Learning how to do payroll can be a pain. You have to make sure your business is registered with all the right agencies, fill out numerous forms for each employee, and often purchase workers’ compensation coverage – all on a tight deadline (less than 20 days for most states by law!). Even a seasoned business owner can get overwhelmed when they want learn how to do payroll.

In this guide, we’ll break down the steps involved in setting up payroll manually if you have the time to do so. This can be a pain however, so we’ll also explain how to cut setup time and automate payroll with Gusto, our recommended payroll software for small businesses. Click here for a free 30 day trial.

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Okay, let’s get started to getting you on your way to running payroll!

How to Do Payroll: Adding Your First Employee

There are 3 phases to adding a new employee to payroll:

1. Before the Employee Starts
2. The Employee’s First Day
3. The Employee’s First 3 Weeks of Employment

Let’s look at each of these in detail.

Phase 1: Before The Employee Starts

When you hire a new employee, you will need to make sure that your business has the following items sorted out BEFORE the employee starts:

1. Apply for an Employer Identification Number (EIN) from the IRS- All businesses that have employees need a federal EIN, which serves as the business’ tax ID. This is something you might have gotten when you first set up your business with your state (or your attorney or accountant might have it). If you don’t have one already, you can apply for one for free from the IRS. Learn more here.
2. Register for State Taxes – States mandate payroll taxes, and you will need to pay these on behalf of your employee.
3. Determine your Federal (FUTA) and State Unemployment Tax (SUTA) rates – we have two great resources on this for more information – here and here.
4. Buy Worker’s Comp Insurance (required in most states) – This is, in general, required of all employers in all states to protect employees from injuries sustained on the job. We tell you more in our guide here.
5. Post required notices and posters around the workplace (if you have a physical space)

Please note that several of these items you need for adding an employee to your payroll will vary depending on the state your business is located in. Once you are all set with your insurance and tax documentation, you can start your new employee, bringing us to phase 2.

Phase 2: The Employee’s First Day

Your employee is ready to start work, and you are ready to start paying them! On their first day, you will want them to:

1. Collect a signed Federal W-4 form for tax withholding (available here) – This does not need to be submitted to the IRS, but you should store it in a paper file or electronically in a personnel file (like Gusto provides).
2. Collect a signed State W-4 form for tax withholding (in some states only: check here) – store it in a paper file or electronically in a personnel file.
3. Get direct deposit information from employee from a voided check (if applicable)

Phase 3: The Employee’s First 3 Weeks of Employment

Once your employee starts, you need to move quickly on the final steps for them.

1. Collect a signed I-9 Form for work eligibility verification (within 3 days of employee’s start date)—You’ll want to make sure the employee can verify their identity and eligibility to work in the United States with a passport or two forms of identification. Accepted identification forms are detailed here.
2. Register your employee in your state’s New Hire Reporting Program (within 20 days)—A new requirement since 1996, you will want to make sure that you report all new or rehired employees to your state.

For a more detailed rundown of these steps, including links to forms and other resources, check out our New Hire Checklist.

Why You Should Consider Payroll Software

If getting new employees set up on payroll sounds complicated, you’re not alone. The reality is messy – especially when you consider how each state government has unique requirements on top of the already-complicated federal laws.

This is why we recommend using payroll software such as Gusto. On top of streamlining the hiring process, you get a system that can automatically run payroll throughout the year, track bonuses, track vacation/sick days, and more. And it can do more than payroll – Gusto also handles benefits onboarding and lets you add workers compensation coverage, making it an all in one HR and payroll software solution.

We tried out a lot of different payroll programs and found Gusto to be the best for small businesses because it:

• Is easier to use and less expensive than competitors, like Intuit and SurePayroll.
• Handles a lot of the setup process automatically (filling out W-4s, sending New Hire Reports)
• Gives you full tax support throughout the year. In other words, Gusto will file your state and federal payroll taxes, issue W-2s to your employees, and take care of your business tax needs.
• Provides other HR services, such as benefits provision and workers comp coverage

If you want to learn more, read our full payroll software guide here. Having payroll software is basically like having an accountant to run payroll in your office – only much cheaper.

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Alternatives to Payroll Software

For most small businesses, HR software like Gusto is the best option for making payroll much quicker and easier (Gusto has also expanded beyond payroll to provide benefits onboarding and other HR services). However, there are other options for how to do payroll. Check out our table below to see for yourself and compare the alternatives to payroll software.

Payroll Options Comparison Table

Payroll Solution	Cost	Pros	Cons	Appropriate For
All-In-One HR and Payroll Software Try Gusto	Wide range from $35+/month upwards	All in one solution including benefits provision (if you want it) and other add-ons like time off tracking.	May cost slightly more than traditional payroll software since it has more capabilities.	Many small businesses, especially those that are growing rapidly or have multiple locations, pay schedules, or a mix of hourly & salaried employees.
Traditional Payroll Services (e.g. ADP & Paychex) See Our Comparison	Wide range from a base fee around $50 + a cost per employee	A simple solution to payroll issues and compliance.	Don’t offer benefits or solve other HR needs. Need to pick a tool that works for your business now and as it expands.	Small businesses with multiple pay schedules, locations, or kinds of employees.
Accounting Software Try QuickBooks Online	$34-$69/month for Quickbooks Online with either manual or automatic payroll	Accounting + payroll = sound budgeting.	You will still need to check for compliance factors like workers comp on your own. Might not do direct deposit.	Very small businesses with under 5 employees.
Your Accountant	Usually $100/hour+	You trust them. They already do your taxes, and they can also take care of payroll for you.	May be costlier than other options. You may still have to do compliance factors like workers comp on your own.	Very small businesses with under 5 employees.
Your Business Bank See Options	Surcharges usually apply, plus the payroll provider the bank uses usually has additional fees	Easy - you already have accounts there, and payroll might be an add-on service.	High fees since they usually outsource your payroll to a payroll software company anyway.	We would advise against using your business bank due to the high cost.
Do-It-Yourself	5-10 hours per payroll, plus 40-80 hours annually working on compliance and documentation	You trust yourself.	The time spent, and the things you might miss = not worth the risk. You may also look unprofessional to your employees, particularly if there are payroll errors.	Very small businesses with under 5 employees.

