How to Run Payroll for a Small Business: Step-by-Step Guide

Hiring your first employee is exciting — and then payroll shows up as a to-do list nobody warned you about. Between tax registrations, forms, withholding calculations, and filing deadlines, it's easy to feel like you need a finance degree just to pay someone correctly.

You don't. Payroll is a process with a clear order to it. Once you've done it once, it's mostly repetition. Here's that process, broken into the steps in the order you'll actually need them.

Step 1: Get an Employer Identification Number (EIN)

Before you can pay anyone, you need an EIN from the IRS — think of it as a Social Security number for your business. It's free, and you can apply directly on the IRS website; most businesses get one immediately online. You'll use this number on every payroll tax form you file from here forward, so it's the true starting point.

Step 2: Register for State and Local Tax Accounts

Your EIN covers you federally, but states run their own systems. You'll typically need to register for:

• State income tax withholding, if your state has one

• State unemployment insurance (SUTA) — every state requires this, but the taxable wage base varies enormously between states, so don't assume the number from one state applies to another

• Local tax accounts, if your city or county has its own payroll tax

One detail that trips up growing businesses: you owe payroll obligations in every state where an employee actually performs work, not just where your business is headquartered. A business based in one state with even a single remote employee in another is legally a multi-state employer and needs to register accordingly.

Step 3: Collect the Right Forms from Every New Hire

Before a new employee's first paycheck, you need three things on file:

• Form W-4 — sets their federal income tax withholding

• Form I-9 — verifies their identity and authorization to work in the US; the employer's portion must be completed within three business days of the start date

• State withholding form — the state-level equivalent of the W-4, required separately in most states

Skipping or rushing these at hiring is the single most common source of payroll problems down the line — a missing W-4 means guessing at withholding, and a late I-9 is a compliance gap even for a fully eligible employee.

Step 4: Complete New Hire Reporting

Separately from the I-9, most states require you to report new hires to a state new-hire directory within a set number of days of their start date. This is used mainly to enforce child support orders and catch unemployment fraud — it's easy to assume the I-9 covers this, but it doesn't. Check your specific state's deadline and reporting method.

Step 5: Choose a Pay Schedule

Decide how often you'll pay employees — weekly, biweekly, semimonthly, or monthly. Biweekly remains the dominant payroll schedule nationally, with nearly half of US employers paying employees every other week. Some states have minimum pay-frequency requirements (they may require at least semimonthly pay for certain employee types), so check your state's rules before locking in a schedule.

Step 6: Calculate Gross Pay

For hourly employees, this means tracking hours worked and applying the correct rate, including overtime where it applies. For salaried employees, it's the agreed salary divided across your pay periods. This is also the point to apply any bonuses, commissions, or reimbursements for the period.

Step 7: Withhold Taxes and Deductions

From each employee's gross pay, you'll withhold:

• Federal income tax, based on their W-4 and IRS withholding tables

• FICA taxes — 6.2% for Social Security (up to the annual wage base, $184,500 for 2026) and 1.45% for Medicare (no cap), both matched by an equal employer contribution

• Additional Medicare Tax — an extra 0.9% once an employee's wages exceed $200,000 in the year, employee-paid only

• State and local income tax, per your state's rules

• Any voluntary deductions — retirement contributions, health insurance premiums, and similar

What's left after all of that is net pay — the amount that actually reaches the employee.

Step 8: Pay Your Employees

Direct deposit is now standard for most small businesses, though paper checks remain a legal option. Whichever method you use, employees are entitled to a pay stub or equivalent record showing gross pay, deductions, and net pay for the period.

Step 9: Deposit Withheld Taxes

The taxes you withheld — federal income tax and both employee and employer FICA shares — don't sit with you until year-end. They're deposited with the IRS on a schedule (monthly or semiweekly) determined by the size of your payroll tax liability, separate from the quarterly report you'll file next. Missing a deposit deadline triggers penalties even if your quarterly filing is later submitted correctly.

Step 10: File Your Quarterly Report

Most employers file Form 941 quarterly, reporting total wages paid, federal income tax withheld, and FICA taxes for the quarter. For 2026, Q1 (January–March) is due April 30, with the same pattern following each quarter after. A Failure-to-File penalty of 5% of the unpaid tax applies for every full or partial month it's late, up to a maximum of 25%.

Step 11: Handle Year-End Reporting

At year-end, you'll issue W-2s to employees (and 1099s to any contractors) summarizing the year's wages and withholding, and file the corresponding forms with the Social Security Administration and IRS. This is also a natural point to reconcile your four quarterly 941 filings against your annual totals — discrepancies here are one of the more common triggers for IRS follow-up.

Step 12: Keep Records

Retain payroll records, W-4s, I-9s, and tax filings for at least the periods required by law — I-9s specifically need three years after hire or one year after termination, whichever is later, while most payroll tax records should be kept for at least four years. Good records are what make an audit a formality instead of a scramble.

Doing It Yourself vs. Getting Help

Most small business owners work with an external tax professional, largely because the tax code is complex enough that handling it entirely in-house carries real risk of costly errors. Payroll costs for a small business extend well beyond wages — factoring in employee taxes like Social Security, Medicare, and unemployment, plus any service fees, typically averages an additional $5 to $20 per employee monthly for outsourced processing, depending on complexity.

None of the steps above are individually difficult. What makes payroll hard is doing all of them correctly, every single pay period, for every employee, in every state you operate in — without ever letting one step drift out of sync with the others.

Getting Started the Right Way

If you're setting up payroll for the first time, the highest-leverage move is getting Steps 1–4 right before your first employee's first paycheck — the EIN, state registrations, new-hire forms, and new-hire reporting. Everything after that is largely repetition of the same cycle, quarter after quarter.

For businesses that would rather hand the ongoing cycle to someone else — especially once you're operating across more than one state — a dedicated payroll and accounting partner can take on calculation, filing, and deposit deadlines so nothing slips between pay periods.

This article is provided for general informational purposes and does not constitute tax or legal advice. Payroll requirements vary by state and business structure — confirm your specific obligations with a registered tax professional or the IRS.