How to Do Payroll Yourself: Step-by-Step Small Business Guide

Running payroll yourself can seem complicated when you first hire employees. You need to collect employee information, track working hours, calculate wages, handle payroll taxes and deductions, pay employees, maintain records, and complete required tax filings.

For a small business with a relatively simple workforce, doing payroll yourself may be possible without immediately outsourcing the entire process. However, payroll requires accuracy, consistency, and an understanding of the federal, state, and local requirements that apply to your business.

The key is to create a repeatable payroll process rather than starting from scratch every payday.

In this guide, we'll explain how to do payroll yourself step by step, what information you need before running payroll, common mistakes to avoid, and when it may make sense to move from manual payroll to payroll software or professional assistance.

Important: This guide primarily discusses payroll for U.S. small businesses and is for general informational purposes. Payroll, employment, tax, wage, and reporting requirements vary by business and jurisdiction. Verify current requirements with the IRS, U.S. Department of Labor, relevant state and local agencies, or a qualified payroll, accounting, tax, or legal professional.

Can You Do Payroll Yourself?

Yes, many small business owners can handle payroll themselves, particularly when they have:

  • A small number of employees
  • Simple compensation structures
  • One business location
  • Straightforward working hours
  • Limited benefits and deductions
  • Time to maintain payroll records
  • A reliable payroll process

However, doing payroll yourself doesn't mean everything has to be calculated with a calculator or spreadsheet.

You can manage payroll yourself while using payroll software to automate calculations, organize records, and support tax-related tasks.

The important distinction is between managing payroll yourself and processing every payroll task manually.

If you're deciding between those approaches, read Manual Payroll vs Automated Payroll: Which Is Better?.

What Do You Need Before Running Payroll?

Before calculating your first employee paycheck, your business needs a basic payroll foundation.

This generally includes business and employee information, a payroll schedule, compensation details, tax information, and a system for maintaining payroll records.

Let's go through the process step by step.

Step 1: Obtain an Employer Identification Number

Businesses with employees generally need an Employer Identification Number (EIN) for federal tax administration.

An EIN is a federal tax identification number assigned to a business by the IRS.

It is commonly used when:

  • Reporting employment taxes
  • Filing business tax documents
  • Communicating with the IRS
  • Completing certain payroll-related processes

If you don't already have an EIN, determine whether your business needs one and complete the appropriate IRS process before setting up payroll.

Your state or local jurisdiction may also require separate registrations or identification numbers.

Step 2: Register for Applicable State and Local Payroll Accounts

Federal registration is only one part of payroll setup.

Depending on where your business operates and where employees work, you may need to register for:

  • State income tax withholding
  • State unemployment insurance
  • Local payroll or income taxes
  • Other employer accounts

Requirements vary considerably by jurisdiction.

This becomes especially important if employees work remotely from another state.

Don't assume that registering your company in one state automatically covers employees working elsewhere.

Step 3: Determine Worker Classification

Before adding workers to payroll, determine whether they are employees or independent contractors under applicable rules.

Employees and independent contractors are treated differently for tax and payroll purposes.

For employees, you may also need to determine whether they are exempt or nonexempt from certain wage and overtime requirements.

Classification can affect:

  • Tax withholding
  • Overtime
  • Minimum wage
  • Benefits
  • Payroll reporting
  • Employment protections

Worker classification should be based on applicable requirements rather than which option is cheaper or easier for the business.

If you're uncertain about a worker's classification, professional guidance may be appropriate.

Step 4: Collect Required Employee Information

Once you've hired an employee, collect the information needed to set them up correctly in payroll.

This may include:

  • Legal name
  • Address
  • Social Security number
  • Employment start date
  • Work location
  • Pay rate or salary
  • Employment status
  • Tax withholding information
  • Benefit elections
  • Direct deposit information, if applicable

Employees generally complete Form W-4 so employers can determine federal income tax withholding.

Businesses also need to complete applicable employment eligibility procedures and any required state documentation.

Keep sensitive employee information secure and limit access to people who need it for legitimate business purposes.

Step 5: Choose a Payroll Schedule

Next, determine how frequently employees will be paid.

