How to Do Payroll Yourself Without Software

Payroll is a fundamental operation for any business, encompassing the process of paying employees for their work and managing the associated taxes and deductions. For small businesses, particularly those looking to manage costs or seeking greater control, handling payroll manually without specialized software can be a viable option. This approach requires a thorough understanding of various financial concepts and diligent adherence to regulatory requirements. Successfully navigating manual payroll involves meticulous record-keeping, accurate calculations, and timely submissions to ensure compliance with federal, state, and potentially local tax laws.

Key Payroll Concepts

Employee compensation begins with gross pay, the total amount earned before any deductions are subtracted. This figure represents the full wages, salary, commissions, or other forms of compensation an employee receives for a given pay period.

From gross pay, various deductions are made, categorized as either pre-tax or post-tax. Pre-tax deductions, such as contributions to a qualified retirement plan or certain health insurance premiums, reduce an employee’s taxable income before taxes are calculated. Post-tax deductions, like wage garnishments or union dues, are subtracted after all applicable taxes have been determined. After all deductions, the remaining amount is the employee’s net pay.

Employers are responsible for various payroll taxes. Federal Income Tax (FIT) withholding is based on information provided by the employee on their IRS Form W-4. Federal Insurance Contributions Act (FICA) taxes comprise Social Security and Medicare taxes, which are split between the employer and employee. For 2025, the Social Security tax rate is 6.2% for both parties on wages up to $176,100, and the Medicare tax rate is 1.45% for both parties on all wages. An additional Medicare tax of 0.9% applies to employee wages exceeding $200,000, which employers do not match.

Employers are solely responsible for Federal Unemployment Tax Act (FUTA) taxes, which fund state unemployment insurance programs. The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages, typically reduced to 0.6% with state unemployment tax credits. State Income Tax (SIT) withholding and State Unemployment Insurance (SUI) taxes also apply, varying by state. SUI rates and wage bases differ across states, and some localities may impose additional income taxes. Employers must withhold these taxes from employee wages and remit both withheld amounts and their own contributions to the appropriate federal, state, and local tax authorities.

Information Needed for Manual Payroll

Before embarking on payroll calculations, gathering all necessary information is paramount. For each employee, essential personal data includes their full legal name, current address, Social Security Number, and date of birth. Employment details such as their hire date, pay rate or salary, and pay frequency (e.g., weekly, bi-weekly, semi-monthly, monthly) are also crucial.

A cornerstone of federal income tax withholding is IRS Form W-4, the Employee’s Withholding Certificate. Employees complete this form to inform employers how much federal income tax to withhold from their paychecks. Employers must obtain a completed Form W-4 from each new employee and interpret the information provided, which includes filing status, any multiple job adjustments, claims for dependents, and other income or deductions.

Many states require employees to complete state-specific withholding forms, similar to the federal W-4, to determine state income tax withholding. These forms are typically available on state revenue department websites. Employers must be aware of their state’s requirements and interpret these forms similarly to the federal W-4 to ensure correct state income tax withholding.

Beyond tax forms, clear documentation of wage agreements and company policies is necessary. This includes detailed information on hourly rates, salaries, overtime policies (e.g., 1.5 times the regular rate for hours over 40 in a workweek), commission structures, and any pre-approved deductions. Examples of pre-approved deductions might include health insurance premiums or 401(k) contributions.

Employers must have access to current federal and state tax rates and thresholds. For federal taxes, IRS Publication 15, “Employer’s Tax Guide,” provides current federal tax withholding tables, FICA tax rates, and FUTA tax information. State tax tables, SUI rates, and wage bases can be found on respective state labor or revenue department websites.

Step-by-Step Payroll Calculation

Payroll calculation begins with gross pay. For hourly employees, gross pay is determined by multiplying the hours worked by their regular hourly rate. If an employee works overtime, those hours are paid at a higher rate, typically one and a half times their regular rate. Salaried employees receive a fixed amount per pay period, though their annual salary must meet minimum wage and overtime exemption criteria.

