A staggering 82 million American employees are affected by payroll issues. The implications are serious, with almost half of the American workforce beginning a new job search once they’ve experienced the second problem with their paycheck.
It’s the reason it’s so important to get the payroll right every time. As a business owner, hiring the first employee means that you need an effective payroll process in place.
Generally, there are three ways of doing payroll. You can hire an accountant, use a payroll service, or process your payroll by yourself. Many small businesses opt for the third option.
But are there benefits of the DIY approach when processing payroll? But how can you go about the process correctly? What challenges should you anticipate?
These are some of the issues we discuss in this comprehensive payroll guide. Read on to learn more about doing payroll by yourself as an entrepreneur.
Why You Should Do Payroll on Your Own
Before we talk about how to do payroll, it’s beneficial to know why you should take the trouble to do it on your own instead of outsourcing the service. Below are three top benefits of DIY payroll processing.
It Affords You Robust Information Security Capability
Your staff payroll information is highly sensitive. When you outsource payroll service, it means you have to share employee information electronically to an outsider. In case this information leaks or lands in the wrong hands, it could put your employees at risk.
When you do your payroll in-house, you can guarantee the security of critical employee data. You can use secure passwords, firewalls, and other internal IT security features to protect sensitive data.
You Have Greater Flexibility
Sometimes, you need to make last-minute changes to your payroll. For instance, you may need to cut a special on-demand check at the last minute. Given that you have all the control of your payroll, this shouldn’t be a problem.
On the other hand, outsourced payroll services aren’t very forgiving. Changing any employee paycheck details may cost you extra if you’re lucky to get the service provider to accept.
It Costs Less Over Time
A common reason companies outsource services is that they want to cut costs. Sure, it may seem like you’re spending a lot of money installing payroll software, but over time, this software will lower your payroll processing costs over time. Besides, you can always take advantage of a free paystub generator that is available online.
If you opt to outsource your payroll to another company, you’re going to have to pay them regularly. The fees could even increase over time.
How to Do Your Own Payroll
When you’ve never handled payroll before, it’s possible to feel a little overwhelmed by the process at first. Don’t worry; we’ve laid out a step by step procedure that should guide you through the process. Let’s get started.
Collect Necessary Paperwork
Every new hire will need to complete certain paperwork during the onboarding process. The most important documents include:
- An IRS W-4 Form
- An I-9 Form that shows eligibility to work in the US
- State and local tax withholding election documents
Find out any other necessary documents you need for your payroll and have them ready.
Have Your New Hires Complete the W-4 Form
Paying employees requires that the employees first complete Form W-4. This form documents their filing status and keeps track of their personal allowances. Employees with more allowances and dependents will typically have less payroll taxes deducted from their paychecks come payday.
Every time you hire a new employee, you’ll have to file a new staff report. Currently, there’s a new version of the W-4 form for 2020, so make sure it’s the one you’re using for the employees you hire.
Apply for Employer Identification Numbers (EIN)
Don’t start processing your own payroll unless you have an EIN. This number helps the IRS identify your business entity. It may also be necessary to sign up for your state’s EIN.
Choose a Suitable Payroll Schedule
Once you have your EIN, get insured. Next, add three essential dates to your business calendar, namely:
- Employee pay dates
- Tax payment due dates
- Tax filing deadlines
These dates will serve as your payroll schedule.
Calculate Withholding Income Taxes
As soon as you’ve agreed on the gross pay amount with your new hires, it’s time to calculate how much you’re going to be withholding from it. How much are you going to be deducting from the gross pay for federal, state, and other income taxes? You can use a reliable paycheck calculator to determine the deductions you need to make.
Don’t forget to calculate the FICA taxes you need to withhold. Other deductions include health plans, retirement plan conclusions, and so on.
After you’ve paid your employees, it’s time to submit the appropriate taxes. You’ll need to submit both federal and state tax deposits as required. Any other deductions such as Medicare and Social Security should go to the appropriate accounts as well.
File Tax Forms and Employee W-2 Forms
The final step of processing a payroll involves sending your employer federal tax returns. This is usually done quarterly. You’ll also need to file any state and local returns.
Remember to prepare your W-2 and annual feelings at the end of the year.
Challenges When You’re Processing Your Payroll
With the information above, you now know how to do payroll yourself. However, you still need to be aware that certain challenges may arise from time.
If you decide to run your payroll process manually, for instance, you may find that your staff is overwhelmed by all the paperwork required. A viable solution is to invest in the latest payroll software in the market or turn to online solutions.
You could also face compliance issues given that laws affecting payroll keep changing. Failure to keep up with the latest changes could land you into trouble with the authorities.
Whenever you encounter any challenge, don’t hesitate to seek professional help from a competent accountant.
Doing Payroll on Your Own Should Never Be an Impossible Challenge
As you can see, any business can process their own payroll. The benefits are many, and with the tips we’ve provided here, doing payroll on your own should never seem scary.
Would you like to learn more about running your payroll? Please keep visiting the Business and Finance sections of the Everything Entrepreneur Blog to learn more about payroll and human resources.