important to note that there are two different types of deductions:

• Non-voluntary deductions
• Voluntary deductions

6. Calculate Net Payment

Net payment is the amount of wages that your employees will receive after all the deductions.

For example, let’s say your employee John’s gross pay is $150/month, and his payment is subjected to $25 of deductions. In this case, John's net pay will be $125.

Once you determine the net pay, you can pay your employees on the scheduled payday as per your payroll schedule.

7. Calculate Your Contributions

While the deductions are amounts that will be deducted from your employees’ paychecks as taxes, there are certain other taxes that you need to contribute for each employee. Here are they:

• FICA Taxes - As mentioned earlier, FICA taxes aren’t just paid by the employee but the employer as well. One-half of the Social Security and Medicare taxes are deducted from the employee’s paycheck, whereas you will need to contribute the other half of taxes to the government.

  For the 2024 tax year, the IRS has set the percentage of FICA taxes as follows:

  Taxes	For Employee	For Employer
  Social Security Taxes	6.2%	6.2%
  Medicare Taxes	1.45%	1.45%

  

  Note:

  • For Social Security Taxes, the wage base limit is $168,600.
  • For medicare taxes, an additional 0.9% of taxes will be charged if the annual cumulative wage exceeds $200,000.

• FUTA and SUTA - In order to provide financial security for unemployed individuals, the FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) require you (employers) to contribute a certain percentage of taxes for every employee.

  To learn more about FUTA and SUTA, click here.

8. Report and Pay Your Payroll Taxes

The most crucial part of payroll processing is tax preparation, filing, and payment!

Tax Filing

There are different payroll tax forms available, and it’s important that you choose the applicable tax form for your business. Here are some of the commonly filed payroll tax forms:

• Form 941 - This is a quarterly return that you must file for your business to report income taxes, Social Security taxes, or Medicare taxes that are withheld from your employees’ paychecks.
  

  Note: If the total taxes you withheld are less than $1000 for the quarter, you can file Form 944 instead of 941.

• Form 940 - This is an annual return that you must file to report income FUTA taxes.
• Form 943 - This is an annual return that must be filed by agricultural workers to report the Social Security and Medicare Taxes withheld
  in employees’ wages.
• Form W-2 - This is an annual return that you must file to report the wages paid to employees and the taxes withheld on their paychecks.

Among all these forms, you can choose and file the tax form that is applicable to your business.

Tax Payment

All the taxes you withheld from your wages as well as your FUTA taxes, are required to be deposited to the IRS. This can be done through the EFTPS (Electronic Fund Transfer Payment System).

Let TaxBandits Take Care of Your Payroll Tax Filings!

TaxBandits, the IRS-authorized e-file provider, can streamline your payroll tax preparation and e-filing of 941, 940, W-2, and other payroll forms.

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