Once gross pay is established, any pre-tax deductions are subtracted to arrive at the taxable gross pay. These deductions, such as eligible health insurance premiums or pre-tax contributions to a 401(k) plan, reduce the amount of income subject to federal and state income taxes.

Federal Income Tax (FIT) withholding is then calculated using the employee’s Form W-4 information and the tax tables provided in IRS Publication 15. Employers can use either the wage bracket method or the percentage method to determine the correct withholding amount.

FICA taxes are calculated next. The employee’s share of Social Security tax is 6.2% of wages up to the annual wage base of $176,100, while the Medicare tax is 1.45% of all wages. If an employee’s wages exceed $200,000, an additional Medicare tax of 0.9% must be withheld from the employee’s portion of wages above that threshold.

State and local tax withholding calculations follow, based on the specific rules and tax tables for each applicable state and locality. After all tax withholdings are determined, any post-tax deductions, such as wage garnishments, union dues, or Roth 401(k) contributions, are subtracted from the remaining pay.

The final step for the employee’s paycheck is to calculate net pay by subtracting all federal, state, and local taxes, as well as all pre-tax and post-tax deductions, from the gross pay. Separately, employers must calculate their own payroll tax contributions. This includes the employer’s matching share of FICA taxes (6.2% for Social Security up to the wage base and 1.45% for Medicare on all wages), FUTA taxes (0.6% on the first $7,000 of each employee’s wages for most employers), and State Unemployment Insurance (SUI) taxes, which are calculated based on the state’s specific rate and wage base for the employer.

Processing Payments

After calculating all payroll figures, process payments to both employees and tax authorities. Paying employees typically involves either issuing physical checks or setting up direct deposit. For checks, employers must ensure all required information is present, including the employee’s net pay, the pay period, and the employer’s details.

Issuing a pay stub with each payment is a legal requirement. This document must clearly detail the gross pay, a breakdown of all deductions (pre-tax and post-tax), the net pay, and year-to-date totals for earnings and deductions.

Federal income tax, Social Security, and Medicare taxes are generally remitted to the IRS through the Electronic Federal Tax Payment System (EFTPS). Employers must enroll in EFTPS, a free service provided by the U.S. Department of the Treasury, to make these payments electronically. Enrollment can take several business days to process, and payments must be scheduled at least one calendar day before the tax due date.

Federal tax deposit schedules vary based on the total tax liability. Most employers are either monthly or semi-weekly depositors. Monthly depositors remit taxes by the 15th of the following month. State income tax and SUI taxes are remitted to state agencies, often through their respective online portals, and local taxes to local authorities. Payment deadlines for state and local taxes vary by jurisdiction.

Meeting Payroll Reporting Requirements

Employers must fulfill various reporting obligations by filing specific forms with federal and state agencies.

IRS Form 941, Employer’s Quarterly Federal Tax Return, is a primary federal reporting document. Most employers use this form to report federal income tax, Social Security, and Medicare taxes withheld from employee wages, along with the employer’s share of FICA taxes. Form 941 is filed quarterly, with due dates typically falling on the last day of the month following the end of each quarter (e.g., April 30, July 31, October 31, and January 31).

IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is filed annually to report FUTA tax liability. This form is due by January 31 of the following year.

At the end of each calendar year, employers must prepare IRS Form W-2, Wage and Tax Statement, for each employee. This form reports the employee’s annual wages and the amount of federal, state, and local taxes withheld. Employers must furnish copies of Form W-2 to employees by January 31 of the following year. A summary of all W-2s is transmitted to the Social Security Administration (SSA) with Form W-3, Transmittal of Wage and Tax Statements, by the same deadline.

In addition to federal forms, states have their own reporting requirements, which can include state unemployment insurance reports, state income tax withholding reconciliation forms, and new hire reporting. These vary by state and are typically managed through state labor or revenue department websites.

Maintaining accurate and organized records is an ongoing responsibility. Federal law requires employers to keep payroll records for a minimum of three years under the Fair Labor Standards Act (FLSA). The IRS mandates retaining employment tax records for at least four years after the tax due date or payment date, whichever is later. These records should include employee information, hours worked, wages paid, deductions, and copies of all filed tax forms and payment confirmations.