Setting up employee payroll requires getting a federal Employer Identification Number, registering with your state tax agency, classifying your workers correctly, choosing a pay schedule, and either selecting payroll software or hiring a payroll service to handle calculations and tax filings. The process takes most small business owners a few days to a couple of weeks, depending on how quickly state registrations come through.
Get Your Employer Identification Number
Before you can pay anyone, you need an EIN from the IRS. This is a nine-digit number that identifies your business for tax purposes, and you cannot legally run payroll without one. The IRS lets you apply online for free, and if your application is approved, you’ll receive your EIN immediately. The online tool is available Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, Saturdays until 9:00 p.m., and Sundays from 6:00 p.m. to midnight.
To apply, you’ll need your business entity type (sole proprietorship, LLC, corporation, etc.) and the Social Security number of the person who controls the business. One important detail: if you’re forming a legal entity like an LLC or corporation, register that entity with your state first. The IRS notes that applying for an EIN before your state formation is complete can delay the process. You’re limited to one EIN application per responsible party per day.
Register With Your State
Federal registration is only half the equation. You also need to set up accounts with your state’s tax agency so you can withhold and remit state income taxes (if your state has an income tax) and pay into the state unemployment insurance fund. Most states require you to register as a new employer within a short window after hiring your first worker, often 10 to 30 days.
Workers’ compensation insurance is another requirement in nearly every state. If you have even one employee, you’re generally required to carry a policy that covers medical treatment and partial wage replacement for work-related injuries or illnesses. You can purchase coverage through a private insurer or, in some states, through a state fund. A few states allow larger employers to self-insure, but most small businesses buy a standard policy. Premiums vary based on your industry, your claims history, and the number of employees on your payroll.
Classify Your Workers Correctly
One of the most consequential decisions you’ll make is whether the people working for you are W-2 employees or 1099 independent contractors. Employees go on your payroll, meaning you withhold taxes, pay your share of Social Security and Medicare, and cover unemployment insurance. Independent contractors handle their own taxes, and you simply pay them for their work.
The IRS looks at three categories to determine classification. First, behavioral control: do you dictate what the worker does and how they do it? Second, financial control: do you decide how the worker is paid, reimburse expenses, and provide tools or supplies? Third, the type of relationship: is the work ongoing, is it a key part of your business, and do you offer benefits like insurance or vacation pay? There’s no single test that settles the question. The IRS weighs all the factors together to assess how much control you have over the worker. Misclassifying an employee as a contractor can trigger back taxes, penalties, and interest, so take this step seriously.
Collect Employee Tax Forms
Every new hire needs to complete two critical forms before their first paycheck. Form W-4 tells you how much federal income tax to withhold from each paycheck. The employee fills it out based on their filing status, dependents, and any additional withholding they want. Many states have their own withholding form as well.
You’re also required to have each employee complete Form I-9, which verifies their identity and eligibility to work in the United States. The employee provides documents (such as a passport or a driver’s license paired with a Social Security card), and you review and record them. Keep I-9 forms on file for at least three years after the hire date or one year after employment ends, whichever is later.
Choose a Pay Schedule
You’ll need to decide how often you pay employees. The most common options are weekly, biweekly (every two weeks), semimonthly (twice a month, often the 1st and 15th), and monthly. Many states have laws dictating minimum pay frequency, so check your state’s requirements before committing. Biweekly is the most popular schedule for small businesses because it balances administrative workload with employee expectations.
Your pay schedule also affects cash flow planning. Weekly payroll means 52 pay runs per year, while biweekly means 26 and semimonthly means 24. Pick a schedule you can sustain financially and administratively, especially in the early months when revenue may be uneven.
Pick a Payroll Method
You have three basic options for actually processing payroll: do it yourself manually, use payroll software, or outsource to a full-service provider. Each comes with trade-offs in cost, control, and time.
Manual Payroll
Running payroll by hand means calculating gross pay, deductions, and tax withholdings yourself using IRS tax tables and your state’s withholding guidelines. You then deposit taxes with the IRS and your state on the required schedule and file the necessary returns. This costs nothing beyond your time, but it’s error-prone and time-consuming, especially as you add employees. Most businesses outgrow this approach quickly.
Payroll Software
Online payroll platforms automate calculations, generate pay stubs, file tax forms, and handle direct deposits. Pricing typically follows a base monthly fee plus a per-employee charge. SurePayroll, for example, starts at $29.99 per month plus $5 per employee for full-service payroll with tax filing. OnPay charges $40 per month plus $6 per person. Roll by ADP runs $39 per month plus $5 per employee. Rippling starts at $8 per month per user with custom pricing based on the services you need. On the budget end, Wave offers a free starter plan with a paid tier starting at $190 per year.
Most of these services handle federal and state tax filings, year-end W-2 generation, and direct deposit. Some also bundle time tracking, benefits administration, or HR tools. If you have fewer than 10 employees, a straightforward platform in the $30 to $50 per month range will likely cover everything you need.
Outsourced Payroll
Accountants and professional employer organizations (PEOs) can manage your entire payroll process. This is more expensive but removes virtually all of the administrative burden. PEOs can also give small businesses access to group-rate benefits like health insurance. This route makes more sense once you have a larger team or complex needs like multi-state payroll.
Understand Your Tax Obligations
Running payroll means you’re responsible for withholding and depositing several types of taxes, plus filing regular returns with the IRS and your state.
Federal income tax: Withheld from each employee’s paycheck based on their W-4. You don’t pay this tax yourself; you collect it and send it to the IRS on a schedule (monthly or semi-weekly, depending on your total tax liability).
Social Security and Medicare (FICA): Both you and the employee pay into these programs. The combined rate is 15.3% of wages, split evenly. You withhold the employee’s half and pay the employer’s half out of your own funds. An additional 0.9% Medicare tax applies to employee wages above $200,000, paid entirely by the employee.
Federal unemployment tax (FUTA): Paid entirely by the employer. The standard FUTA rate is 6% on the first $7,000 of each employee’s annual wages, but most employers receive a credit that brings the effective rate down to 0.6%.
State unemployment insurance (SUI): Also employer-paid in most states. Rates vary by state and are typically based on your industry and claims history. New employers usually start at a default rate set by the state.
File the Right Returns on Time
The IRS requires most employers to file Form 941, the Employer’s Quarterly Federal Tax Return. This form reports wages paid, federal income tax withheld, and the employer and employee shares of Social Security and Medicare taxes. Deadlines fall on the last day of the month after each quarter ends: April 30, July 31, October 31, and January 31.
Very small employers with $1,000 or less in annual payroll tax liability may qualify to file Form 944 instead, which covers the entire year in a single return. You’ll also need to file Form 940 annually to report your federal unemployment tax.
At the end of each year, you must provide every employee with a W-2 showing their total earnings and withholdings. W-2s are due to employees by January 31 of the following year, and copies go to the Social Security Administration as well. If you use payroll software, it will generate and distribute these automatically.
Run Your First Payroll
Once your registrations are in place, your employees’ forms are collected, and your software or service is set up, you’re ready to process your first pay run. Before you finalize it, double-check a few things: verify each employee’s pay rate and hours, confirm that withholding amounts look reasonable based on their W-4, and make sure your bank account has enough funds to cover net pay plus the employer-side taxes you owe.
Most payroll platforms let you run a preview before committing. Use it. Review every line on every pay stub for that first cycle. Catching an error before money moves is far easier than correcting it after the fact. Once everything looks right, approve the payroll, and your employees will receive their pay via direct deposit or paper check on the scheduled pay date. From there, keep your tax deposit schedule and quarterly filing deadlines on a calendar so nothing slips through the cracks.