How to Do Payroll Yourself: 9 Steps for Small Businesses
If you’re running a small U.S. business with full-time employees, you can run payroll in-house without the need for an accountant or payroll service. The key is getting the right process in place and repeating it every payday.
Before each pay run, calculate employees’ wages, withhold their taxes, and pay them what they’re owed. Afterward, you’ll need to pay your business’s share of payroll taxes, make deposits, and file returns by their respective deadlines.
This nine-step guide takes you through each step, so you’ll be confident on your first pay run and on every payday after that.
The main pros and cons of doing payroll in-house are:
| Pros | Cons |
|---|---|
| Lower fees: You don’t have to pay a processor’s per-company or per-employee fees. | Dependence: If the people who handle payroll are ill or away, your employees may not get paid on time. |
| Less data sharing: You don’t have to share employees’ Social Security numbers and bank details with third parties, which reduces the risk of data breaches. | Tax deadlines: You have to track multiple tax deposits and filing deadlines yourself. Miss a required deposit, and you may face an IRS penalty. |
| Better cash flow: Some processors collect payroll taxes on payday. Doing payroll yourself lets you hold that money until the IRS deposit deadline. | More paperwork: As the business grows, you may have to deal with different state laws and complex deductions like health insurance premiums or wage garnishments. |
Doing payroll yourself may be manageable if you have a straightforward pay setup. But if you have employees in several states, need to make complex deductions, or see frequent errors, consider professional support.
Step 1: Register your business for payroll
To do payroll yourself, you need a federal employer identification number (EIN). If your business doesn’t have one already, apply directly through the IRS. It’s free when you apply online. The IRS uses your EIN to match your tax returns and payments to your business.
Have your business type (for example, an LLC or a corporation) and the responsible person’s Social Security number or individual taxpayer identification number ready. The responsible person is the person who owns or controls the business and manages its money.
When the IRS approves your application, you’ll receive the EIN immediately.
Next, check the employer tax registration rules in each state where you hire people. Register for any required state income tax withholding and unemployment tax accounts.
Keep your EIN and any state withholding or unemployment tax account numbers somewhere you can find easily. You’ll need them to file payroll returns and pay taxes.
Set up an electronic federal tax payment method too. You can use the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay for businesses, or an IRS business tax account. See Step 7 for payment details.
Step 2: Collect employee information and withholding forms
You need the following information for each employee to work out their pay and prepare their tax forms:
- Personal details: Legal name, Social Security number, address
- Pay rate: Agreed hourly rate or salary
- Tax forms: A Form W-4 and any state withholding form they need to complete
- Deductions: Authorization to make deductions from their pay, like health insurance premiums
- Payment details: Information needed for your chosen payment method, such as bank details for direct deposit or a mailing address for checks
Form W-4
Ask each new employee to complete Form W-4 and keep the signed form on file. This gives you details on what can change the amount of federal income tax you withhold. For example, if someone has a second job, you may need to withhold more. If they claim a tax credit for a child, you may need to withhold less.
The W-4 also asks your employees for:
- Their filing status, like whether they are single or married filing jointly
- Any tax deductions they expect to claim, such as mortgage interest
- Any extra federal income tax they want withheld to help avoid a tax bill when they file their return
You’ll need the W-4 answers, the employee’s wages, and how often you pay them to work out the amount you should withhold using the IRS tables in Step 5.
Note: The IRS changed the format of Form W-4 in 2020 and removed its question about “allowances.” But if an employee gave you a valid form before then, you can keep using it.
If an employee doesn’t return their W-4
You can still pay employees without a W-4. For federal income tax withholding, follow the IRS default by calculating it as if they’d answered “Single or Married filing separately” and left the rest of the form blank.
Form I-9
Complete Form I-9 to verify new employees’ identity and authorization to work in the U.S. Separately, report new hires following your state’s requirements.
Step 3: Set your pay schedule and payroll deadlines
Check the payday rules in each state where your employees work before choosing a pay schedule. Some states require you to pay workers weekly. If you pay them less frequently, you may need to get written permission.
