Completing manual payroll when done correctly can save your company a lot of money. But manual payroll is more susceptible to errors, resulting in penalties- and ultimately could cost your company more money. If you are wanting to do manual payroll, you’ll have to learn how to do so correctly and efficiently so you can get the benefits.
Learn more about the pros and cons of completing your own payroll and how to set yourself up for success for manual payroll.
Pros and Cons of completing your own Payroll
Companies choose to do manual payroll because they can minimize or eliminate the cost of payroll. Payroll help can vary from more affordable options to very specialized personalized options, from 1:1 help to large and expensive payroll infrastructures. Many small companies choose to invest in calculators or software to run payroll. Outsourcing payroll can be considered a cost-saving to the bottom line when payroll becomes complicated or time-consuming.
Can readily start
Some large payroll systems need to be onboarded or require other tasks before payroll can begin. With manual payroll, you can begin right away, and there is no delay or requirements to start.
A deeper understanding of payroll
Manual payroll will require you to have a greater understanding of the payroll, costs, and profits of your company. By doing manual payroll, you may gain greater insight into your company.
Payroll can easily eat up large amounts of time. Given the attention to detail needed, speeding up payroll will most likely have consequences. For those that don’t have time to spare, know that payroll will take a significant amount of time, and you may find that time is best invested in other areas of your business. Payroll is simply a compliance function, and it may be hard to calculate the opportunity cost of not growing a business or working on other activities.
Errors and consequences
It’s pretty common for manual payroll to have errors. These errors could happen from not enough attention to detail, or common accounting errors, etc. Payroll errors to the IRS result in payroll penalties, which can be costly. In addition to financial penalties, errors can result in unhappy employees since payroll errors might mean delayed payments.
Harder to grow and maintain
With every employee your company hires, payroll becomes a lengthier process. Manual payroll becomes more difficult to maintain and time-consuming. If your business is growing or looking to expand, manual payroll may be challenging over time.
How to Manually Do Payroll
If you decide to move forward with manual payroll, here are steps you’ll need to know-
1. Prepare The Proper Tax Documents
The first step to any payroll is assembling the correct tax documentation. This includes employee forms, federal tax forms, and state forms.
All employees will fill out a W-4 to determine how much to withhold. More employee forms may include:
- Form I-9, Employment Eligibility Verification PDF
- Form W-4P, Withholding Certificate for Pension or Annuity Payments
- Form W-9, Request for Taxpayer Identification Number and Certification
- Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-to-Work Credits
In addition to employee withholding information, you’ll need documentation for employer tax forms. The forms that IRS lists (not exhaustive) are:
- Form 940, Employer's Annual Federal Unemployment Tax Return
- Form 941, Employer's Quarterly Federal Tax Return
- Form 943, Employer's Annual Tax Return for Agricultural Employees
- Form 944, Employer’s Annual Federal Tax Return
- Form 945, Annual Return of Withheld Federal Income Tax
- Form CT-1, Employer's Annual Railroad Retirement Tax Return
- Form CT-2, Employer's Annual Railroad Retirement Tax Return
- Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips
Lastly, you’ll want to understand what forms are necessary to fill out in your state. Find out what tax forms are required for each state here.
2. Have Your EIN Number Handy
Your EIN is a unique number given to you by the federal government for tax purposes. This number is necessary to open a business bank account, apply for business licenses and file your tax returns. If you don’t have an EIN or are unsure, you can find out more here.
3. Gather Employee earnings information
After you have the appropriate documentation and your EIN, you’ll need to gather all employee earning information. This includes gross pay, net pay, bonus, commissions, overtime, holidays, etc.
4. Choose Your Payroll Schedule
You’ll also need to determine the payroll schedule. Payroll schedules often vary based on hourly vs. salary, payroll structure, or other elements. Your payroll schedule options include:
- Weekly: This type of pay schedule works best for organizations that pay hourly wages or employees that have irregular schedules.
- Biweekly: This type of pay schedule works best for organizations that pay hourly wages.
However, this payroll schedule means extra work for your accounting team to make sure that costs and payouts are aligned based on the months that payments were issued for tax purposes:
- Semi-monthly: With this type of pay schedule, the processing costs and time spent on payroll tend to below.
- Monthly: Because this happens so infrequently, this schedule has the lowest processing cost compared to the other options here. However, it is important to note that this is probably the least preferred option for employees as managing money and paying bills can become more difficult and strategic.
5. Track Employee Time
For all your hourly workers, you’ll need to track the time. You can manually track time, use a time tracker or software.
6. Calculate Gross Pay
Next, you’ll need to calculate the gross pay. Gross pay is the total wages or salary before taxes or deductions are taken out. Gross pay is important to correctly calculate because it is your starting point for other calculations. For hourly employees, this calculation will be all hours plus any OT work. You can find a gross pay calculator here.
7. Subtract Withholdings, Deductions, & Allowances
After calculating the gross pay, you’ll start subtracting deductions, withholding, and allowances to arrive at the net pay.
First, subtract pre-tax deductions
Next, deduct employment taxes
What’s the difference between payroll tax and income tax? Read more here.
Finally, withhold post-tax deductions
8. Calculate Net Pay
After you’ve calculated pre-tax deductions, employment taxes, and post-tax deductions, you’ll arrive at the employee net pay. Be sure to document the above in the employee's payroll file to show authorization for any deductions and send the pay stub to the employee along with their payment.
9. Keep Strong payroll records
One way to ensure your manual payroll process goes smoothly is to keep strong and accurate payroll records.
Need help with your payroll records? Meet your Payroll expert.
10. Don’t Forget To File & Pay Payroll Taxes
Lastly, to avoid any penalties and truly benefit from the cost-saving aspect of manual payroll, be sure to file and pay to avoid costly penalties from the IRS. Many that do manual payroll, file after payday.
Use the right Payroll Software
Doing manual payroll requires time, attention to detail, and diligent record-keeping. The time loss of keeping a steady payroll can quickly make the entire process expensive, despite no upfront cost. Payroll software like ours was built for small teams to save money and time. We lift the payroll burden. If you are considering a manual payroll system vs. a payroll system, consider how much time you are putting into payroll, how many employees you have, or if your company is growing and evaluate your costs and benefits. Find something that fits your business and budget sooner rather than later, as payroll is a constant need for every business.