How to run payroll: DIY, software, or professional help

Learning how to run payroll is a milestone for every small business. It means you’re growing, building a team, and taking your venture to the next level. But whether you choose to process payroll manually, use software, or hire a professional, the goal is the same: paying your people accurately and on time.

Let’s walk you through the essentials of payroll, the three main ways to manage it, and step-by-step instructions for getting started.

• Payroll basics every business owner should understand
• Three ways to run payroll for your business
• How to do payroll yourself (step-by-step)
• How payroll software simplifies the process
• Common payroll mistakes and how to avoid them
• How to reduce payroll costs without cutting corners
• Payroll recordkeeping and compliance essentials
• Choosing the right payroll approach as your business grows

Payroll basics every business owner should understand

Before diving into the how-to guide, it’s important to understand what payroll actually involves. You might think it’s just cutting checks, but there’s more to it than that. The process usually includes:

• Calculating employee earnings (gross pay).
• Withholding the correct amount for federal, state, and local taxes.
• Deducting benefits like health insurance or retirement contributions.
• Remitting those taxes and deductions to the appropriate government agencies.
• Filing the necessary tax forms on time.
• Maintaining accurate records for payroll compliance.

What happens if payroll is done incorrectly? If payroll is done incorrectly, you may face penalties and interest charges from the IRS or state tax agencies. Common problems include withholding the wrong amount, missing a filing deadline, or paying an employee incorrectly. Fixing these mistakes usually takes a lot of time and effort, distracting you from running your business.

Beyond financial penalties, payroll errors can damage trust with your employees. Your team depends on their paychecks for rent, mortgages, and daily life. Accurate, on-time pay helps keep morale high and work moving.

Watch The Video: In this tutorial, Hector Garcia provides a step-by-step guide to running payroll for your employees

Three ways to run payroll for your business

As a business owner, you generally have three options for handling payroll. The right choice depends on your budget, team size, and comfort level with numbers and compliance regulations.

Option 1: Doing payroll yourself

This is the manual approach. You act as the payroll department by calculating withholdings, writing checks, and filing tax forms yourself. This is best for very small teams (1–2 employees) and early-stage businesses with tight budgets.

Is DIY payroll legal for small businesses? Yes, but you’ll need to follow all federal, state, and local requirements, calculate payroll withholdings correctly, remit taxes, and file the necessary forms on time.

Option 2: Using payroll software

Payroll software automates the heavy lifting. You enter employee hours and pay rates, and the software handles calculations, direct deposits, and tax filings. This method is great for growing businesses and anyone with recurring payroll needs. In fact, 27% of small business owners say their payroll platform is their most useful digital tool.

Does payroll software handle taxes automatically? QuickBooks can calculate your federal and state payroll taxes when you run payroll. If you turn on automated taxes (and your plan supports it), it can also file certain payroll tax forms and make tax payments for you, which cuts down on manual work and helps you stay on track. You can still review and approve the details before anything is submitted.

Option 3: Hiring a payroll professional

This involves outsourcing your payroll to an accountant or a dedicated payroll service bureau. They handle everything from setup to filing. This is best for businesses with complex payroll needs (e.g., multiple tax jurisdictions) or owners who want to be completely hands-off.

You might wonder: Am I still liable if my accountant makes a mistake? In most cases, yes. A professional can handle the work, but the responsibility doesn’t fully transfer. You’ll want to spot-check filings and payments occasionally and make sure your provider is reputable.

How to do payroll yourself (step-by-step)

Calculating tax withholding amounts, gross and net pay, and additional deductions is no easy task, but it has to get done. 

If you’re hoping to save money on payroll-related costs and ready to get those brain neurons firing, follow along with these six steps to learn how to do payroll by yourself.

Step 1: Set up business and tax accounts

Before you run your first payroll, you’ll want to get the admin and tax setup out of the way. This one-time groundwork makes every payday smoother. Here are some of the key components of the setup process:

• EIN: Apply for an employer identification number (EIN) from the IRS. This is like a Social Security number for your business.
• State registrations: Register with your state’s labor and tax departments to pay state income and unemployment taxes.
• EFTPS: Enroll in the Electronic Federal Tax Payment System (EFTPS) to pay federal taxes online.
• Payroll schedule: Establish a pay schedule (weekly, biweekly, semimonthly, or monthly) that complies with state laws.

Step 2: Collect employee tax forms

When you hire someone, you need to collect the right paperwork to determine how much tax to withhold. You can collect all of the necessary information by asking new hires to fill out the following forms during the onboarding process: 

• Form W-4: For traditional employees. It tells you how much federal income tax to withhold.
• Form W-9: For independent contractors. It provides their taxpayer identification number (you generally don’t withhold taxes for contractors).