A pay period is the time covered by one paycheck, with the most common pay periods being:
- Weekly (52 periods a year)
- Biweekly (once every two weeks, normally 26 periods a year)
- Semimonthly (on the same two dates each month, like the 1st and 15th, totaling 24 periods a year)
- Monthly (12 periods a year)
Enter the start and end dates of your first pay period and payday on a calendar. Payday is the date by which your staff must receive their wages.
Decide on a payroll processing deadline. This is the date by which you need to check each employee’s hours, calculate their pay, and submit or authorize payments so employees receive them by payday.
To determine your processing deadline, find out how much time it takes for employees to receive your payments and work backward from payday. For example, if it takes three working days for payments to reach your employees’ bank accounts and payday is Friday, make sure you finish up payroll and send the payments off by Tuesday.
Separately, add reminders for payroll tax deposits and tax returns, as those dates don’t automatically fall on payday. See Steps 7 and 8 for details.
Step 4: Review hours and calculate gross pay
For each employee, confirm their hours worked, correct missed punches, and check approved paid leave, bonuses, or commissions. If something’s missing, find accurate time records to fill the gaps rather than guessing.
Base overtime pay
Under federal law, employees who qualify for overtime must receive at least one-and-a-half times their regular rate for each hour they work over 40 in a workweek.
Most hourly employees (like cashiers) are eligible for overtime pay, and some salaried employees (like office administrators) are too. They are called non-exempt employees.
But a salaried manager may be exempt if their pay and duties meet all the necessary conditions. For a manager, that means running a business or department, regularly directing at least two full-time employees, and having a significant say in hiring or firing.
You don’t have to pay exempt staff overtime wages. Check the Department of Labor’s exemption tests to know if an employee is exempt or non-exempt.
Working out overtime wages for staff you pay weekly is fairly straightforward, but it gets more complicated if your pay period is biweekly, semimonthly, or monthly.
Here’s how you work it out:
- Count the hours worked each workweek. Leave out paid vacation hours from the total.
- Don’t average out hours across workweeks. If someone works 45 hours one week and 35 the next, they’d have five overtime hours in the first week. The shorter second week doesn’t cancel them out.
- Calculate overtime. For staff with no other earnings like bonuses and commission, pay at least one-and-a-half times their hourly rate for those extra hours. At $20 an hour, five overtime hours come to $150 ($30 x 5).
Record regular hours, overtime hours, and paid leave hours separately. You’ll need all three when you calculate gross pay.
Other earnings and overtime pay
Include any bonus or commission the employee earned and which are due in this pay period.
If your employees receive tips, ask them for a written record of the cash and card tips they received. Keep those amounts separate from the wages you pay them.
If you count an employee’s tips toward the minimum wage you must pay, that’s a tip credit. You can use one only if you meet federal and state requirements. If wages plus tips fall short of the required minimum wage, you must make up the difference.
Bonuses, commissions, and tip credits can also affect how you calculate overtime.
For example, a sales bonus or commission may raise the regular rate you use to work out overtime. With a tip credit, you calculate overtime using at least the full applicable minimum wage or a higher regular rate, not the lower cash wage you pay the employee.
Calculate gross pay
Gross pay is what an employee earns before you take out taxes or other deductions.
For someone you pay by the hour, add regular pay, overtime pay, pay for approved leave, and any bonuses or commissions due.
If an employee receives a salary, divide their annual salary by the number of pay periods you chose in Step 3, then add any overtime or other earnings they’re owed.
2026 payroll example
Let’s say you have a non-exempt employee you pay weekly, and they work 45 hours at $20 an hour. In this example, we aren’t considering state overtime rules as they vary by location, so it’s only federal rules that apply here.
To keep it simple, we’re also assuming that your staff member has no paid leave, bonuses, commissions, tips, benefits deductions, or state and local taxes. They earn less than the Social Security wage base and the threshold for Additional Medicare Tax.
