How to Do Payroll Yourself: A Step-by-Step Guide for Massachusetts Small Businesses

Running payroll yourself is absolutely doable for a small Massachusetts business — especially if you have just a few employees. Here’s the complete process, step by step.

What You Need Before You Start

• Employee’s completed W-4 (federal withholding) and M-4 (MA state withholding)
• Employee’s pay rate and hours worked for the period
• Your EIN (Employer Identification Number)
• Your MA withholding account number (from MassTaxConnect)
• The employee’s year-to-date wages (important for tax caps)

Step 1: Calculate Gross Pay

Hourly employees: Gross pay = Regular hours × Hourly rate + Overtime hours × (Hourly rate × 1.5)

Overtime kicks in after 40 hours in a workweek (not a pay period — important distinction for biweekly pay).

Salaried employees: Gross pay = Annual salary ÷ Number of pay periods per year

Step 2: Subtract Pre-Tax Deductions

Pre-tax deductions reduce the taxable wage base before you calculate withholding:

• 401(k)/403(b) contributions — reduce federal and state income tax (not FICA)
• Health insurance premiums (Section 125 plan) — reduce income tax AND FICA
• HSA contributions — reduce income tax

Taxable wages = Gross pay − Pre-tax deductions

Step 3: Calculate Federal Income Tax Withholding

Use IRS Publication 15-T (2025 Percentage Method Tables). The amount depends on:

• Taxable wages (gross minus pre-tax deductions)
• Pay frequency
• W-4 filing status and elections

Simplified example — biweekly, $2,000 taxable wages, Single, Standard withholding:

1. Adjust wages for pay period: $2,000 biweekly → annualized = $52,000
2. Look up in 2025 Pub 15-T table for Single: $52,000 falls in the 22% bracket
3. Calculate: $4,543 + 22% × ($52,000 − $44,725) = $6,143.50 annual
4. Per pay period: $6,143.50 ÷ 26 = $236.29

Or just use the OtterDesk calculator — it applies the 2025 tables automatically.

Step 4: Calculate Massachusetts State Income Tax

Massachusetts has a flat 5% rate on all wages. Straightforward:

MA withholding = Taxable wages × 5%

But adjust for personal exemptions from the employee’s M-4. Each exemption is worth $1,000/year:

Per-period exemption value = $1,000 × Number of exemptions ÷ Pay periods per year

Adjusted taxable wages = Taxable wages − Per-period exemption

MA withholding = Adjusted taxable wages × 5%

Example: Employee claims 1 exemption, biweekly pay, $2,000 taxable wages:

• Per-period exemption: $1,000 ÷ 26 = $38.46
• Adjusted wages: $2,000 − $38.46 = $1,961.54
• MA withholding: $1,961.54 × 5% = $98.08

Step 5: Calculate FICA (Social Security & Medicare)

Employee share:

• Social Security: 6.2% on wages up to $176,100 YTD
• Medicare: 1.45% on all wages (no cap)
• Additional Medicare: 0.9% on wages over $200,000 YTD (employee only)

Employer match:

• Social Security: 6.2% (same cap)
• Medicare: 1.45% (no cap)

Example: $2,000 wages, employee has $20,000 YTD (well under caps:

• SS employee: $2,000 × 6.2% = $124.00
• Medicare employee: $2,000 × 1.45% = $29.00
• SS employer: $124.00
• Medicare employer: $29.00

Step 6: Calculate MA PFML

Employee share:

• Medical leave: 0.70% of wages up to $176,100
• Family leave: 0.18% of wages up to $176,100
• Total: 0.88%

Employer share (25+ employees only):

• Employer pays at least 60% of the medical leave portion: 0.42%
• Employee pays remaining 40%: 0.28% (medical) + 0.18% (family) = 0.46%

Example: $2,000 wages, employer has fewer than 25 employees:

• Employee PFML: $2,000 × 0.88% = $17.60
• Employer PFML: $0

Step 7: Net Pay

Net pay = Gross pay − Federal withholding − MA withholding − Employee FICA − Employee PFML − Post-tax deductions

Full example — $2,000 gross, single, 1 MA exemption, biweekly, small employer:

Step 8: Employer Obligations Each Pay Period

Besides writing the check, you must:

1. Deposit federal taxes (withholding + employer + employee FICA) to the IRS
   • Most small employers deposit monthly (by the 15th of the following month)
   • If you accumulate $100,000+ in a single day, deposit the next business day
2. Remit MA withholding and PFML via MassTaxConnect (monthly or quarterly)
3. Keep payroll records — gross pay, deductions, net pay, dates — for at least 3 years

Step 9: Quarterly and Annual Filings

Should You Do It Manually or Use Software?

Manual makes sense when:

• You have 1–3 employees with simple, consistent pay
• You’re comfortable with the math and record-keeping
• You want to understand exactly what’s happening

Switch to payroll software when:

• You have 4+ employees
• Pay varies significantly week to week
• You have tipped employees, multiple pay rates, or garnishments
• You’re spending more than 2 hours per pay period on payroll

The OtterDesk payroll calculator handles all the math above for free — federal withholding, MA state tax, FICA, PFML — and shows you the full employer cost breakdown for any Massachusetts employee.