How to pay employees without formal payroll software

When you’re starting a business, it’s common to take a DIY approach to many business functions to save time, resources, and money. So, it’s no surprise that many founders wonder whether investing in payroll software is something they can put off until later.

The question most founders find themselves wondering is this: Can I legally run payroll without payroll software? The good news is that using payroll software isn’t legally required. Many early-stage founders process their first payroll manually, especially if they’re only paying themselves and a few employees.

However, although using payroll software is optional, payroll compliance isn’t. You can calculate wages, withhold taxes, and pay employees without a dedicated software, but you’re still responsible for calculating wages correctly, withholding the right taxes, paying employees on time, meeting every filing deadline, and maintaining accurate records. When your company employs a small number of employees, manual payment can be straightforward and manageable. As your team grows or gets more complex, so does the risk of getting something wrong.

In this guide, we’ll explain how to run payroll without software, compliance risks to watch for, when manual payroll makes sense, and when it’s time to switch to payroll software.

There’s no law requiring businesses to use payroll software. So, if you’re wondering, “Can I do payroll without software?” — the answer is yes. Employers have run payroll manually for decades using spreadsheets, calculators, and paper checks, and many small businesses still do it today.

But “legal” doesn’t necessarily mean “simple.” If you run payroll manually, you’re still responsible for meeting every legal requirement that payroll software would normally help automate. Here are a few things to keep in mind.

You’re still responsible for tax withholding

Whether you use spreadsheets or software to manage payroll, you’re legally required to withhold the correct federal income tax, social security, medicare, and applicable state and local taxes from every paycheck.

Federal and state reporting requirements don’t change

No matter what method you use to manage payroll, you’ll still have to file quarterly and annual payroll tax forms, issue W-2s at year-end, and meet every state-specific requirement that applies to your business.

Manual payroll requires accurate record keeping

When you don’t have software automatically tracking things like hours worked, wages paid, and taxes withheld, the responsibility to maintain meticulous records like that falls entirely on you.

So, although it’s possible to run payroll without relying on software, doing it well and staying compliant will require you to maintain accurate records, pay attention to detail, stay on top of payroll tax rates (which are subject to change), and manage work that a software could easily automate for you.

If you’ve decided that manual payroll is what works for you right now, here’s what the process will look like and what you’ll need to do.

1. Gather employee information and tax forms

To pay employees, you’ll need to collect the appropriate hiring and tax documents from each employee, such as tax withholding forms, Social Security number, and direct deposit information. Having the right employee records on hand will make the rest of payroll much easier.

2. Track hours worked

If employees are paid hourly, you’ll need a system for tracking hours worked, overtime, paid leave, and any other time that needs to be compensated.

3. Calculate gross wages

Multiply hours worked by hourly rate to arrive at the gross wage figure. This is the amount an employee earns before deductions, and can include regular wages, overtime pay, bonuses, commissions, paid time off, and more.

4. Calculate deductions and tax withholding

This step is where manual payroll can get especially complicated. You’ll need to determine the appropriate deductions for each employee for things like federal income tax withholding, Social Security and Medicare, employee benefits, and retirement contributions.

5. Determine net pay

Subtract all deductions and withholdings from gross wages to calculate each employee’s take-home pay.

6. Pay employees

After calculating deductions and reviewing your numbers, it’s now time to pay your employees. You can issue payments via direct deposit, check, or another agreed-upon method on a consistent schedule. Depending on your state’s requirements and your business practices, that schedule could be weekly, biweekly, or monthly.

7. Remit payroll taxes

Paying employees is only part of payroll. You’ll also need to deposit withheld payroll taxes according to your filing schedule and state deadlines. Keep in mind that missing payment deadlines can lead to penalties and interest.

8. File required payroll forms

Employers are responsible for filing payroll tax returns and year-end reporting forms with the appropriate tax authorities for each employee. The exact requirements vary depending on where your business operates and where your employees are located.

9. Maintain payroll records

It may feel like a relief to be at the end of this process. But before you finally take that well-earned breather, there’s one last thing you need to do: Keep detailed records of everything that went into the payroll process. This includes hours worked, wages paid, taxes withheld and remitted, all the payroll forms you’ve filled, and payment confirmations for at least four years. Good record keeping makes audits, tax filings, and employee questions much easier to manage.