On their Form W-4, the employee selects Single and doesn’t check the multiple-jobs box. They’re also claiming no tax credits, and haven’t entered any other income, deductions, or extra withholding.
| Calculation | Amount |
|---|---|
| Regular pay: 40 × $20 | $800.00 |
| Overtime: 5 × $30 | $150.00 |
| Gross pay | $950.00 |
| Federal income tax withholding | -$72.08 |
| Employee Social Security | -$58.90 |
| Employee Medicare | -$13.78 |
| Net pay | $805.24 |
Here’s how we worked out the $72.08 in federal income tax withholding using the IRS’s 2026 instructions:
- Annual pay: $950 × 52 weekly pay periods = $49,400
- Adjusted pay: $49,400 − the worksheet’s $8,600 adjustment = $40,800
- Annual withholding: The Singles table gives $1,240 + 12% of the amount above $19,900 = $3,748
- Weekly withholding: $3,748 ÷ 52 = $72.08 after rounding
Your business will also pay its share of Social Security ($58.90) and Medicare ($13.78), adding $72.68 to the cost of this paycheck. You may owe federal unemployment tax (FUTA) and applicable state taxes as well.
Step 5: Calculate taxes, deductions, and net pay
Net pay is the amount an employee gets after you’ve taken off taxes and other deductions from their gross pay. Taxable wages are the earnings subject to a particular tax. Some deductions reduce the wages used for one tax but not another.
Here’s a list of the taxes that come out of your employee’s pay and what your business pays separately:
| Tax | What you take from the employee’s pay | What your business pays |
|---|---|---|
| Federal income tax | Use their W-4, taxable pay, and pay schedule with the IRS’s withholding tables, as there’s no set percentage for every employee. A traditional 401(k) contribution usually lowers their taxable pay for this tax, but not for Social Security or Medicare. | You don’t pay a separate share. |
| Social Security | Generally 6.2% of wages subject to this tax, up to $184,500 in 2026. | The same 6.2%, up to the same limit. |
| Medicare | Generally 1.45% of their taxable pay for Medicare, with no limit. Take an extra 0.9% from wages you pay them above $200,000 in a year. | The same 1.45%. You don’t pay the extra 0.9%. |
| Federal unemployment tax (FUTA) | Nothing | 6% of the first $7,000 of their taxable pay for FUTA each year. You may qualify for a credit that brings the rate down to 0.6%. |
| State and local taxes | Take out income tax and any other amounts employees must pay. | Pay state unemployment tax and any other employer taxes that apply. Rates and limits depend on where the employee works. |
The taxes your business pays are extra costs. Don’t take them out of the employee’s paycheck.
Federal deductions for qualified tips and overtime don’t automatically make those earnings exempt from payroll taxes. Overtime and tips of $20 or more per month are still generally subject to Social Security and Medicare. Use any updated W-4 and current IRS instructions to calculate federal income tax withholding.
To work out net pay, start with the employee’s gross pay, then:
- Work out taxable wages for each tax: Apply any allowed pretax deductions to the wages used for that tax.
- Calculate employee taxes: Use those taxable wages, the employee’s W-4, and the rates or withholding tables above. Include any state or local tax you must withhold.
- Add other deductions: Include any 401(k) contribution, health insurance premium, or wage garnishment you must take out.
- Subtract taxes and deductions from gross pay: Count each deduction once. The amount left is the employee’s net pay.
Step 6: Check payroll and pay employees
Before you complete the pay run, go through each staff member’s paycheck one last time.
Compare the hours and pay rates used in your calculations with approved timesheets and pay records. Check paid leave, bonuses, tax withholding, and other deductions. Then confirm that gross pay minus withholding and deductions equals net pay.
Check that there’s enough money in your business account to cover employees’ wages and payroll taxes.
Allow enough processing time for your chosen payment method so employees receive their wages by payday. For direct deposits, check your bank’s cutoff time and account for weekends and bank holidays.
You may also need to provide your employees with a paystub. Check your state’s labor department guidance to find out whether you have to provide one, what information needs to be on it, and when you must give it to employees.
Step 7: Deposit payroll taxes
Now you need to send your payroll taxes to the IRS, including the federal income tax you withheld and both your business’s and your employees’ shares of Social Security and Medicare.
You usually have to deposit these taxes before you file payroll tax returns. Filing returns isn’t a substitute for making the required deposits.
