How to do payroll yourself: A step-by-step guide for small business owners

You started a business, hired your first employees, and now it’s time to pay them. Easy, right? Just write a check, maybe add a thank-you note, and call it a day. Unfortunately, not quite. 

Welcome to the sometimes confusing—but totally manageable—world of payroll. Running payroll yourself might make you think of endless spreadsheets, but that’s not always the case. In fact, it can be a smart move if you know what you’re doing.

In this guide, we’ll explain how to do payroll yourself, specifically for small businesses based in the United States, from choosing the right payroll software to calculating compensation and withholdings. You’ll also learn the pros and cons of keeping payroll in-house versus outsourcing it to a third-party payroll service. 

Whether you’re looking to save money or stay hands-on with your organization’s finances, here’s what you need to know about small business payroll processing.

Manual payroll in 6 steps

Managing payroll in-house takes time and attention to detail—benefits, tax withholdings, and local laws are complicated to navigate. But if you run a small business with 10 employees or fewer, learning how to do payroll is entirely possible, especially if you’re comfortable with numbers and tracking deadlines.

How does payroll work? Here’s how to build a solid payroll system: 

1. Collect employee tax information

Before you pay your employees, you’ll need an EIN (employer identification number) from the IRS, along with any required state or local tax IDs. An EIN is necessary to do business—without one, you won’t be able to open a business bank account, hire employees, or file taxes. Once you have your EIN, you can register with the Electronic Federal Tax Payment System (EFTPS), the Treasury Department’s online platform for submitting tax payments and paying federal payroll taxes. 

You’ll also need your employees' tax information: W-4s and I-9s for employees and W-9s for independent contractors. 

2. Choose a pay period 

Next, decide on your pay schedule. Will you pay employees weekly, biweekly, semimonthly, or monthly? Business owners are free to choose the payroll schedule that works best for their cash flow, but pay schedules must be consistent and recurring to comply with the Fair Labor Standards Act. 

3. Calculate gross pay

For hourly workers, log their hours accurately and apply overtime if needed. For salaried employees, this part’s more straightforward—just divide their annual salary by the number of pay periods. Be sure to include any bonuses, commissions, or other types of pay. 

4. Withhold payroll taxes

For formal employees, this includes statutory payroll deductions like FICA taxes (Social Security and Medicare taxes), federal income tax, and any applicable state and local taxes. 

You may also need to withhold voluntary deductions for health insurance, retirement contributions, life insurance, other job-related expenses (like union dues or uniforms), and other pre-tax savings accounts like a 401(k) or Health Savings Account (HSA). 

Once you’ve calculated all deductions, subtract them from the employee’s gross pay to determine the net pay—the amount that appears on the employee’s paycheck. 

5. Pay employees and deposit payroll taxes

After calculating net pay, you’re ready to pay your team. Whether you issue checks or process direct deposits, make sure you stick to the agreed-upon pay schedule. In some states, missing a payment deadline can result in penalties. You’ll also need to deposit the withheld taxes and your share of FICA with the IRS and your state tax agency. Depending on your payroll size, these deposits are typically due on a semiweekly or monthly basis.

6. File tax forms

Finally, you’ll need to file tax forms to report what you’ve paid. Every quarter, you’ll submit Form 941 to report federal income tax and FICA. Each January, you’ll file Form 940 to report annual federal unemployment (FUTA) taxes. You’ll also need to send W-2 forms to employees and 1099-NEC forms to independent contractors by January 31. Be sure to check your state’s requirements, too—some have additional payroll tax forms and deadlines. 

Benefits of doing payroll yourself

Setting up payroll accounts isn’t exactly a walk in the park. But that doesn’t mean you have to outsource to a payroll provider. Here are a few reasons to learn how payroll works: 

• Save money on payroll solutions: Third-party payroll services automate the process—but often at a steep price, especially for small businesses with limited budgets. Running payroll manually cuts costs and frees up financial resources for other priorities. 
• Stay in control of the payroll process: Manually processing payroll forces you to dig into the details. That hands-on experience gives you a better understanding of your payroll expenses, helping you make smarter financial decisions, like when to hire, how to budget for raises, and whether your cash flow can support bonuses and benefits.
• Simpler for small teams: For businesses with just a few employees or independent contractors, a DIY payroll solution can be relatively straightforward. Fewer people means fewer calculations and tax forms, which might be manageable without costly payroll software or full-service payroll providers. 