Common pay frequencies include:

  • Weekly
  • Biweekly
  • Semimonthly
  • Monthly

State laws may affect permitted or required pay frequencies for certain employees.

Once you've selected an appropriate schedule, establish:

  • Pay-period start date
  • Pay-period end date
  • Payroll processing date
  • Employee payday

Consistency makes payroll easier for both employees and the business.

Step 6: Determine Employee Compensation

Document how each employee is paid.

Employees may receive:

  • Hourly wages
  • Salary
  • Overtime
  • Bonuses
  • Commissions
  • Tips
  • Shift differentials
  • Other compensation

Make sure payroll records reflect current pay rates.

Whenever compensation changes, document the effective date and update the payroll system before the appropriate payroll cycle.

Step 7: Create a Time-Tracking Process

If employee compensation depends on hours worked, you need a reliable way to collect and approve time.

Businesses may use:

  • Paper timesheets
  • Spreadsheets
  • Digital time clocks
  • Time-tracking software
  • Payroll-integrated time systems

Time records may include:

  • Regular hours
  • Overtime
  • Paid leave
  • Unpaid leave
  • Shift information
  • Corrections

Managers should review time records before payroll calculations begin.

A payroll system can automate calculations, but inaccurate time records will still produce inaccurate payroll.

Step 8: Calculate Gross Pay

Once employee time and compensation information are ready, calculate gross pay.

Gross pay is an employee's earnings before taxes and deductions.

Hourly Employee Example

Suppose an employee earns $20 per hour and works 40 regular hours.

The basic calculation is:

40 hours × $20 = $800 gross regular pay

If applicable overtime was worked, it would need to be calculated according to the rules that apply to the employee.

Salaried Employee Example

Suppose an employee earns $52,000 annually and is paid biweekly.

A simplified salary calculation would be:

$52,000 ÷ 26 pay periods = $2,000 gross pay per pay period

These examples are simplified and do not account for every possible payroll situation.

Step 9: Calculate Overtime

For covered nonexempt employees under federal law, overtime is generally required at not less than one and one-half times the employee's regular rate for hours worked over 40 in a workweek.

State requirements may provide additional rules.

For a simplified example, suppose an eligible employee earns $20 per hour and works 45 hours during a workweek.

Regular pay:

40 × $20 = $800

Simplified overtime rate:

$20 × 1.5 = $30

Overtime pay:

5 × $30 = $150

Total:

$800 + $150 = $950

Actual overtime calculations can become more complicated when bonuses, commissions, multiple pay rates, or other compensation affect the regular rate.

Step 10: Add Bonuses, Commissions, and Other Earnings

Before calculating taxes and deductions, include applicable additional compensation.

This might include:

  • Bonuses
  • Commissions
  • Tips
  • Shift differentials
  • Incentive pay
  • Certain taxable benefits
  • Other earnings

Different types of compensation can have different payroll and tax treatment.

Make sure each payment is categorized appropriately rather than simply adding every payment as ordinary wages without review.

Step 11: Calculate Payroll Taxes

Payroll taxes are one of the areas where doing payroll yourself requires particular care.

Depending on the business, employee, and location, payroll may involve:

  • Federal income tax withholding
  • Social Security tax
  • Medicare tax
  • Additional Medicare Tax where applicable
  • Federal unemployment tax
  • State income tax
  • State unemployment taxes
  • Local taxes

Some taxes are withheld from employee wages, while others are employer responsibilities. Some involve both employee and employer portions.

Tax rates, wage bases, withholding calculations, and requirements can change.

For this reason, many businesses that technically "do payroll themselves" use payroll software or current official tax resources rather than manually maintaining every tax formula.

Step 12: Calculate Employee Deductions

After determining applicable payroll taxes, calculate other deductions.

Depending on the employee and business, deductions may include:

  • Health insurance
  • Dental or vision coverage
  • Retirement contributions
  • Garnishments
  • Other authorized deductions

Some deductions may be made before certain taxes are calculated, while others are taken after taxes.

The distinction can affect taxable wages.

Businesses should understand the treatment of each deduction rather than simply subtracting all deductions at the end.

