How to Do Payroll Manually: A Step-by-Step Process

Information for Payroll Processing

Careful organization and specific information are needed before manual payroll calculations begin. This data ensures accurate wage payments and tax withholdings. Gathering documentation streamlines the process.

Before an employee can be paid, employers must obtain certain details. The Employee’s Withholding Certificate, Form W-4, provides information about an employee’s filing status, dependents, and any additional income or deductions they anticipate. This form determines the amount of federal income tax to withhold from their wages.

The Employment Eligibility Verification, Form I-9, confirms an employee’s legal right to work in the United States. This document requires employees to attest to their employment eligibility and present acceptable identity and employment authorization documents. The I-9 is a mandatory federal requirement for all new hires.

Beyond employee-specific forms, employers need their own identification numbers. The Internal Revenue Service (IRS) issues an Employer Identification Number (EIN), a nine-digit number used for federal tax purposes. This number identifies the business to the IRS for reporting and remitting federal payroll taxes.

Businesses also require state and potentially local tax identification numbers. These IDs are necessary for reporting and remitting state income taxes, if applicable, and state unemployment insurance contributions. Some localities may also levy their own income taxes, requiring separate registration and reporting.

Establishing a consistent payroll schedule is another preparatory step. Businesses adopt weekly, bi-weekly, semi-monthly, or monthly pay periods. Documenting each employee’s pay rate, whether an hourly wage or an annual salary, is also needed for accurate gross pay calculations.

Other potential deductions also require pre-collection of information. Details for pre-tax deductions, such as qualified health insurance premiums or traditional 401(k) contributions, must be gathered from employee enrollment forms. Information for post-tax deductions like Roth 401(k) contributions, wage garnishments, or union dues must be on file before payroll processing.

Calculating Employee Wages and Withholdings

Manual payroll involves calculating gross pay and deducting all required withholdings. This process ensures compliance with tax laws and proper net pay distribution. Precision prevents errors that can lead to penalties or employee dissatisfaction.

Gross pay is the starting point for all payroll calculations. For hourly employees, gross pay is determined by multiplying the total hours worked by their hourly rate. If an employee works more than 40 hours in a workweek, federal law requires overtime pay at a rate of at least 1.5 times their regular hourly rate for those excess hours. Salaried employees receive a fixed amount per pay period, regardless of the hours worked, unless their employment agreement specifies otherwise.

Once gross pay is determined, certain pre-tax deductions are subtracted. These deductions reduce an employee’s taxable income before federal income tax is calculated. Examples include qualified health insurance premiums or contributions to a traditional 401(k) retirement plan. The remaining amount is often referred to as taxable gross pay.

Federal income tax withholding is calculated based on the employee’s Form W-4 and IRS Publication 15-T, Federal Income Tax Withholding Methods. This publication provides detailed instructions, including wage bracket tables and percentage methods, to determine the correct amount to withhold. Using the wage bracket method involves finding the employee’s wage amount in the table, then locating their filing status and number of allowances to identify the withholding amount.

Social Security and Medicare taxes, collectively known as FICA taxes, are also withheld from gross pay. For 2025, the employee’s share of Social Security tax is 6.2% of wages, up to an annual wage base limit of $174,900. Medicare tax is 1.45% of all wages, with no wage base limit. An additional Medicare tax of 0.9% applies to wages exceeding certain thresholds, such as $200,000 for single filers, without an employer match for this additional tax.

State and local taxes are calculated based on the specific rules of the jurisdiction where the employee works or resides. This can include state income tax, which varies significantly by state, and an employee share of state unemployment insurance (SUI). Some cities or counties may also impose local income taxes or other payroll-related levies.

After pre-tax deductions and federal, state, and local taxes, any post-tax deductions are subtracted. These deductions do not reduce taxable income. Examples include contributions to a Roth 401(k), wage garnishments ordered by a court, or union dues.

Net pay is calculated by subtracting all deductions—pre-tax deductions, federal taxes, state taxes, local taxes, and post-tax deductions—from the gross pay. This final amount is the actual take-home pay the employee receives. Maintaining meticulous records of each calculation step aids transparency and audit purposes.

