Payroll is both the system you use and the process you follow to pay employees of your private practice. You may need to set up payroll even if you’re the only person working for your business. 

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If your solo private practice has elected S corporation status, you’re required by the IRS to pay yourself as an employee. That means you’ll need to run payroll—even if you’re the only employee being paid.

What is payroll?

As a system, payroll is the set of routines and supporting documents you use to pay salaries and wages to employees. Most small- to medium-sized businesses use software or a SaaS solution like Gusto as their payroll system.

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As a process, payroll—or “running payroll”—is the set of steps you follow each pay period to pay employees. It’s part of your practice’s financial admin along with bookkeeping, financial reporting, and tax filing.

How to set up payroll for your private practice

Setting up payroll is a fairly complex task, with many tax forms to fill out and file and employee information to record and store. Using a software or SaaS solution makes it more straightforward.

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Regardless of whether you do it yourself or use software, here’s an overview of the steps you must follow to set up payroll for your private practice:

1. Collect employee information

Collect relevant employee information, including:

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• Personal information: Each employee’s name, address, and SSN.
• Banking information: Routing and accounting numbers for direct deposit.
• Deductions: Information on employee benefits, including contributions to retirement plans.
• Wage garnishments: If you are required by law to garnish a portion of an employee’s pay (e.g. for child support payments), you should have this information on hand.
• Job application: The employee’s original application before they started their position.

2. Gather necessary forms

You’ll need IRS forms both for adding each employee to your payroll system and for reporting wages paid, calculating withholdings, and reporting information to the IRS.

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If you’re using payroll software, it should provide you a list of all the necessary forms, and help automate completing and filing them. If you’re taking a DIY approach, you can get started with this list of payroll forms.

3. Set a payroll schedule

Your payroll schedule determines when employees get paid. State and federal laws may determine which schedule you need to follow. You can contact your state labor relations office for more info.

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Most schedules are either semimonthly or biweekly:

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• Semimonthly: Each employee is paid twice each month, resulting in a total of 24 paychecks over the course of the year.
• Biweekly: Each employee is paid every two weeks, resulting in a total of 26 paychecks per year.

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Once your system is in place and you have all the necessary information on hand, you’re ready to run payroll.

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How to run payroll for your private practice

The exact steps you follow to run payroll will depend on your bookkeeping system and methods of payment. 

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But, in general, you’ll follow these basic steps:

1. Calculate gross pay

This is your employee’s earnings before income tax or payroll tax (FICA) withholdings.

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You have three ways of calculating gross pay. Which one you use depends on whether employees are paid hourly (wages), annually (salaries), or on a per-session basis:

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• Wages (hourly):

(Regular hours worked during pay period x hourly wage) + (Overtime hours worked during pay period x number of overtime hours)

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• Salary (annually):

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Annual salary ÷ Number of pay periods per year

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• Per-session:

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Number of sessions worked during pay period x Per-session pay rate

2. Calculate deductions

As an employer, you’re required to withhold income tax and payroll tax (FICA—Medicare and Social Security) from each employee’s pay. You remit these funds to the IRS on a monthly or semiweekly basis.

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FICA is a total of 15.3% of the employee’s gross pay. The employee contributes 7.65% and your practice pays 7.65%.

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Income tax is based on the employee’s tax bracket.

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These are just federal tax requirements. Depending on your location, and on employee benefits like retirement accounts, you may also need to calculate:

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• State taxes
• Local or municipal taxes
• 401(k) contributions
• Contributions to worker’s compensation
• Other benefits, such as HSA contributions

3. Calculate net pay

Each employee’s net pay is their gross pay minus withholdings.

4. Issue payment

To pay employees by direct deposit, you’ll need each employee’s banking information and an account with an automatic clearing house (ACH) service.

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Provide each employee with a pay slip or pay stub. This should include:

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1. Your practice information: Business name and mailing address.
2. Employee information: Name, position, department, and employee ID (if any).
3. Pay period: A date range for the period being covered.
4. Payment date: The date on which you initiate the payment.
5. Income sources: May include wages, salary, per-session payments, overtime, or bonuses.
6. Deductions: A breakdown of all federal and state withholdings, plus contributions to employee benefits plans.
7. Net income: Total pay for the period covered after withholdings are deducted.

5. Enter payroll on the books

Your particular entry will depend on your payroll system and bookkeeping system, and your chart of accounts. But a typical entry for payroll involves these accounts:

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• Wages or direct labor expense
• Salaries expense
• Payroll taxes expense
• Cash
• Federal withholding taxes payable
• Social security taxes payable
• Medicare taxes payable
• Federal unemployment taxes payable
• State withholding taxes payable
• State unemployment taxes payable
• Garnishments payable

6. Remit withholdings

To remit withholdings from employees’ pay means to submit the funds to tax authorities.

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The IRS requires you to remit funds on a monthly or semiweekly basis, depending on the total amount withheld. Different states and municipal tax authorities have their own schedules and processes for remitting pay.

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Making remittances is a process in its own right, and one of the more labor-intensive parts of running payroll. You can speed up and simplify the process by using a payroll tool like Gusto.

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Electing S corp status for your private practice means putting yourself on payroll. That takes extra work—but it comes with tax benefits. Learn more about How to Maximize S Corp Status.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post. ‍

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‍Bryce Warnes is a West Coast writer specializing in small business finances.

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