Drawbacks of doing payroll yourself

With Medicare taxes, wages, overtime, and wage garnishments to calculate, it’s no surprise that many businesses turn to professional accountants or payroll software for help. Here’s a quick look at why calculating payroll on your own might not be the easiest, most efficient option:

• Time-consuming: Manually running payroll takes time and can pull you away from all the other responsibilities small business owners juggle. From calculating gross pay and deductions to staying on top of tax deadlines, payroll processing can quickly eat into your workweek. 
• Limited support: When you run payroll yourself, you’re also your own payroll support team. If something goes wrong, like a missed direct deposit or misfiled tax form, you’re responsible for finding the correct payroll solution. 
• Higher risk of error: Filing payroll tax forms like 941s, W-2s, and 1099s isn’t run-of-the-mill paperwork. It’s a legal obligation. Deadlines vary by agency and state, and falling behind (or calculating net pay wrong) can lead to costly compliance mistakes. 

Alternatives to doing payroll yourself

Feeling overwhelmed? Don’t worry. There are plenty of ways to take payroll off your plate without sacrificing accuracy, compliance, or peace of mind:

• Use payroll software: Rather than crunching numbers by hand, payroll software automates calculations for gross pay, net pay, and deductions. It also handles tax filings and runs direct deposit. Be sure to use a payroll software that’s compatible with your global payroll needs, especially if you manage a multi-country payroll system. 
• Hire an accountant: A trusted accountant will manage payroll, ensure compliance, and help your small business avoid costly errors. You can either hire in-house or outsource to an accounting firm to handle payroll and other financial tasks like bookkeeping and budget planning. 
• Outsource to a third-party payroll service: Full-service payroll providers specialize in everything related to payroll processing. It’s a hands-off, scalable solution for businesses that want to automate payroll without managing the process themselves.
• Consider a professional employer organization (PEO): Some companies choose to work with a PEO, which acts as a co-employer and takes on payroll, HR, benefits, and compliance. While this can simplify operations for growing teams, it also means sharing employer responsibilities with a third party, an approach that isn’t right for every small business. If you’re looking for a more flexible alternative, employer of record (EOR) platforms like Oyster can help you manage global payroll, benefits, and compliance in 180+ countries while you retain full control over your team.

Best practices for managing payroll

Want fewer payroll headaches? These best practices will help you run payroll accurately, stay compliant, and avoid costly errors:

• Mark tax form deadlines on your calendar: Add reminders for key filing dates, and schedule them into your workflow with enough buffer time to prepare, file, and submit payments without rushing. 
• Consider payroll software for growth: If you can count your employees on one hand, you can probably calculate payroll on your own. But as your business grows, payroll software can help automate calculations and tax filings and provide you with better insights into your payroll expenses. 
• Keep clear records: Up-to-date records of employee tax forms, wage garnishments, benefits, and other payroll details will simplify payroll management and help you stay prepared in case of an IRS audit. 

Payroll mistakes to avoid

Payroll slip-ups can lead to penalties, unhappy employees, and in some cases, serious legal trouble. Here are a few common mistakes to watch out for and how to steer clear of them: 

• Incorrectly classifying employees or contractors: Misclassifying workers can result in back taxes and fines. Use IRS guidelines to determine whether someone is a W-2 employee or a 1099 contractor before running payroll. 
• Errors in calculating overtime and deductions: Incorrect overtime wages or withholdings can shortchange employees or lead to overpaid taxes. Always double-check your calculations—or better yet, use a payroll solution to automate them. 
• Late payroll processing: Missing paydays can damage employee trust and may violate labor laws. Set a consistent pay schedule and automate direct deposit to ensure payments go out on time.

Simplify payroll with Oyster

Just because you can calculate gross pay, make direct deposits, and file payroll taxes on your own doesn’t mean you have to. Manual payroll can cost you valuable time and increase the risk of errors, especially as your staff grows. Oyster’s global payroll platform automates the entire payroll process—helping you focus on growing your team and your business.

Book a demo to learn more.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.