All small businesses with employees have one thing in common: payroll taxes. They're the taxes that both employers and employees must make to state and federal programs like Social Security, and they can be a big source of stress for small business owners.
Many entrepreneurs lessen their payroll tax workload with the help of specialized software and tools, but what if you have none? Whether by choice or not, there may be a time when you might need to know how to do small business payroll taxes on your own. If that time is now, we're here to help.
Why Do Small Business Payroll Taxes Yourself?
With commercials for tax assistance software running 24/7 during tax season, it's hard to imagine a world without such tools. But for some entrepreneurs, payroll tax tools and software aren't an option.
For instance, perhaps they can't find a tool that can accurately work for their unique business, or maybe they can't yet afford the software they know will work best. Or, maybe they just can't shake the urge to DIY (we are talking about entrepreneurs, after all).
Whatever the case, some small business owners may find themselves needing to do payroll taxes without the help of online tools or automated software. If that's you, then you're probably wondering, "Can I do my own payroll for my small business?" Don't sweat it — we've got your back. Here, we'll explain everything you need to know about doing small business payroll taxes yourself.
What You Need Before Doing Small Business Payroll Taxes
The IRS isn't a big fan of making things simple, so it makes sense that there are a few things you need to get in order before you can start doing payroll taxes. Here's a quick checklist you can use to get started:
- Get an Employer Identification Number (EIN): Also referred to as a "tax ID number," an EIN is essentially like a Social Security number for your business. If your business is its own entity and has employees, then it also needs an EIN.
- Register as an employer: If your business has employees, then obtaining a business license isn't enough — you'll also need to register as an employer. Each state has different rules and regulations about how to do so, so be sure to thoroughly research yours. Note that registering as an employer is not the same as registering your business — in Texas, for example, businesses with employees must register with the Texas Workforce Commission.
- Enroll in the Electronic Federal Tax Payment System (EFTPS): Unless you prefer to do your taxes by mail, you'll want to enroll in the EFTPS. Ran by the U.S. Department of the Treasury, it's the system that makes it possible for businesses and individuals to file their taxes online.
- Gather the right documents: For the most stress-free experience possible, you'll need to have each employee's withholding certificate (Form W-4), employment eligibility verification (Form I-9) and direct deposit authorization form (if applicable). It's also a good idea to get your federal, state and local withholding tables ready for easy reference.
Also be sure to research your state's specific payroll laws if you haven't already. For example, your state may require employers to pay for State Unemployment Insurance (SUI), or it may have overtime laws that you weren't aware of. The bottom line is that you don't want to be caught off-guard, so it pays to do your due diligence before diving in.
How to Set up Payroll Taxes for Small Business
At this point, you're probably still wondering, "How do I manually run payroll?" Let's break it down into manageable steps.
- Calculate the amount you'll need to withhold from each employee's pay. This includes federal and state income tax, annual Federal Insurance Contributions Act (FICA) taxes, quarterly Federal Unemployment Tax Act (FUTA) taxes, Medicare tax and Social Security tax. (Hint: Those withholding tables you prepared earlier will be your best friend during this step).
- Calculate each employee's gross pay. For hourly employees, simply multiply their hours worked by their hourly pay. For salaried employees, their salary is their gross pay.
- Calculate each employee's pre-tax deductions and subtract them from their gross pay, including retirement fund contributions, health benefits and the like.
- Calculate the amount you'll need to pay as an employer. This includes your share of Medicare tax, Social Security tax and FICA taxes. (Hint: An employer tax calculator can simply this step.)
- Pay your employees, record each payment and be sure to handle their pay stubs as required by your state's laws.
- Pay the taxes you owe using the appropriate forms, including Form 940 for FUTA taxes and Form 941 for FICA taxes.
If you're up to tackling those steps, you can certainly do all your small business payroll taxes without ever using a third-party tool or software.
But if you're like many entrepreneurs, the only question on your mind after reviewing all those forms and regulations is, "What is the easiest payroll software to use?" We don't blame you, and we have small business accounting and bookkeeping services that will make doing your payroll taxes a breeze.
Carrie Buchholz-Powers
Carrie Buchholz-Powers is a Colorado-based writer who’s been creating content since 2013. From digital marketing to ecommerce to land conservation, she has experience in a wide range of fields and loves learning about them all. Carrie is fond of history, animals and beauty in equal measure. In her free time, she enjoys knitting, playing video games and exploring Colorado's prairies and mountains with her husband.
