How to Run Payroll Like a Pro [Free Payroll Checklist]

In March of 2023, there were over 155 million Total Nonfarm Payroll employees across the US––that’s a lot of people who rely on accurate payroll processes. Many organizations choose to outsource their payroll entirely to PEOs, but some small businesses often have to go the DIY route.

Want to run payroll yourself with the confidence of a pro? We’ve broken down the complete payroll process into seven clear steps.

Editor's Note: Always ensure you are keeping accurate records in case there is a discrepancy. Employers have the burden of proof if there is any dispute with employees or government agencies.

How to Do Payroll Yourself in 7 Steps

Step 1: Prior To Processing Payroll

Prior to running payroll for the first time, you will need:

• An Employer Identification Number (EIN)
• State and local tax identification numbers
• Employee tax information
  • Form W-4 for full- and part-time employees
  • Form W-9 for contract and freelance employees
  • Form I-9 verifying eligibility for U.S. employment
• Employee wage or salary information
• Employee direct deposit information (if you pay via direct deposit)
• Federal and state withholding accounts
  • Electronic Federal Tax Payment System account (EFTPS)
  • State unemployment insurance account (SUTA), as detailed on your state’s Labor Office website
  • State new hire reporting account
  • State worker’s compensation insurance account
• A payroll budget account
• A payroll schedule
• Direct deposit service and/or paper checks
• Your tax payment schedule

Step 2: Review Employee Information

Did you know that the average company has an 80% payroll accuracy rate and makes 15 corrections per pay period? These can add up quickly and result in thousands lost annually due to payroll errors. Taking the time to make sure all employee information is accurate can quite literally pay off.

Review your employee information prior to running payroll to ensure everything is up to date.

• New employee information
  • Full name and address
  • Whether they are an employee or independent contractor according to law
  • Social Security number or EIN from IRS Form W-4 for employees or Form W-9 for contractors
  • Employee tax withholding information from Form W-4 (withholding is not generally necessary for independent contractors)
  • Rate of pay and other earnings such as sales commissions or tips
  • Whether their earnings are subject to garnishment
  • Which employee benefits they have chosen that require withholding
  • Direct deposit bank account information (if that’s how you issue pay)
  • Form I-9, verifying eligibility for U.S. employment
• Current employees’ personal information
  • Address changes
  • Tax withholding changes
  • Benefits changes
  • Employment status changes
  • Job title changes
  • Wage/salary changes

Step 3: Calculate Gross Pay

Next, you’ll want to calculate gross pay, or the total pay earned before taxes and deductions. This is also the time to check on PTO, additional pay such as commissions and bonuses, and any other factors that will influence your employees’ paychecks.

Calculate the correct amount of money each employee will receive before withholdings.

• Hourly employees
  • Gather signed timecards or approved timesheets from managers
  • Review hours entered for each employee
  • Calculate overtime (varies by state)
  • Calculate any paid time off
  • Calculate any additional pay
    • Retroactive pay
    • Commissions
    • Bonuses
• Salaried employees
  • Calculate gross pay
  • Record any paid time off
  • Calculate any additional pay
    • Retroactive pay
    • Commissions
    • Bonuses

Step 4: Calculate Net Pay

Calculate the amount of money you need to take out of each employee’s pay, making sure to deduct all pre-tax contributions before calculating taxes. Also, don’t forget to calculate any company-matched contributions to healthcare or retirement funds.

• Pre-tax or tax-exempt adjustments
  • Benefit premiums (pre-tax)
  • HSA contributions (pre-tax)
  • Retirement fund contributions [pre-tax for 401(k) and non-Roth IRA]
  • Reimbursements for expenses (not taxed)
• Taxes and withholdings
  • Federal income tax
  • Medicare tax
  • Social Security withholdings
  • State income tax
  • Local taxes
  • Wage garnishments
• Double check locations and amounts for accuracy

Step 5: Final Review

Now is the time to review, review, review. Before you cut paper checks or enter amounts for direct deposit, be sure to do a final pass to look for discrepancies and ensure you’re working with updated records.

As we mentioned earlier, payroll mistakes can cost your business more than you may realize. It never hurts to double check.

Step 6: Disburse Payment

Whether you’re sending paper checks or direct deposits to your employees, don’t forget to review employee pay instructions and disburse payment. You’ve now neared the end of the process, and your employees are getting ready to do their payday happy dance.

• Review pay instructions for each employee
  • Print and sign paper checks
  • Enter and approve direct deposit amounts

Step 7: Distribute Withholdings

Money withheld from employees’ pay must be deposited to the proper accounts for eventual payment to state, local, and federal taxes, or directly to retirement funds and benefits providers.

Remember that any company-matched contributions should be included along with these distributions.

There you have it, do-it-yourself payroll for small business in seven steps!

Payroll Software, the Payroll Pro’s Perfect Sidekick

Have you ever eagerly anticipated payday only to receive an incorrect or delayed paycheck? If so, you know why accurate, timely pay is arguably the most important benefit you can provide your employees. DIY or homegrown payroll solutions become unwieldy and error-prone as the business grows, and upgrading to payroll software is a powerful next step, especially if you want to keep your payroll process in-house.

Using payroll software also minimizes your risk, since the responsibilities for withholding and paying taxes, overtime, and benefits premiums are often handled by the payroll provider, who should be insured.

Next Steps: Pay Your People Confidently

If processing payroll has one rule that’s important above all others, it’s keeping accurate and complete records. In the event that a current or former employee receives incorrect pay or a state or federal agency receives incorrect taxes, the burden of proof is on the employer to prove everything was accurate. It’s critical for employers to remain in compliance by doing the following:

• Keeping detailed, complete, and organized records
• Paying state and federal taxes on time to avoid penalties
• Reporting hiring and workforce changes to the IRS