Step 13: Calculate Net Pay

Once gross earnings, applicable taxes, and deductions have been determined, calculate the amount the employee will receive.

A simplified formula is:

Gross Pay − Employee Taxes − Employee Deductions = Net Pay

For example:

Gross pay: $2,500
Employee taxes: $500
Other deductions: $250

Net pay would be:

$2,500 − $500 − $250 = $1,750

This is only an illustrative example and should not be used as a tax calculation.

Step 14: Review Payroll Before Paying Employees

Do not immediately process payments after completing the calculations.

Review payroll first.

Look for unusual items such as:

  • Missing employees
  • Duplicate employees
  • Incorrect hours
  • Unexpected overtime
  • Incorrect pay rates
  • Large bonuses
  • Unexpected deductions
  • Negative net pay
  • Employees with no pay
  • Recently terminated employees receiving normal wages
  • Unexpected bank-account changes

Comparing the current payroll with the previous payroll can make unusual changes easier to identify.

Payroll reports can make this review significantly easier. See What Are Payroll Reports? Types, Examples and Best Practices for the reports businesses can use during payroll review.

Step 15: Pay Employees

Once payroll has been reviewed and approved, employees can be paid using the method your business supports.

Common methods include:

  • Direct deposit
  • Paper checks
  • Other legally permitted payment methods

Pay employees according to the established payday and applicable state requirements.

Businesses should also provide any required pay statement information.

Step 16: Record Employer Payroll Expenses

Employee net pay is not the business's entire payroll cost.

The employer may also have expenses such as:

  • Employer Social Security taxes
  • Employer Medicare taxes
  • Unemployment taxes
  • Employer benefit contributions
  • Other payroll-related expenses

Record these amounts correctly in your accounting system.

A payroll journal or accounting integration can make this process easier.

Step 17: Deposit Payroll Taxes

Withholding taxes from employees does not complete the employer's tax responsibility.

Applicable payroll taxes must also be deposited according to required schedules.

Federal employment-tax deposit schedules depend on applicable IRS rules, and state and local requirements may have their own schedules.

Missing deposit deadlines can lead to penalties and interest.

Maintain a payroll tax calendar containing all applicable deadlines.

Step 18: File Required Payroll Tax Returns

Employers may need to file various federal, state, and local payroll tax returns.

Common federal payroll-related forms can include:

  • Form 941
  • Form 940
  • Form W-2
  • Form W-3

Other forms may apply depending on the business and its workers.

Do not assume that every business files the same forms on the same schedule.

Identify which requirements apply to your business and maintain a filing calendar.

Step 19: Maintain Payroll Records

Accurate payroll records are important for payroll management and compliance.

Depending on applicable requirements, records may include:

  • Employee information
  • Hours worked
  • Pay rates
  • Gross wages
  • Overtime
  • Taxes
  • Deductions
  • Net pay
  • Payment records
  • Payroll tax information
  • Payroll reports
  • Employee tax forms

Different records can have different retention requirements.

Businesses should establish a documented record-retention policy.

For a broader review of payroll compliance responsibilities, read Small Business Payroll Compliance Checklist.

Step 20: Reconcile Payroll

After payroll is processed, compare payroll information with your financial records.

Review:

  • Payroll register
  • Bank transactions
  • Direct deposit totals
  • Payroll tax liabilities
  • Benefit liabilities
  • Payroll journal entries
  • Accounting records

If the numbers do not agree, investigate the difference.

Reconciliation can help catch problems that weren't identified during payroll preparation.

A Simple DIY Payroll Example

Consider a small business with an hourly employee earning $25 per hour.

The employee works 40 hours during the week.

Gross Pay

40 × $25 = $1,000

Suppose, purely for illustration, the payroll calculation produces:

Employee taxes: $220
Other deductions: $80

Then:

$1,000 − $220 − $80 = $700 net pay

The employer's total payroll cost may be higher than $1,000 because the business may also owe employer payroll taxes and benefit contributions.

This distinction is important.

Gross wages, net pay, and total employer payroll cost are three different numbers.

Manual Payroll vs Using Payroll Software Yourself

Doing payroll yourself doesn't require doing payroll manually.

