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Business payroll management is a lot of work. You'll need to understand federal, state, and local regulations surrounding business insurance, employee wages, employee pre- and post-tax deductions, tax laws, and overtime pay.
You'll also have to calculate the amount of funds to deduct from your employees' gross wages for each pay period, and record it all on their pay stubs. Most businesses opt for high-quality payroll software to manage all those laws and calculations, but if you're willing to put in the work, you won't have to pay a cent.
Here, we explain the basics to understand about how the typical payroll process works. These are just guidelines, however, and you should still research your local tax law to ensure you are meeting all requirements.
Who Should Be On Your Payroll?
Payroll refers to the amount that is paid on a regular basis to each of your employees.
Pay periods might be weekly, biweekly, or monthly and payments may come in the form of paper checks or direct deposits. Certain amounts must always be deducted for taxes and benefits to meet any federal, state, and local regulations that apply, and you'll need to save records for your own business tax filings.
Your employees might be full time or part time, and might be paid per hour or on a salaried basis. Independant contractors are not on your payroll, since they'll handle their own taxes and you won't be withholding any. However, you will still be issuing a payment for them, and if you're using a payroll software, it will track these payments as well.
Here are the main terms and definitions to know when researching everything you'll need to complete during the payroll process.
- Payroll taxes: Taxes paid on wages, tips, and salaries. These can be federal, state, or local, and are paid by both employees and the employer.
- Gross wages: The amount earned by an employee before any taxes, benefits, or garnishments are deducted.
- Overtime pay: The amount paid to employees for hours worked beyond the standard amount (40 hours per week, unless exempt).
- EIN: Every business needs an EIN, or Employer Identification Number, in order to pay their federal taxes.
- Pre-tax deductions: The amount withheld from an employee's gross wages before taxes are deducted. These deductions reduce the employee's taxable income.
- Post-tax deductions: The amount withheld from an employee's gross wages after taxes are deducted.
- Pay stub: A record given to each employee along with their paycheck, listing their wages and deductions. This can be digital or paper.
- Net pay: The amount that an employee receives after all taxes and deductions have been withheld.
How to Set Up Payroll for the First Time
Businesses can set up their own payroll for free by registering themselves and downloading the correct tax forms from the IRS website.
However, businesses can streamline the process. Payroll software is the most popular solution: It automates payments and calculations, while flagging the regulatory standards your business must meet. Other options include a third-party payroll service or hiring an employee specifically for payroll.
How to Do Payroll Yourself
Managing your company's payroll involves plenty of paperwork and tax forms. Here's a nine-step process outlining the general concept, although some details will vary depending on your local or state regulations.
1. Get a W-4 form from each employee
You'll need every employee to fill out a W-4. This is the federal government form that gives employers the information they need to withhold the right amount for taxes, like their filing status or personal allowances. The IRS provides printable blank W-4 forms online.
You may also need employees to complete a state tax withholding form, an I-9 form, and, if you're paying with direct deposit, a direct deposit authorization form.
2. Get an Employer Identification Number
Every business needs an Employer Identification Number, or EIN, to make your tax account easy to track. If you don't already have one, you'll need to register your operation with the IRS.
3. Get insured
Federal regulations require any business with employees to have three types of insurance: workers' compensation, unemployment, and disability. Some states require additional insurance. It'll all be logged in your payroll taxes, so you'll need be fully insured before you pay a cent.
4. Get registered with the Electronic Federal Tax Payment System
This step is technically an optional one, but if your business is registered with the Electronic Federal Tax Payment System (or EFTPS), you'll be able to manually file all your federal payroll taxes online, rather than through the physical mail, which takes longer and can be more fallible.
5. Calculate gross wages
Once you have all your forms and insurance, you're ready to start issuing payments. You'll have to start by figuring out how much each employee has earned during the pay period. If you pay hourly, you'll need to consider hours worked, overtime, and paid breaks. Factors that might impact salaried workers include bonuses or unpaid time off.
6: Calculate and withhold pre-tax deductions
Pre-tax deductions include healthcare, disability, and dental insurance, as well as a host of other benefits that might include child care, life insurance, a retirement 401(k), and even parking permits.
7. Calculate and withhold post-tax deductions
Post-tax deductions might include a retirement Roth IRA plan, some types of disability insurance, union dues, and charity donations.
8: Pay payroll taxes
Once you have the final net payment for each employee, mail a check or issue a direct deposit, along with a pay stub that lets them know how their taxes break down.
9: File tax forms and W-2s
If you've been completing payroll correctly each pay period, you should have the data you need to fill out your monthly, quarterly, and annual tax filings. Your employer federal, state, and local tax returns are likely due month or quarter, while W-2s are filed annually.
- Before you start, have: W-4s, an EIN, and business insurance
- For payroll, figure out: Gross wages, minus pre-tax and post-tax deductions
- After you're done: Save data for monthly, quarterly, and annual tax filings
Alternative Options for Processing Payroll Manually
The payroll process will be time-consuming and offers potential for mistakes, but you'll need to stay on top of it: Paying employees late will invite a federal audit, to say nothing of the impact on employee morale.
Payroll doesn't have to be a do-it-yourself process. If you'd like to save time and make sure you never miss a decimal space, you have three options: You can use software, you can outsource to a third-party service, or you can hire someone to handle payroll.
Choose Payroll Software
Payroll software is an inexpensive solution to payroll management. With it, managers can automate all taxes and calculations, ensuring a speedier, relatively painless process. Some payroll software solutions will offer more features than others, with top options like Gusto or Rippling Payroll including time and attendance tracking, human resources functions, benefits management, data migration, and more.
Base costs start at around $30-$45 per month, plus a $4-$8 per employee, per month fee, although you can read our guide to payroll software costs for exact prices. Our researchers have put together a guide to the best payroll software, if you need a place to start.
$8/month/employee (custom prices)
$39/month + $5/employee
$45/month + $4/employee
Bespoke quote only
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Three months free – no payments until February
Demo upon request
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Outsource Your Payroll
Outsourced payroll services are another option. These cost more than software, but come with a big benefit: Another human being checking and double-checking the calculations. A large or medium-sized operation may find that the comfort of knowing a trained individual is in charge of the payroll is enough to outweigh the increase in costs.
Hire Someone for Your Business
Large companies may prefer to bring on an employee entirely for the company payroll or may deligate a human resources employee to cover the task. This option makes more sense the larger your company has grown, as in-house management becomes more useful as the burden of tracking employee paychecks grows.
Tips for Doing Payroll Yourself
You'll become better and better at payroll the more you do it. Here are the best practices you should follow to hurry that growth process along:
- File taxes on time — Keep a list of tax deadlines to reference, or set them all up in an online calendar system so that you'll be alerted ahead of each deadline.
- Check your records — Try taking a second glance at the previous pay period's records each time you complete the records for the current period. This will help you slowly prepare for taxes, and you won't be overwhelmed with double checking an entire year at once when it's time for your annual filing.
- Take notes on the small details — Did any aspect of business paperwork take longer than it needed to? Write yourself a note to remind you for the next time. Much of the payroll tax process is repetative, but by the time the same filing deadline rolls around next year, you might have forgotten that the last decade's worth of old W-4s are in the green filing box in your storage room.
- Pick out the right payroll software — The easiest tip of all is to get a software that can remember the details for you. Take a minute to browse through our researched summaries of all the best payroll software.
Hopefully, our step-by-step outline in this guide can put you on the right track towards completing your payroll, although you should always check your state and local business regulations to make sure you're following all of them.
If you're looking for a tool to further streamline the process, we'd recommend payroll software. Here are the few of the best, according to our expert research team:
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