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How to Do Payroll Taxes on Your Own

Person looking at charts on a laptop computer
When you start hiring employees, you'll need to know how to do payroll taxes.

While you can hire an accounting or payroll firm to take care of this responsibility for you, you can save some money by doing it yourself. If this is the path you choose, there are some important tax facts to keep in mind — and if you're ever unsure of something, it's important to consult with a financial professional. Here are first steps you should take.

Get Your Employer Identification Number

This is your first step toward becoming an authorized employer. As defined by FindLaw, an Employer Identification Number (EIN) is a federal tax identification number. It's like a social security number, but for businesses. "Generally, all businesses must have an EIN in order for the Internal Revenue Service (IRS) to identify taxpayers who are required to file various business tax returns," the source explains.
To get an EIN, you'll need to fill out an online application, but be warned: In order to do so, you'll need to know a lot about your business. Will you be an S Corp, partnership or something else? Have you gathered all of your legal documents?

If you're starting a new business or adding employees to an established business, you'll need tax information for the organization. This might be your social security number, an ITIN or another number, depending on how your business is set up.

Get the Right Documents

Among all new hires' paperwork should be an I-9 form. This is the document that shows an employee's eligibility to work in the United States. It doesn't matter whether the employee is a U.S. citizen or a visa holder, everyone needs one of these forms filled out and the proper documentation to go with it. You can also use the E-Verify system to match up the employee's information with the federal government database, which helps cut down on fraud.
The next form needed is a W-4. On this document, employees list their personal information regarding payroll withholding. It includes data such as the number of dependents, whether or not the employee receives child support and whether the employee wishes to withhold at a single or married rate. It's important to note that employees can decide how many deductions they want on their paycheck.

They can list zero dependents even if you know they have six kids. It changes the net amount of their paycheck, and they will deal directly with the IRS to receive any refund they are due.

If your state has an income tax, you'll also need whatever forms the state has for income withholding.

The last thing you'll need is the gross pay for the employee for the time period. If this is an hourly rate, then you calculate it based on the number of hours worked, including overtime pay. If the employee is salaried exempt, then it is a set rate each period.

Calculate the Withholding

To arrive at the withholding amount, you will first need the following:
  • Gross pay
  • Income tax withholding tables
  • Current FICA (Social Security and Medicare) withholding tables
  • Deductions for benefits, such as health care
  • Deductions for retirement plans, such as a 401k
  • Other deductions for court-ordered withholdings, such as child support
Once you have all of this information, you can begin the necessary calculations. While you can do them by hand, you'll probably want to invest in payroll software. It makes it less likely that you'll make a calculation error that can cause problems for you or your employees.

There are many options available for small businesses that can be used inexpensively and do not require installations on your computer systems. Reputable companies that run these software systems will keep them up to date with the proper tables, so that you can be assured your withholding is correct.

Prepare Before You Hire

Before you bring your first employee onboard, you'll want to thoroughly prepare and make sure you're in compliance with all laws so that your employees can receive their paychecks on time. It's a good idea to consult a certified financial professional or tax expert if you're uncertain about anything.