There are two common approaches.

Fully Manual Payroll

The business uses spreadsheets, calculators, tax tables, calendars, and manual records.

This may have low software costs, but it requires more administrative work.

Self-Managed Payroll Software

The business owner or internal employee remains responsible for payroll but uses software to automate repetitive tasks.

Software may help calculate:

  • Wages
  • Taxes
  • Deductions
  • Net pay
  • Payroll reports

Some platforms may also support direct deposit, tax deposits, filings, and year-end forms.

This approach can give the business control while reducing repetitive calculations.

If you're considering automation, read Payroll Automation Software: Key Features, Benefits and How to Choose.

How Much Time Does DIY Payroll Take?

The amount of time required depends on payroll complexity.

Important factors include:

  • Number of employees
  • Hourly vs salaried employees
  • Number of states
  • Overtime
  • Bonuses
  • Commissions
  • Benefits
  • Deductions
  • Time tracking
  • Tax requirements
  • Software integrations

A five-person business with fixed salaries and one location may require much less payroll administration than a similarly sized business with hourly workers operating across multiple states.

Employee count alone is therefore not a good measure of payroll complexity.

Advantages of Doing Payroll Yourself

Lower Outsourcing Costs

Managing payroll internally may reduce the amount paid to an external payroll professional or service.

However, businesses should also consider the value of the owner's or employee's time.

Greater Control

You maintain direct oversight of employee information, calculations, payroll approvals, and records.

Better Understanding of Payroll

Handling payroll can give business owners a stronger understanding of labor costs, taxes, and compensation.

Immediate Access to Information

You don't necessarily need to contact an outside provider every time you need basic payroll information.

Disadvantages of Doing Payroll Yourself

It Takes Time

Payroll can become a significant recurring administrative task.

Errors Can Be Costly

Incorrect wages, taxes, deductions, deposits, or filings may require corrections and can potentially create penalties or employee issues.

Requirements Change

Tax, wage, and payroll requirements can change over time.

Businesses need a process for monitoring applicable changes.

Multi-State Payroll Can Become Complex

Employees working in different states can create additional tax and payroll responsibilities.

Payroll Data Requires Security

Payroll contains sensitive employee and financial information that must be protected.

Common DIY Payroll Mistakes

Misclassifying Workers

Incorrect employee or contractor classification can affect taxes, wages, overtime, benefits, and reporting.

Calculating Overtime Incorrectly

Do not assume overtime is always as simple as multiplying the standard hourly rate by 1.5. The applicable regular rate can be affected by other compensation.

Missing Tax Deadlines

Create a calendar for deposits and filings rather than relying on memory.

Using Outdated Tax Information

Tax rules and limits can change. Use current information for each applicable tax year.

Ignoring State and Local Requirements

Federal payroll requirements are only part of the process.

Failing to Review Payroll

Even automated payroll should be reviewed before payment.

Poor Record Keeping

Keep payroll records organized and retrievable.

Mixing Payroll and Business Accounts

Maintain clear accounting records so payroll transactions and liabilities can be properly reconciled.

How Payroll Reports Make DIY Payroll Easier

Payroll reports can make self-managed payroll much easier to review.

Useful reports may include:

  • Payroll register
  • Gross-to-net report
  • Tax liability report
  • Deduction report
  • Employee change report
  • Payroll journal
  • Year-to-date report
  • Exception report

Instead of checking every calculation individually, reports can help you focus on totals and unusual changes.

Businesses can also use payroll information for broader planning. Our Payroll Reporting and Analytics: A Complete Business Guide explains how payroll data can be used to monitor labor costs, overtime, payroll trends, and other KPIs.

How to Make DIY Payroll Easier

If you plan to continue doing payroll yourself, create a standardized workflow.

Use a Consistent Payroll Calendar

Keep pay dates, tax deposits, filings, and year-end deadlines in one place.

Integrate Time Tracking

Avoid manually re-entering employee hours when reliable integration is available.

Automate Repetitive Calculations

Software can reduce manual calculations for wages, taxes, and deductions.

