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Can I do my business' payroll myself?

Written by Kristen Grau on Nov 04, 2021 | Last updated on Nov 23, 2021
Reviewed by Sheila Malavet

Yes, but you shouldn’t. Running payroll without software can save you a few hundred dollars today, but cost you much more in penalties later on.

Many small business owners try to save a quick buck by doing payroll manually instead of using payroll software. This almost always ends up costing them more in tax penalties later on.

In short, you shouldn’t run payroll by yourself. Running payroll on your own is more complicated than writing a few checks every two weeks. It’s that plus withholding federal, state and local taxes, sending those tax payments to the IRS and your state, and filing your tax forms on time. Even if your business is just you, all of those things still apply.

If you stay on top of your state and federal tax deadlines and never forget to file all the right forms and always pay the IRS and your state the correct amount, then you might be OK running payroll on your own. That’s unfortunately not the case for most small business owners.

The good news is that it doesn’t need to be. Using a payroll software will do nearly all the work for you and save you from stress and hefty penalties.

While doing your payroll manually is the most affordable option up front, it will do you more harm than good. These are the top reasons why.

You might owe tax penalties

If you don’t withhold taxes correctly, you could end up paying penalties and interest. There are federal taxes every employer has to withhold from every employee’s paycheck, which include:

  • Federal Insurance Contributions Act (FICA) taxes: Federal payroll taxes, which cover Medicare and Social Security, are 15.3 percent in total. Half of that comes from the employee’s income and the other half comes from you.
  • Federal income taxes: You may need to withhold different amounts for employees depending on their salaries — so knowing the different rules and amounts is crucial.

Depending on where your business is located, you may have to withhold state or even local income taxes on top of that. (Florida has no state income tax.) There are also federal and state unemployment taxes you have to pay that come exclusively from you, the employer — not the employee.

One of the major penalties you can face is the Trust Fund Recovery Penalty (TFRP). If you’re late on paying your payroll taxes, you could face a penalty of 100 percent of your taxes due. You won’t be the only one accountable for that penalty either.

The 100 percent penalty can apply to, according to the IRS, anyone “responsible for collecting or paying withheld income and employment …” That may include you, your payroll processor, tax return signer, bookkeeper or even more parties.

That’s just one potential penalty. You can also face up to a 15 percent late filing penalty for forms like Form 941 and Form 944. On top of the TFRP and the late filing penalties, you’ll also have to pay interest on both of those penalties.

Small business owners who are running payroll for the first time often don’t know every little detail that goes into payroll — and may not even know that using payroll software is an option. Getting a payroll software like Gusto from the get-go can save you plenty of time and money down the road.

It’s time-consuming and stressful

The standard and most common pay period for employees is biweekly. If you have both salaried and hourly employees, you might even have some on a biweekly pay schedule and others on a weekly pay schedule.

Either way, that’s a lot of hours spent on payroll. You also have to spend extra time depositing payroll taxes. You’ll likely have to pay the IRS on a monthly basis.

By using a payroll software instead, you could invest those hours in doing more important things for your business. That time could be better spent closing a big deal or recruiting new employees.

On top of manual payroll being a time suck, it can be a particularly stressful time suck. It’s not as simple as sending a check to all your employees — there are tons of state and federal rules that you need to follow.

And like we mentioned before, getting the tax portion of payroll right can save or cost you thousands of dollars. Doing payroll on your own constantly leaves you with one stressful and costly question: “Am I doing this right?”

You might get into legal trouble

The IRS can quickly escalate the consequences of missing your payroll tax payments. If you ignore your payroll taxes long enough, penalties will be the least of your worries.

If you ignore those penalties, here’s what else the IRS could do to you:

  • Take you to court
  • Seize money from your bank account
  • File liens against you
  • Sell your business

These consequences would likely only apply to you if the IRS decides you “willfully” failed to pay payroll taxes. They might decide that you did willfully fail to pay — even if you didn’t.

If the IRS decides to file a criminal lawsuit against you, you could even face jail time in certain scenarios for not paying your payroll taxes.

How to avoid common payroll issues

The good news is you can avoid all of these issues by investing in a good payroll software. Gusto is typically the best payroll software for small business owners because it’s user-friendly and affordable.

Gusto, and other payroll software, will withhold your employees’ taxes, make your tax payments for you and file the right forms for you on time. They’ll handle your state’s tax requirements, too. And in the unlikely case they mess something up and you end up owing a tax penalty, they’ll cover it for you.

So yes, you have to pay for payroll software — but it won’t be more than what you’ll end up paying the IRS in penalties and interest without one.

Most payroll software will also gather your employees’ tax forms, like their W-4, when they onboard. And when tax season rolls around, it will send them their W-2 or 1099 automatically — which is another area small business owners will sometimes face late penalties.

A payroll software leaves you with more money in your bank account that you saved by avoiding penalties, and more time to grow and run the business you love.

The bottom line

If you’re thinking about doing your company’s payroll on your own, don’t do it.

It’s stressful, time-consuming, but most importantly, dangerous. You can put yourself at risk of paying penalties and interest if you don’t handle payroll taxes correctly. You can also put yourself in legal danger in some instances.

There’s an easy solution to avoid all the stress and risks: Sign up for a payroll software. Yes, it costs some money — but you won’t have to worry about paying hefty penalties from the IRS because of a mistake.

If you’re expanding your business and hiring new employees, payroll is only one of the factors you need to iron out. Talk to an advisor today about how you can handle your payroll and get your employees set up the right way.

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Sheila Malavet

Sheila Malavet

Sheila loves to empower our clients and team members by building our infrastructure and mentoring new team members on the importance of our core values. When not having fun at DiMercurio Advisors she is spending time with her adorable daughter, Aleigh’ana.