The information your employees provide will help you determine the proper withholding amounts and send out accurate W-2s and 1099s at the end of the year.

Step 3: Track hours and earnings

Before you can run payroll, you need clean, consistent pay data. That starts with tracking how much each person worked (or earned) during the pay period, then double-checking anything that could change their pay, like overtime, tips, bonuses, or unpaid time off.

• Hourly employees: Track clock-in/clock-out times (or total hours worked). Note any shift differentials, tips, or extra pay that should be included.
• Salaried employees: Salaried pay is usually consistent each pay period, but you still want to track things that can affect pay, like PTO, unpaid leave, commissions, or bonuses.

How do overtime rules work? Under the Fair Labor Standards Act (FLSA), covered employees generally must receive overtime pay for hours worked over 40 in a workweek, at a rate of at least 1.5 times their regular rate of pay. Some employees may be exempt, and some states have additional rules, so it’s a good idea to confirm what applies to your team.

Step 4: Calculate pay and deductions

Gross pay is the number of hours an employee worked during a specific pay period multiplied by their hourly rate. You can collect the necessary data using paper timesheets, punch clocks, or spreadsheets. Use an automated payroll software and employee time tracking solution.

To manually calculate payroll:

1. Add up the total hours worked for each employee.
2. Multiply that number by each employee’s hourly wage to determine gross pay.
3. Account for any tips and overtime hours accrued by non-exempt employees. 

After you calculate gross pay, you can process payroll deductions using your employee’s W-4 information. You will need to take out:

• Pre-tax deductions for things like retirement plans and flexible savings accounts. 
• Federal and state-mandated deductions like FICA taxes (Medicare and Social Security). 
• Post-tax deductions like wage garnishments, union dues, and Roth IRA contributions. 

In addition to regular tax withholdings and deductions, you must factor in payroll processing factors like 401(k) contributions, local taxes, and workers’ compensation premiums.

Once you’ve calculated your employee’s gross pay and withheld the necessary taxes, calculate the net pay, (i.e., the amount they get to take home). The net pay formula is:

Gross pay - deductions = Net pay 

Step 5: Pay employees

Once the math is checked, it’s time to distribute funds. You can pay via:

• Direct deposit: The most common and convenient method.
• Paper checks: Requires you to print and sign checks.
• Pay cards: A debit card loaded with the employee’s wages.

Tip: Run payroll a few business days before payday when possible. That gives you buffer time for approvals and bank processing.

Step 6: File and remit payroll taxes

After distributing your employee paychecks, you must file, pay, and report all of your payroll taxes to the IRS. To meet federal and state regulations, you need to:

• Deposit federal taxes: You must pay all employee tax withholdings and FICA taxes to the IRS. The IRS requires filers to use Electronic Funds Transfer (EFTPS) to make federal tax deposits.
• File state tax reports: If your state requires you to collect and pay state income tax and unemployment taxes, you will need to adhere to your state’s individual pay schedule and code.
• Make FUTA payment: You must make federal unemployment tax payments to the IRS quarterly.
• File Form 940: This is the form you use to report your Federal Unemployment Tax Act (FUTA) liability
• File Form 941: You need to file this form quarterly to pay your FICA taxes.

Tip: DIY payroll can be a good starting point. But it often becomes harder when:

• You add more employees
• You start paying bonuses/commissions regularly
• You hire in multiple states
• You’re spending too much time fixing mistakes or catching up on deadlines

If payroll is taking hours every pay period, payroll software (or a professional) can be a practical upgrade.

How payroll software simplifies the process

If you want to speed up the payroll process and increase accuracy, we recommend investing in payroll software. 

Payroll software, like QuickBooks, simplifies the process by turning payroll into a repeatable routine instead of a manual scramble each pay period.

Most platforms can handle the heavy lifting, like calculating gross pay to net pay, applying payroll withholdings based on the details you’ve already set up, generating pay stubs, and keeping your records organized in one place.

You still stay in control, though, because you’ll typically review the inputs that can change from run to run, like hours worked, overtime, bonuses, commissions, new hires, and any updates to pay rates or benefit deductions.

The biggest benefit is risk reduction. Since you’re cutting down on manual math and duplicate data entry, software helps prevent the small mistakes that can lead to incorrect pay or time-consuming fixes later.

And if you’re already using QuickBooks for accounting, using a payroll tool that connects to your books can make payday even easier by keeping your payroll and accounting data aligned without extra steps.

Common payroll mistakes and how to avoid them

Misclassifying workers

Misclassifying employees as contractors (or misclassifying exempt vs. nonexempt roles) can create compliance issues.