Review Exceptions

Focus extra attention on unusual overtime, large pay changes, bonuses, new employees, terminations, and bank-account changes.

Reconcile Every Payroll

Don't wait until year-end to identify accounting differences.

Document Your Process

Write down the steps required to complete payroll.

This makes the process easier to repeat and reduces dependence on one person's memory.

When Should You Stop Doing Payroll Manually?

There is no specific number of employees at which every business should automate or outsource payroll.

Instead, watch for signs that the current process is becoming inefficient or risky.

These may include:

  • Payroll takes several hours every cycle
  • Errors occur repeatedly
  • The business is hiring quickly
  • Employees work in multiple states
  • Overtime calculations are becoming complicated
  • Benefits and deductions are increasing
  • Payroll reporting is difficult
  • Tax deadlines are difficult to manage
  • Too much information is maintained across separate spreadsheets

At that point, automation may provide more value than continuing with a completely manual process.

If you're ready to transition, see How to Automate Payroll: A Step-by-Step Guide for Small Businesses.

When Should You Consider Professional Payroll Help?

Some businesses prefer to maintain payroll internally, while others use an accountant, bookkeeper, payroll provider, or tax professional.

Professional assistance may be particularly useful when:

  • Payroll operates across multiple jurisdictions
  • Worker classification is uncertain
  • The business has complicated compensation
  • Payroll tax problems have occurred
  • The business is correcting previous payroll filings
  • Payroll administration is taking too much owner time
  • The business is expanding rapidly

The decision should consider both direct cost and the value of time, expertise, and risk reduction.

Frequently Asked Questions

Can a small business owner do payroll themselves?

Yes. A small business owner can manage payroll internally, but they remain responsible for understanding and following applicable wage, tax, reporting, and recordkeeping requirements.

Do I need payroll software to do payroll myself?

Not necessarily. Payroll can be calculated manually, but software can reduce repetitive calculations and administrative work. The best approach depends on payroll complexity.

What is the basic formula for payroll?

At a simplified level, payroll begins with gross earnings and subtracts applicable employee taxes and deductions to determine net pay:

Gross Pay − Employee Taxes − Employee Deductions = Net Pay

The employer may also have separate payroll tax and benefit expenses.

How do I calculate payroll taxes?

Payroll taxes depend on the tax involved, employee information, wages, jurisdiction, and current rules. Businesses should use current official guidance or properly configured payroll software rather than relying on outdated tax rates.

How often do small businesses run payroll?

Common schedules include weekly, biweekly, semimonthly, and monthly. Applicable state requirements and business needs should be considered when choosing a schedule.

Is doing payroll yourself cheaper?

It can reduce direct outsourcing expenses, but the owner's or employee's time also has value. Software costs, administrative work, and the potential cost of errors should be considered.

Can I use a spreadsheet for payroll?

A spreadsheet can support simple payroll calculations and records, but it requires careful maintenance. As payroll becomes more complex, dedicated software may provide better automation, controls, and reporting.

What payroll records should I keep?

Depending on applicable requirements, records may include employee information, hours, pay rates, wages, overtime, taxes, deductions, payroll reports, payments, and tax documents.

Can payroll software guarantee compliance?

No. Software can automate calculations and support payroll processes, but employers remain responsible for accurate information, appropriate configuration, classifications, and applicable requirements.

Final Thoughts

Learning how to do payroll yourself can give a small business greater control over one of its most important recurring processes.

The basic workflow is straightforward: set up the business and employees correctly, collect accurate time and compensation information, calculate gross wages, determine applicable taxes and deductions, review payroll, pay employees, complete required tax responsibilities, maintain records, and reconcile the results.

The complexity comes from making sure each step follows the requirements that apply to your employees and business.

For a very small company with straightforward payroll, an organized DIY process may work well. As the business grows, however, manually calculating and tracking everything can become increasingly time-consuming.

Doing payroll yourself also doesn't mean avoiding technology. Payroll software can automate repetitive calculations while allowing the business owner or internal payroll administrator to maintain control.

Whatever approach you choose, the strongest payroll process combines accurate information, consistent procedures, careful review, organized records, timely tax administration, and regular reconciliation.