Can I do my own payroll for my small business?

Can I do my own payroll?

Yes, if you can keep two calendars. One calendar is the IRS. The IRS is the Internal Revenue Service, the federal tax agency. The other calendar is your state. Miss a deposit and the bill can land on you, not only on the business.

You have three ways to do the job.

Do it by hand

You figure the paycheck. You send the taxes. You file the returns. This can fit a new shop with one state and a small crew. A new employer starts on the monthly deposit schedule described below.

Use payroll software

Software can do the arithmetic. On some plans it files a return the company names on its own help page. Publication 15 (Circular E), the IRS Employer’s Tax Guide, says you stay responsible if a third party misses a deposit or a return. A payroll login is not a state tax account.

Hire an accountant

An accountant can prepare the returns. The same Publication 15 rule still applies. You stay responsible for the filing and the payment. The directory compares software by state. The methodology page explains the three grades.

How to set up payroll for a small business

Setup is the work before the first payday. Hiring your first employee is the list for the employer identification number, the state accounts, and Form W-4. This page starts after those accounts exist.

An employer identification number is the nine-digit tax ID the IRS assigns to a business. Form W-4, the Employee’s Withholding Certificate, is the form your employee fills out to set federal withholding. Withholding means money you take out of a paycheck and send to a tax agency.

Before you run a payday yourself, you need three things. You need the employer identification number. You need the state accounts on that state’s page. You need a way to pay the IRS electronically. Enroll in the IRS’s free online tax-payment system (EFTPS) before the first deposit. The EFTPS page says a new enrollment can take up to five business days.

How to do your own payroll for a small business

Each payday is the same list. Do it in this order.

1. Start with gross pay. Gross pay is the wages the person earned before taxes. Count the hours and the pay rate. The U.S. Department of Labor requires those records for workers covered by the Fair Labor Standards Act, the federal wage-and-hour law. 29 CFR Part 516 is the recordkeeping rule.
2. Withhold federal income tax using Form W-4. Publication 15 says to keep a Form W-4 on file for each employee. The dollar amount comes from Publication 15-T, the IRS withholding tables that Publication 15 points to. If a new employee does not give you a 2026 Form W-4, Publication 15 says to treat the person as single or married filing separately, with nothing filled in on steps 2, 3, or 4.
3. Withhold Social Security tax and Medicare tax. For 2026, Publication 15 sets Social Security at 6.2 percent of wages, up to $184,500 for that employee. Medicare is 1.45 percent of wages. Medicare has no wage cap. Also withhold an extra 0.9 percent Medicare tax on wages you pay that employee above $200,000 in the year. You do not match that extra 0.9 percent.
4. Add the employer share. You owe another 6.2 percent for Social Security, up to the same $184,500 wage base, and another 1.45 percent for Medicare. That share stays off the paycheck. You may also owe federal unemployment tax. Publication 15 calls it FUTA. Only the employer pays it. The usual test is $1,500 of wages in a calendar quarter, or one employee for part of a day in 20 different weeks. Household work and farm work use other tests in Publication 15. For 2026 the rate is 6.0 percent of the first $7,000 of wages. If you pay state unemployment tax in full and on time, the credit can be as much as 5.4 percent. The rate after that full credit is 0.6 percent. A credit-reduction state can shrink the credit. Read the Form 940 instructions before you use 0.6 percent.
5. Withhold state income tax only if that state taxes wages. Add state unemployment tax. State unemployment tax is often called SUI or SUTA. It is a separate account from FUTA. Use the rate on the state’s notice. Texas does not withhold state income tax from paychecks. Washington does not either. You still owe federal withholding, Social Security, and Medicare. You still owe that state’s unemployment tax.
6. Pay the employee the net pay. Net pay is what is left after the taxes you withhold. The employer share is not subtracted a second time.
7. Hold the withheld taxes and the employer share for the deposit. Do not spend that money on other bills.

Deposit federal tax on the IRS schedule

A deposit is the payment of the withheld federal income tax, Social Security, Medicare, and the employer share of Social Security and Medicare. Publication 15 says you must pay it by electronic funds transfer. EFTPS is free. IRS Direct Pay and your IRS business tax account are also free. A bank, a tax pro, or a payroll service may charge a fee to pay for you.

Your schedule is not the same thing as your payday. Publication 15 uses two schedules. A monthly schedule depositor sends the month’s taxes by the 15th day of the next month. A semiweekly schedule depositor follows the payday. Wages paid on Wednesday, Thursday, or Friday are due the next Wednesday. Wages paid on Saturday, Sunday, Monday, or Tuesday are due the next Friday.

