To do manual payroll, you register with the IRS for an Employer Identification Number, collect a W-4 and I-9 from every new hire, calculate each paycheck’s gross pay and tax withholdings by hand using IRS tables, subtract deductions in the correct order, pay the employee, and then deposit the withheld taxes electronically and file the required quarterly and annual returns. It is entirely doable for a small employer. It is also unforgiving: one late deposit or misclassified worker can cost more than a year of payroll software.
Set Up Before the First Paycheck
You need an Employer Identification Number before you pay anyone. Apply using IRS Form SS-4 online, by fax, or by mail. The EIN is the nine-digit number the IRS will use to identify your business on every payroll form.1Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN)
Every new hire completes two forms before their first paycheck. Form W-4 tells you how to calculate their federal income tax withholding based on filing status, dependents, and any extra amounts. Form I-9 confirms the person is authorized to work in the United States. The employee fills out Section 1 on or before their first day, and you examine their identity and work-authorization documents within three business days.2U.S. Citizenship and Immigration Services. 2.0 Who Must Complete Form I-9
Classify the Worker Before You Pay Them
Treating an employee as an independent contractor is one of the most expensive mistakes a small business can make. Skip withholding and the employer-side taxes, and when the IRS catches it you owe back taxes, penalties, and interest on every paycheck. The IRS weighs three categories: behavioral control (do you direct how and when the work is done), financial control (do you provide tools, reimburse expenses, set the pay structure), and the nature of the relationship (is the work ongoing and central to your business, are benefits offered). If the answer to most is yes, the worker is likely an employee.3Internal Revenue Service. Worker Classification 101: employee or independent contractor
Calculate Gross Pay
Federal law requires you to record each employee’s daily hours, weekly totals, regular hourly rate, and both straight-time and overtime earnings.4U.S. Department of Labor. Fact Sheet 21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA) A paper time card or a shared spreadsheet is fine as long as the numbers are accurate.
For hourly workers, multiply total hours by the hourly rate. Hours beyond 40 in a single workweek must be paid at one and a half times the regular rate.5U.S. Department of Labor. Overtime Pay The federal minimum wage is $7.25 per hour, and if your state’s minimum is higher you pay the higher rate.6U.S. Department of Labor. State Minimum Wage Laws
For salaried workers, divide the annual salary by the number of pay periods. A $52,000 salary paid biweekly produces $2,000 per period across 26 pay periods; paid semi-monthly, the same salary produces $2,166.67 across 24 pay periods. Salaried employees classified as exempt under the FLSA are not entitled to overtime. Non-exempt salaried workers still are.
Bonuses, commissions, and back pay are supplemental wages. If you pay a bonus separately from regular wages, you can apply a flat 22% federal withholding rate instead of using the standard wage-bracket tables. If a single employee’s supplemental wages exceed $1 million in a calendar year, the rate on the excess jumps to 37%.7Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
Calculate the Withholdings
Three separate federal taxes come out of each paycheck, plus state and sometimes local tax.
Federal Income Tax
Use the employee’s W-4 and the tables in IRS Publication 15-T. Publication 15-T offers two methods: the Wage Bracket Method, which is a table lookup, and the Percentage Method, which involves a short worksheet. Either method accounts for filing status, any credits claimed in Step 3, and adjustments from Step 4.7Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
Social Security and Medicare
Withhold 6.2% of gross wages for Social Security and 1.45% for Medicare. You pay a matching 6.2% and 1.45% as the employer, for a combined FICA rate of 15.3%.8Internal Revenue Service. Topic no. 751, Social Security and Medicare withholding rates Social Security tax applies only to the first $184,500 of wages per employee in 2026; once an employee crosses that year-to-date threshold, stop withholding the 6.2% for the rest of the calendar year.9Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
Medicare has no wage cap. Once an employee’s wages exceed $200,000 in the calendar year, withhold an Additional Medicare Tax of 0.9% on every dollar above that mark. There is no employer match on the additional 0.9%.8Internal Revenue Service. Topic no. 751, Social Security and Medicare withholding rates
State and Local
Most states impose their own income tax, and some cities and counties add local taxes. Rates and methods vary. Check your state’s department of revenue for withholding tables and registration requirements. A few states have no income tax at all.
Apply Deductions in the Right Order
The sequence matters. Pre-tax deductions come out of gross pay before you calculate withholdings, which reduces the wages subject to tax. Post-tax deductions come out after taxes are calculated.
Health insurance premiums under a Section 125 cafeteria plan reduce wages before both federal income tax and FICA. Traditional 401(k) contributions reduce wages for federal income tax purposes but remain subject to Social Security and Medicare tax. Roth 401(k) contributions, garnishments, and union dues come out of net pay after all withholding.
