How to Do Payroll Manually

Find out what you need to know to run payroll manually for your employees. Includes steps, tips, and frequently asked questions.

Updated on March 31st, 2020

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Manual payroll is the process of paying employees their after-tax wages using human calculations instead of an automated method. While many businesses use payroll software to streamline their payroll, manual payroll is still a popular option because it is cheaper and relatively simple for anyone who has a financial background.

How to Do Payroll Manually:

1. Each of your employees needs to fill out a W-4 form.

A W-4 form is an IRS form that documents an employee's status so that the employer can deduct the correct amount of federal income tax from their paycheck. If you are outside of the United States, your federal government probably has a similar form that must be completed when a new employee is hired. Make sure you file this form as soon as possible.

2. Make sure your business is registered and has an EIN.

Your business needs to be registered with the government in order to legally employ people and deduct taxes. Registering will give you a number, which is sometimes called an Employer Identification Number (EIN). This number helps the tax agency to recognize who an employee works for when they file their income tax at the end of the year.

If you don't already have an EIN you can apply for one online through IRS.gov.

3. Decide on a pay period.

Some businesses pay their employees at the end of every week, while others pay every two weeks or at the end of every month. Determine what makes the most sense for your business, but keep in mind that labor laws in your area may specify mandatory intervals for payment.

If your business is flexible on the pay period, consider sending out an employee survey to find out if there is a preference among your workforce. In most cases, the frequency and timing of payroll is coordinated to match typical cash flow highs and lows.

4. Implement a way to track compensation.

To ensure that your payroll is accurate at the end of each pay period, you need a way to track hours, vacation time, etc. Most businesses do this electronically with time tracking software that employees can use to sign in and sign out at the end of each shift. If your employees are on a set salary, you just need to make sure that you record any unpaid time off that they take during a pay period.

5. Manually calculate payroll.

Determine how much money each employee has earned during the pay period (rate of pay times hours worked) and then take this number and deduct any applicable state or federal taxes from it. If your employees also pay a premium to be included in a group health plan or union, you can deduct these fees as well. The remaining sum is the employee's net pay.

Tax deductions that must be taken out of an employee's gross pay are:

  • Medicare.
  • Social Security.
  • Federal Income Tax.
  • Unemployment.

When it comes to doing payroll manually, knowing and understanding deductions is one of the most complex things to master. Besides basic income tax, you may need to deduct 401(k) contributions and contributions to a group benefits plan. The Department of Labor recently proposed a rule that could help small businesses share the administrative burdens of offering retirement plans to employees.

An FTE calculation is an important tool for finding out about how many working hours your company is paying for, and will help you when filing your corporate taxes.

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How do you calculate payroll taxes manually?

Calculating payroll taxes manually is very easy as long as you have all of the right information. Let's look at an example.

Bob is a Janitor who works for City Cleaning Services. Last week he logged 40 hours. Bob's current pay rate is $15.00 per hour. This means his gross pay for the week is $600.00 (40 x $15.00). However, taxes still need to be deducted from Bob's paycheck.

Let's assume that Bob's combined federal and state income taxes are 23%. Now that we know this, all we have to do it multiply $600 by 23%. 600 x 0.23 = $138.

Thus, $138.00 will be deducted from Bob's paycheck, leaving him with net pay of $462.00.

6. Manually run payroll.

The best way to keep all of your employees happy is to make sure everyone gets paid on time. Whether you pay your employees by printing off checks and distributing them, or you use direct deposit, make sure your payroll calculations have been done in time to pay everyone on the same date.

If you want to pay your employees using direct deposit, which is the most common method, you will need each of them to share their banking information with you and provide consent for direct deposits. You'll also need to contact your bank to find out what they require for direct deposits out of your payroll account.

Most people who run payroll manually use a spreadsheet to record gross pay, net pay, and deductions for each employee. This makes it easy to keep records and verify amounts before a payroll run.

It is also important to set up an employee mileage reimbursement program to make sure you reimburse employees fairly if they've used their personal vehicles for business purposes.

7. Pay your taxes.

All of the taxes that you deduct from paychecks must be remitted to the government. You can pay taxes on a monthly or quarterly basis.

Employers are now required to use the Electronic Federal Tax Payment System (EFTPS) to submit their tax payments. You can register your business and connect to your bank on the EFTPS website to make regular payments.

Advantages of a Manual Payroll System Over a Computerized System:

  • Less cost because no software subscription package is required. All that is needed is an Excel spreadsheet and a calculator.
  • Payroll can be double and triple checked for accuracy before each run.
  • You can run payroll whenever you like instead of setting periodic payroll runs.
  • No complicated setup/installation steps or manual entry when adding a new employee.

FAQs:

How do you calculate payroll hours and minutes manually?

You should have a method in place for recording how many hours each of your employees is working each day. At the end of a pay period, you can add up the total number of hours that they worked and multiply it by their rate of pay to determine their gross pay. Hours can be tracked using a punch card, time tracking software, or manual entry in a spreadsheet.

What are the advantages of a manual payroll system?

  • More affordable than payroll software.
  • Less chance of error.
  • Payroll is more flexible as it can be run at any time for any number of employees.
  • There is no complicated software setup process.

What is manual payroll?

"Manual payroll" refers to the process of paying employees by completing a payroll run without the aid of software. This means that employee deductions and benefits must be calculated and remitted manually and the bookkeeper or payroll manager must ensure that the employee receives his/her net pay.

How do you do manual payroll?

To do payroll manually, you need to calculate each of your employees' gross pay for the pay period, and then determine the dollar amount of all taxes/benefits that must be deducted. Once you have done this, you can find their net pay and pay them via check or direct deposit.

How does a normal payroll system work?

In a normal payroll system, employees are paid on a weekly, bi-weekly, or monthly basis. The pay that they receive is their net pay, which means all deductions for taxes, 401(k) contributions, and other benefits have already been withheld by the employer.