Which schedule you use depends on a lookback period. For a 2026 Form 941 filer, Publication 15 sets that period as July 1, 2024, through June 30, 2025. Form 941, the quarterly federal payroll tax return, is where those taxes are reported. If the taxes you reported for the lookback period were $50,000 or less, you are a monthly schedule depositor. If they were more than $50,000, you are a semiweekly schedule depositor. A new Form 941 filer counts the quarters before the business started as zero. You are a monthly schedule depositor for the first calendar year.

Two exceptions change that plan. If you accumulate $100,000 or more in these taxes on any day, Publication 15 says you must deposit by the next business day. You then become a semiweekly schedule depositor for the rest of that year and the next year. If your Form 941 tax for the current quarter or the prior quarter is less than $2,500, and you did not hit that $100,000 one-day rule, you may pay with a timely filed Form 941 instead of depositing during the quarter.

FUTA uses its own deposit rule. Figure it each quarter. If the quarter’s FUTA tax, including any amount carried forward, is over $500, deposit it by the last day of the next month. If it is $500 or less, carry it to the next quarter. If the fourth quarter is still $500 or less, you may pay it with Form 940 by January 31.

Quarterly and annual filing calendar

A deposit does not file the return. You still file. If the due date falls on a Saturday, Sunday, or legal holiday, the IRS employment-tax due-dates page says you may file on the next business day.

File the W-2s through Business Services Online, the Social Security Administration’s employer filing system. The IRS says an employer that files 10 or more information returns must file them electronically. Count the W-2s with the other information returns.

The IRS may tell you in writing to file Form 944, the annual employment-tax return, instead of Form 941. Publication 15 says to file Form 944 only after that written notice. Until the notice arrives, file Form 941.

State withholding and state unemployment tax are a second calendar. Do not paste one state’s form onto another state.

California opens an Employment Development Department payroll-tax account within 15 days after you pay more than $100 in wages in a quarter. A federal deposit does not open that account. New York can open unemployment, withholding, and wage reporting on one registration. If you are liable for unemployment insurance, you file Form NYS-45. That return combines the three. Illinois withholds state income tax and files Form IL-941. Unemployment is a separate quarterly Form UI-3/40. New Jersey withholds gross income tax. Form NJ-927 pays unemployment, workforce development, temporary disability, and family leave insurance. Massachusetts wants Form M-4, the state withholding certificate, as well as Form W-4. Withholding and unemployment sit on two portals.

Pennsylvania withholds a flat state income tax. Local earned income tax goes to a local collector. One state account does not cover it. Ohio withholds state income tax on the state account. School district tax can use that same account. City income tax is a separate account.

What a late deposit can cost

The failure-to-deposit penalty is the IRS charge for a deposit that is late, short, or paid the wrong way. Publication 15 and the failure-to-deposit page use the same steps. The rates do not stack. A later rate replaces the earlier one.

The IRS charges interest on penalties. It may remove the penalty if you had reasonable cause and the failure was not willful neglect.

A separate bill can reach you personally. Withheld income tax and the employee’s Social Security and Medicare are trust fund taxes. You hold the employee’s money until you deposit it. The trust fund recovery penalty equals the unpaid trust fund tax. That is the withheld income tax plus the employee’s share of Social Security and Medicare. Publication 15 states the penalty as 100 percent. The IRS can assess it against a responsible person who willfully failed to collect, account for, or pay the tax. A responsible person can be an officer, a partner, or a person who signs checks. Willfully means you knew the deposit was not happening, or you ignored an obvious risk. After the penalty is assessed, the IRS can file a lien or take a levy against personal assets.

Signs you should stop doing it by hand

Stop when the calendar is no longer a short monthly list.

• You missed a deposit, or you are not sure which schedule you are on.
• Your lookback taxes went over $50,000, so you moved to the semiweekly schedule.
• You hit the $100,000 next-day deposit rule.
• You pay people in more than one state. Each state has its own return.
• A local tax sits beside the state tax. Pennsylvania’s local earned income tax and Ohio’s city tax are that kind of extra account.
• The state return is more than withholding and unemployment. New Jersey’s NJ-927 also carries disability and family leave. Massachusetts wants Form M-4 and a second portal.
• You cannot keep the wage records. Keep payroll records at least three years. Keep time cards and wage-rate tables at least two years. That is 29 CFR §§ 516.5 and 516.6.
• You are using the withheld money to pay rent, vendors, or yourself.

When payroll software takes the job

Software fits when the list above is already true, or when you do not want to own the arithmetic. It can figure gross pay, withholding, and the employer share. On some plans it files a return the company names on its own help page.

It does not erase the tax. Publication 15 says you remain responsible if the payroll service misses a deposit or a return. Read the state page for the account you still open yourself. Compare the state split on the directory. Gusto is one plain link. Patriot is the other service on this site.

Related guide: Independent contractor vs employee is the label check before you withhold. This page starts after the person is an employee.