How to avoid it: Review IRS guidelines to ensure you correctly classify workers based on the control you have over their work.

Missing tax deadlines

Missing required deposit or filing deadlines can lead to penalties.

How to avoid it: If you’re not using bookkeeping software or working with a professional, set up deadline reminders each month and work with a CPA to make sure everything is in order for your year-end taxes.

Incorrect overtime calculations

Overtime rules can be simple, but still easy to mess up when time tracking is inconsistent.

How to avoid it: Use reliable time tracking (or a time clock app) and set a clear cutoff for when hours must be submitted and approved each pay period. Also, confirm which roles are nonexempt vs. exempt under the FLSA.

Poor recordkeeping

Messy, incomplete, or missing payroll records are unacceptable to the IRS. 

How to avoid it: Develop a recordkeeping system that works for you, whether it's paper or digital, and don’t stray from it. Organize employee files in a way that feels intuitive to you, and set aside time during the first month of each year to cull any unnecessary files. 

Late payroll runs

If you run payroll late, your company may be penalized, and you could be charged interest on the missing payments. 

Avoid it: Start reviewing timesheets for the previous week as soon as you can to give yourself enough time to approve hours and fix mistakes, especially if you run payroll mid-week. If you can’t remember to prioritize this, set up alerts on your phone and calendar. 

How to reduce payroll costs without cutting corners

Payroll expenses have historically been one of the highest costs to business owners. Fortunately, if you follow these steps, you can reduce your expenses, even if you’re currently overstaffed. 

Avoid payroll tax penalties

Missing a tax deadline or filing incorrectly can cost you penalties. Using payroll software can automate tax calculations and filings, so you’re less likely to miss a date or make an error.

Cross-train employees to minimize overstaffing 

When you spot a skill gap, don’t rush to hire someone new. Look within your team first. You can fill those voids without increasing headcount by training employees to handle multiple roles rather than being overly dependent on one person for specific tasks. This means if someone leaves, you’re not left scrambling to fill a major hole, and your workflow continues smoothly.

Automate payroll

Automating payroll is one of the easiest ways for you to save time, reduce costs, and avoid mistakes. When you handle payroll manually, there’s a higher chance of errors, missed details, and too much time spent on repetitive tasks. With an online solution like QuickBooks, you make payroll easier for everyone on your team.

You might wonder: Is outsourcing payroll expensive? It depends on the method. Hiring a dedicated CPA is the most expensive route. Payroll software provides a middle ground, offering professional-grade automation at a fraction of the cost of a human accountant. DIY is free, but it costs you valuable time.

Payroll recordkeeping and compliance essentials

Payroll records are your paper trail. They help you answer employee questions, fix mistakes faster, and prove what you paid and filed if a tax agency ever follows up.

What records to keep

At a minimum, keep documentation that shows who you paid, how you calculated pay, and what you filed/deposited. The IRS requires you to keep employment tax records like your EIN, wage and payment amounts/dates, employee info, withholding certificates (like Form W‑4), records of tax deposits, and copies of returns you filed. 

The U.S. Department of Labor (DOL) also requires employers to keep wage‑and‑hour records used to support pay calculations (like hours worked, pay rates, and additions/deductions)

How long to keep them

A simple rule is keep them at least as long as the strictest requirement that applies to you. 

The IRS says to keep employment tax records for at least four years after filing the 4th quarter for the year or after the tax becomes due or is paid, whichever is later. 

The DOL says to preserve payroll records for at least three years, and keep the records used to compute wages (like time cards and schedules) for two years.

Why audits happen

An audit doesn’t automatically mean you did something wrong. Typically, it’s simply the IRS double-checking that what you reported matches their records and standard patterns. The IRS says audits can be triggered through random selection or computer screening (where returns are compared to typical “norms”), or through a related examination (when your return is connected to another taxpayer’s transaction that’s being reviewed).

Choosing the right payroll approach as your business grows

Every business starts somewhere. You might begin with a spreadsheet and a calculator, but as your team grows, your needs will change.

If you’re spending hours every pay period double-checking math, or if the thought of an IRS notice keeps you up at night, it’s likely time to move from DIY to software. If your business expands into multiple states or you have hundreds of employees, bringing in a professional might be the next logical step.

Staying on top of your payroll is one of the greatest favors you can do for yourself and your business. Whether you choose to do it manually, with smart software like QuickBooks, or with an outsourced professional, tackle your payroll with confidence.

Explore QuickBooks today to see how automation can give you back your time. For more helpful information like this, visit QuickBooks’ YouTube channel.