Issuing Employee Payments

After gross pay and deduction calculations are complete, issue payments to employees. This involves selecting a payment method and ensuring employees receive a clear breakdown of their earnings and deductions. Proper payment procedures maintain employee satisfaction and compliance.

Common methods for paying employees include traditional paper checks, direct deposit, or pay cards. Paper checks require careful preparation, ensuring the correct net pay amount is written and that the check includes necessary information such as the pay period dates and the employer’s details. These checks must then be distributed securely to each employee.

Direct deposit is a widely used payment method that electronically transfers funds directly into an employee’s bank account. This requires obtaining the employee’s bank name, routing number, and account number. Direct deposit offers convenience for both the employer and employee, reducing the need for physical check handling.

Pay cards function similarly to debit cards, with net pay loaded onto the card each pay period. This option can be useful for employees who do not have traditional bank accounts. Regardless of the chosen method, funds must be available and disbursed on the scheduled payday.

Providing a detailed pay stub to each employee is a mandatory requirement. The pay stub must clearly list the employee’s gross pay, all pre-tax and post-tax deductions, and the resulting net pay for the current pay period. It should also include year-to-date totals for wages and taxes withheld, offering a comprehensive financial summary.

Maintaining accurate records of all payments made is an aspect of payroll. This includes copies of checks, direct deposit confirmations, and detailed pay stubs. These records serve as proof of payment and are necessary for internal accounting purposes and potential audits.

Fulfilling Tax Obligations

Beyond paying employees, manual payroll involves fulfilling tax obligations to government entities. This includes depositing withheld taxes and filing required payroll tax forms. Adhering to these responsibilities avoids penalties and maintains legal compliance.

Employers are responsible for depositing federal income tax, Social Security, and Medicare taxes withheld from employee wages, along with the employer’s share of FICA taxes. These deposits are made electronically through the Electronic Federal Tax Payment System (EFTPS). The deposit schedule, either monthly or semi-weekly, depends on the total tax liability reported during a lookback period.

For example, most new employers begin on a monthly deposit schedule, with deposits due by the 15th of the month following the payroll. If the total tax liability exceeds $50,000 in the lookback period, employers switch to a semi-weekly deposit schedule, requiring deposits by Wednesday for paydays on Wednesday, Thursday, or Friday, and by Friday for paydays on Saturday, Sunday, Monday, or Tuesday. Failure to deposit on time can result in penalties, ranging from 2% for deposits one to five days late to 15% for deposits more than 16 days late or unremitted.

Employers must also file several federal payroll tax forms. Form 941, Employer’s Quarterly Federal Tax Return, reports wages paid, tips reported, federal income tax withheld, and both employee and employer shares of Social Security and Medicare taxes. This form is filed quarterly, with deadlines on April 30, July 31, October 31, and January 31 of the following year.

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, reports the FUTA tax liability. FUTA tax is an employer-only tax that funds unemployment compensation. The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages, though employers can receive a credit of up to 5.4% for timely state unemployment tax payments, effectively reducing the net federal rate to 0.6%. Form 940 is filed annually by January 31 of the following year.

The Form W-2, Wage and Tax Statement, reports an employee’s annual wages and the amount of federal, state, and local taxes withheld. Employers must furnish a copy of Form W-2 to each employee by January 31 of the following year. Copies of Form W-2 are also sent to the Social Security Administration (SSA) by the same deadline, which then shares the information with the IRS.

In addition to federal obligations, businesses must file corresponding state and local payroll tax returns and make deposits according to their specific requirements. These requirements vary significantly by jurisdiction, including state income tax withholding forms, state unemployment insurance reports, and local tax filings. These filings also have specific deadlines that employers must meet.

Maintaining meticulous records of all payroll calculations, payments, and tax filings is for audit purposes. The IRS recommends keeping employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later. These records include Forms W-4, I-9, payroll registers, and copies of all filed tax forms.