Choose how to make federal deposits
Before your first deposit is due, choose how you’ll send the money to the IRS:
- EFTPS: You need to enroll before you can make your first payment.
- Direct Pay for businesses: Pay from your bank account without having to sign in.
- IRS business tax account: Sign in to make a payment through your account.
Save the confirmation each time you make a deposit so you have a record of what you paid and when.
Work out your federal deposit deadline
Most employers file Form 941 quarterly to report federal payroll taxes. The IRS may authorize Form 944 instead if your expected annual liability is $1,000 or less. You must receive that authorization before using the annual form.
For 2026, if you’ve filed only Form 941, your lookback period runs from July 1, 2024, through June 30, 2025. The IRS uses the payroll taxes you reported for that period, not your total wages or how often you pay employees, to set your deposit schedule.
Add the tax totals from your Form 941 returns for those four quarters. Use the final figure to know your schedule:
| Taxes reported in the lookback period | Deposit schedule | When to deposit |
|---|---|---|
| $50,000 or less | Monthly | By the 15th of the month after you’ve paid wages. |
| More than $50,000 | Semiweekly | If payday is Wednesday, Thursday, or Friday, deposit the taxes by the following Wednesday. For Saturday, Sunday, Monday, or Tuesday paydays, do so by the following Friday. |
If you hired your first employee in 2026 and have no earlier tax liability, you start as a monthly depositor, unless the $100,000 next-day rule below applies.
There are two factors that may affect when your federal tax deposit is due:
- Quarterly taxes under $2,500: If you owe less than $2,500 for this quarter or the last one, you may be able to pay when you file Form 941, but check the IRS’s conditions first.
- Taxes reach $100,000: If your payroll taxes reach $100,000 during a deposit period, you need to pay it by the next business day.
Check the cutoff time for your chosen payment method so you can make each deposit on time.
Deposit FUTA separately
There’s a different deposit schedule for FUTA. At the end of each quarter, total up the amount of FUTA you’ve not yet deposited. If it’s:
- More than $500, deposit it by the end of the following month.
- $500 or less, you can carry it into the next quarter and add it to the FUTA you owe then.
If you still owe $500 or less at the end of the year, you can pay it when you file Form 940, generally by January 31 of the next year.
Add state and local deposit dates
Refer to the state tax and unemployment agencies you registered with in Step 1 to find your deposit dates. Add any local tax deadlines that apply, too.
Step 8: File payroll returns and year-end forms
Next comes filing payroll tax returns with the IRS. You also need to report each employee’s annual wages to them and the Social Security Administration (SSA):
| Form | What it reports | When to file |
|---|---|---|
| 941 | Federal income tax withheld and both your and your employees’ Social Security and Medicare taxes. | Quarterly, generally by April 30, July 31, October 31, and January 31. |
| 940 | Your business’s FUTA tax for the year. | Annually, generally by January 31. |
| W-2 | Each employee’s annual wages and taxes withheld. | Give one to each employee and file it with the Social Security Administration (SSA), generally by January 31. |
| W-3 | The totals from the W-2s you file with the SSA. | File it with your W-2s. If you use the SSA’s W-2 Online service, it creates the W-3 for you. |
If the IRS has authorized you to file Form 944, file it once a year instead of filing Form 941 quarterly.
For 2026 wages, give employees their W-2s and file the W-2s and W-3 with the SSA by February 1, 2027. Weekend and holiday rules or specified extensions can affect filing dates. Check the IRS tax calendar and 2026 W-2/W-3 instructions.
If you have 10 or more information returns in total, including W-2s and 1099s, you’ll generally have to e-file them. Paper filing requires an applicable exception or IRS waiver.
Step 9: Reconcile and retain payroll records
Compare your payroll totals with what you paid employees, the taxes you deposited, and the figures on your filed returns. If something doesn’t match, find out why and correct it.
Keep your time records, payroll calculations, employees’ withholding forms, deduction authorizations, filed tax returns, and payment confirmations. According to the IRS, you should keep employment tax records for at least four years after filing the year’s fourth-quarter return.
Note that other records may have different deadlines, and state rules may require you to keep them longer. Limit access to records containing employees’ personal information.