Get the sequence backward and you either over-withhold, shortchanging the employee, or under-withhold and owe the IRS the difference. Write the calculation out step by step every time: gross pay, minus pre-tax deductions, calculate taxes on the reduced amount, subtract post-tax deductions, net pay.
Pay the Employee
Once withholdings and deductions are subtracted, what remains is take-home pay. You can write a check or set up direct deposit. Keep a copy of every payment record.
Federal law does not require you to give employees a pay stub. The FLSA requires accurate wage and hour records but does not mandate an itemized statement to the worker.10U.S. Department of Labor. Fair Labor Standards Act Advisor Most states, however, have their own pay stub laws, and many require a written breakdown of gross wages, itemized deductions, and net pay. Check your state’s labor department. Even where it isn’t required, giving employees a clear breakdown prevents disputes.
Deposit the Withheld Taxes
Withholding the money is only half the job. You must send it to the IRS on a set schedule. All federal tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay, or your business tax account.11Internal Revenue Service. Depositing and reporting employment taxes
Your deposit frequency depends on your lookback period. For 2026, that period runs from July 1, 2024, through June 30, 2025. If you reported $50,000 or less in taxes during that window, you are a monthly depositor and must deposit each month’s taxes by the 15th of the following month. Report more than $50,000 and you are a semiweekly depositor with tighter deadlines tied to your specific payday.12Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide New employers default to the monthly schedule.
Late deposit penalties are steep and jump quickly:
- 1–5 days late: 2% of the unpaid deposit
- 6–15 days late: 5% of the unpaid deposit
- More than 15 days late: 10% of the unpaid deposit
- More than 10 days after the first IRS notice: 15% of the unpaid deposit
The penalties don’t stack. A deposit 15 days late is charged 10%, not 2% plus 5% plus 10%.13Internal Revenue Service. Failure to Deposit Penalty Set calendar reminders. Missing a deadline by one day triggers a penalty.
File the Returns
Depositing taxes and reporting them are two separate obligations.
Form 941, Quarterly
Form 941 reports total wages paid, federal income tax withheld, and both shares of Social Security and Medicare tax. File it by April 30, July 31, October 31, and January 31. Deposit everything on time during the quarter and you get an extra 10 calendar days to file.14Internal Revenue Service. Employment tax due dates
Form 940, Annual FUTA
Form 940 covers federal unemployment tax. The gross FUTA rate is 6.0% on the first $7,000 of each employee’s wages per year. Pay your state unemployment taxes in full and on time and you receive a credit of up to 5.4%, bringing the effective FUTA rate to 0.6%.15Internal Revenue Service. Topic no. 759, Form 940, Employers Annual Federal Unemployment Tax Act (FUTA) Tax Return Only employers pay FUTA; do not deduct it from employee wages.16Internal Revenue Service. About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return States with outstanding federal unemployment loans trigger a credit reduction that raises the effective rate. The IRS publishes the list annually.17Internal Revenue Service. FUTA credit reduction
Form W-2, Annual
By January 31 following the tax year, give every employee a completed Form W-2 showing total wages, tax withholdings, and benefit contributions.18Internal Revenue Service. About Form W-2, Wage and Tax Statement The same January 31 deadline applies to filing copies with the Social Security Administration.19Social Security Administration. Deadline Dates to File W-2s When you process payroll manually, keep a running ledger of each employee’s year-to-date wages and withholdings. Rebuilding it from old pay stubs in January is painful.
Report New Hires to Your State
Federal law requires you to report every new and rehired employee to your state’s new hire reporting agency within 20 days of their start date. Some states impose shorter deadlines. The report includes the employee’s name, address, and Social Security number, and your business name, address, and EIN. States use the data primarily to enforce child support orders.20The Administration for Children and Families. New Hire Reporting Fines for missing the deadline vary by state.
Pay State Unemployment Insurance
Nearly every state also requires employers to pay into a state unemployment insurance fund. New employer rates typically range from about 1% to over 10% of taxable wages depending on the state. Each state sets its own taxable wage base, often higher than the $7,000 federal FUTA base. Register with your state’s workforce or employment security agency, and it will assign a rate based on your industry and experience. Paying these on time is what qualifies you for the 5.4% FUTA credit, so falling behind on state unemployment taxes costs you at both levels.
Keep the Records Long Enough
The IRS requires you to keep all employment tax records for at least four years after the tax becomes due or is paid, whichever is later.21Internal Revenue Service. Employment tax recordkeeping The Department of Labor’s FLSA rules require payroll records, including total wages and pay dates, to be kept at least three years, and supporting documents like time cards and wage rate tables at least two years.4U.S. Department of Labor. Fact Sheet 21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA) Default to the longer window and keep everything for at least four years. That means physically organizing time cards, pay records, W-4s, and copies of every tax form you file, or scanning them into a backed-up digital archive.