How to Set Up Payroll for a Small Business

An EIN is your business's federal tax ID number - you need it before you can pay any employees or contractors. Apply for free on the IRS website at irs.gov/ein. If you apply online during business hours, you receive your EIN immediately.

Even if you are a sole proprietor and already use your Social Security Number for business taxes, you should get an EIN before hiring. Using your SSN for payroll tax filings exposes it unnecessarily and creates complications when you eventually transition.

LLC and corporation owners: your EIN is tied to your business entity, not your personal identity. If you ever change your business structure, contact the IRS about whether you need a new EIN.

Most states require employers to register separately with the state revenue agency (for income tax withholding) and the state workforce agency (for unemployment insurance). These are typically two different registrations with two different agencies.

Registration timelines vary. Some states issue your state employer account number within minutes online. Others take up to two weeks by mail. Start this process before you hire your first employee.

If you have employees working in more than one state, you may need to register in each state where they perform work - not just where your business is based. Remote employees typically create nexus in their state of residence.

Every new employee must complete a Form I-9 (Employment Eligibility Verification) before or on their first day of work. You must review the original identity and work authorization documents in person (or via an authorized agent) and complete your section within 3 business days of the hire date.

All employees must complete a federal Form W-4 (Employee's Withholding Certificate) before their first paycheck. The W-4 determines how much federal income tax to withhold. Employees can update their W-4 at any time - it takes effect on the next payroll run.

Check whether your state has its own withholding certificate in addition to the federal W-4. Many states use the federal W-4 as-is, but California, Colorado, New York, and others have their own forms.

Report every new hire to your state new hire reporting agency within 20 days of the hire date (some states require faster reporting). Most payroll providers do this automatically.

The four standard pay frequencies are: weekly (52 paychecks/year), biweekly (26 paychecks/year), semi-monthly (24 paychecks/year), and monthly (12 paychecks/year). Biweekly is the most common for hourly employees; semi-monthly is common for salaried staff.

Biweekly has a simpler relationship between hourly wages and pay period earnings but results in 2 months per year with three paydays, which can affect cash flow planning.

Some states set minimum pay frequency requirements. California and New York require most employees to be paid at least semi-monthly. Check your state requirements before choosing monthly pay.

Once you set a pay schedule, changing it is possible but requires advance notice to employees and careful handling of partial periods. Pick a schedule you can sustain.

Open a separate checking account solely for payroll. Transfer the exact amount needed to cover each payroll run into this account before the processing date. This practice prevents accidental overdrafts, makes reconciliation straightforward, and creates a clear audit trail.

Payroll providers use ACH debits to pull funds from your account. You typically need to provide your account and routing number during setup and verify the account with small test deposits.

Direct deposit requires the account to be in good standing and may require a 60 to 90 day account history with your bank before some providers will approve direct deposit for new customers.

Use the comparison table on our home page to select the right payroll solution for your team size, budget, and feature needs. Full-service providers handle all tax filings automatically; payroll software leaves filings to you.

During setup you will enter your business EIN, state account numbers, bank account details, and pay schedule. Then add each employee's name, address, Social Security Number, W-4 elections, pay rate, and bank account for direct deposit.

For contractors (1099 workers), you typically enter less information - name, address, and either SSN or EIN, plus their payment rate. You do not withhold taxes from contractor payments.

Run a test payroll or check the preview totals carefully before approving your first real payroll. Verify that gross pay, deductions, and net pay are correct for each employee.

Allow at least 4 business days before your intended pay date for your first payroll run, as new accounts are often subject to longer ACH processing windows. After your account establishes a history, most providers offer 2-day or next-day direct deposit.

For hourly employees, enter hours worked each pay period. For salaried employees, the amount is fixed each period unless there was a partial period (termination, start mid-period).

After submitting, you will receive a confirmation with the total amount to be debited, the date it will be debited, and the pay date for employees. Save these confirmations.

Review each pay stub after the run. Common errors on first payrolls include wrong Social Security Numbers, incorrect W-4 elections, and missing pre-tax deductions. Catch them early.

Full-service providers handle quarterly Form 941 filings and annual Form 940, W-2, and 1099-NEC filings automatically. If you use payroll software, mark these deadlines in your calendar: Form 941 is due by the last day of the month following each quarter (April 30, July 31, October 31, January 31).

W-2 forms must be furnished to employees by January 31. 1099-NEC forms for contractors paid $600 or more must also be furnished by January 31. Copies must be filed with the SSA/IRS by the same date when filed electronically.

Update your payroll system whenever an employee's status changes: pay rate changes, address changes (especially state changes for remote workers), W-4 updates, benefit enrollment changes, or terminations.

Review your SUTA rate notice from your state each year. Your unemployment insurance rate adjusts based on your claims history and can significantly affect your payroll costs.