Handling payroll without software is possible. Each of the processes may be manageable in isolation, but doing all of them accurately and on time every single pay period, without errors, can be challenging.

Here are some of the most common payroll compliance risks for small businesses without software solutions in place.

Incorrect tax withholding

Using incorrect tax tables or entering incorrect employee information can lead to errors in tax withholding that get repeated every pay period. These errors may require you to submit amended filings or result in penalties — and both of these outcomes create administrative headaches that could have been avoided.

Missing payroll tax deadlines

Payroll taxes often have strict filing and payment deadlines. Even if you make accurate calculations, making late tax deposits can trigger penalties and interest.

Misclassifying workers

Misclassifying an employee as a contractor (or vice versa) can create significant tax and legal consequences. Misclassification can result in back taxes, penalties, and, in some cases, legal liability. For example, if your finance team mistakenly treats a contractor like an employee during a manual payroll process, you might end up with more costs to bear than what it would have cost to automate this process with software.

Overtime calculation mistakes

Federal and state overtime rules aren’t always straightforward. Getting overtime calculations wrong can lead to wage claims, and the Department of Labor could charge you penalties.

Inadequate payroll records

If you’re audited and can’t produce accurate records, you can end up facing legal consequences or penalties, even if your actual payroll was correct.

State-specific compliance requirements

Different states have different tax requirements. And if you have remote employees, you’ll need to be up-to-date on local tax laws for each employee's location. Manually tracking multiple states’ requirements can significantly increase the risk of missing something.

Late or inaccurate filings

Missing deadlines for quarterly or annual filings or having inaccuracies in those filings can create compliance issues for the future and bring on increased scrutiny. Small mistakes like this can become expensive.

Despite possible risks, manual payroll can still be the practical choice for some businesses. Here are a few scenarios where it might make sense:

• You’re a solo founder paying only yourself.
• You have a very small team (such as one or two salaried employees).
• All employees are salaried with no hourly wage or overtime calculations to manage.
• Your company’s hiring activity is limited and infrequent.
• Compensation structures are straightforward, without complex bonuses, commissions, or benefits.

In these situations, the time savings from payroll may not justify the cost. As long as you’re thorough and disciplined about accuracy and deadlines, you can make manual payroll work for your business.

Signs you’ve outgrown manual payroll

Eventually, most businesses reach a point where manual processes stop scaling. Here are some signs that it may be time to make the switch:

• You’re hiring multiple employees.
• You’re paying contractors as well as employees.
• You have employees in multiple states.
• You have hourly workers.
• You’re managing overtime calculations.
• Benefits deductions are increasing.
• Payroll adjustments are happening more frequently.
• You’re spending significant administrative time on payroll.

In these scenarios, payroll software can be well worth the investment, since it can reduce risk and help you reclaim time to focus on growing your business.

Payroll errors can create more than just administrative headaches. A missed filing deadline, incorrect tax calculation, or outdated employee record can quickly become a compliance issue. Payroll software reduces that risk by automating many of the repetitive calculations, deadlines, records, and processes that would otherwise have to be managed manually.

For example, modern payroll software can automatically calculate payroll taxes using current federal and state rates and help you keep track of filing deadlines, which makes it easier to submit accurate quarterly and annual forms on time. It can also maintain a digital record of each pay period, including approvals and changes, giving you an accessible audit trail if you ever need to review how a payment was calculated.

Automation can also support day-to-day payroll administration. For instance, employees can update their own information through self-service tools, which reduces the need for you to handle updates with manual data entry, and direct deposit eliminates the need for you to process payments individually. Digital reporting also gives your team greater visibility into payroll, and automated state tax compliance tools can help reduce the risk of errors across different jurisdictions.

Using payroll software isn’t mandatory — but accuracy, compliance, and timely payroll always are. Plenty of founders have success with running payroll manually in the early days, especially when they have a small team and simple payments. However, as your business grows, every new employee, location, or benefit adds complexity and the risk of mistakes. Eventually, the administrative burden and compliance risk of manual payroll can outweigh the cost of payroll software.

As the founder of a growing company, you’ll want to build financial operations that give you a steady foundation today and scale with your business tomorrow. Mercury helps growing businesses manage banking, spend, and financial workflows in one place so you can build a system that grows with confidence. Explore tools that can simplify your workflows today.