How to Do Payroll with Gusto in 9 Steps

For the rest of the article, we’ll show you how to add employees and set up payroll using Gusto. To follow along, you can sign up for a free 1 month trial by clicking this link. Afterwards, the cost is $39/month + $6 per employee. So for 5 employees, the cost would be $69/month. You can do a cost estimator here.

Note: While this guide should be easy enough to follow, if you have trouble at any point in time, you can chat with a Gusto support representative. Just click the green question mark icon on the bottom-right corner of the screen when you are on their website and a chat window will open on the right side. You can also call their support team, or schedule a call for a future time/date if you have a tight schedule but still need to learn how to do payroll.

Step 1: Basic Information

After you sign up for a Gusto account, you’ll first be asked to add some basic company information, including your business address(es). This helps Gusto determine what specific forms you need for your state. Assuming you have only one location, this first step will be very simple.

Step 2: Adding Employees

Next you’ll begin adding your employee(s) to the system. You’ll start with some basic information, including their name, address, email, hire date, and salary/wage.

The next step is to enter personal details, like social security number (SSN) and birthdate, as well as tax withholding preferences. The employee should have indicated their tax withholding preferences in their W-4 form. However, we recommend using Gusto’s handy “employee self-onboarding” option. By selecting this option, employees will receive an email with a link to create their profiles and enter withholding and direct deposit information themselves. This is also useful if you don’t have employees’ birthdays, tax forms, or SSNs on hand.

At around this same stage, you can automatically file a New Hire Report. This is a notice you must send to your state office within 20 days of hiring a new employee (as explained in the 3 phases at the beginning of this article). By selecting the option below, Gusto will automatically file the report with your proper state agency.

Once each employee is added, Gusto will automatically fill out federal and state W-4 forms (in the 3 phases at the start of this article). All you need to do is print out the form, sign it, and have your employee sign it. Then you just need to store it in a safe place. Unless specifically requested, W-4s do not need to be submitted to the government.

Step 3: Federal Tax Setup

The next step is to enter your Federal and (where applicable) State Tax information. This requires some pretty basic information, like your company type (LLC, S-Corp, etc.) and federal deposit schedule. If you’re unsure about any of these, Gusto will give you a short explanation/advice on the right side of the menu. The only tricky part here may be applying for a Federal Employer Identification Number (EIN), if you do not have one already. Gusto will link you to the IRS page where you can apply online for an EIN for free.

Step 4: State Tax Setup

This menu is similar to the Federal Tax Setup, although it will vary depending on the state you’re located in. You’ll likely need to enter a State Employer ID number and a State Unemployment Tax (SUTA) Rate. As with the previous menu, Gusto will give you suggestions on what to enter and provide links to other agencies where needed.

Step 5: Bank Account Setup

This next step involves linking your business bank account with Gusto. This is required so that Gusto can pay employees from your account and send the government payroll taxes on your behalf. Just enter your bank account and routing number. Gusto will make two small bank deposits (that will appear in a day or so) which you’ll enter into the system later on to verify your account.

Need a Business Bank Account? Click here to see which business checking account provider we recommend.

Step 6: Choose Your Pay Period

Now it’s time to answer some specific questions on how you’ll be running payroll:

• How frequently will you pay employees? (once a week, every other week, twice a month, or once a month?) – In general, most businesses pay either 2x per month or at the end of each month (before things like rent are due).
• When is payday? (what day of the month or day of the week?) – Most businesses pick something standard like the last day of the month (or the prior business day to that). If you are paying 2x per month, you will want to pick the 15th as well.
• When will you run the first payroll?- That should be sometime soon, since you just hired someone!
• For what work period will that first payroll cover?- Some companies do payroll in arrears if they have hourly employees, meaning that the employees have a 1-payroll lag from when they turn in their hours worked to when they are paid for them. For example, this is normal for a restaurant where employees work a different number of shifts each week, or may pick up extra shifts if someone calls in sick.

If you have salaried employees, this is NOT a best practice to follow. If you have hourly employees, you may have to do this depending on how you track their hours and their schedule consistency.

Gusto has multiple pay schedules available and you can read more here on how to set them up.

Step 7: Sign Company Forms

With employees entered, federal/state tax forms submitted, and your pay schedule now set up, you’re just about ready to start running payroll.

Before you can do so, however, there’s more 2 forms you’ll need to sign:

1. Company Direct Deposit Authorization – This gives Gusto approval to transfer money in and out of your bank account, in order to pay employees and payroll taxes. Employees can register for direct deposit on their side of the process when they set up their profiles in Gusto (see Step 2). We recommend requiring direct deposit for all employees in order to avoid the hassles of paper checks and reliance on snail mail.
2. Reporting Agent Authorization – This gives Gusto authority to pay all payroll taxes on your behalf.

To sign the forms, just add yourself as the company signatory. The signatory is the person at your business who has the authority to approve these forms, as well as future documents sent to the government (like payroll tax forms). Once entered, you can sign the forms instantly with an electronic signature.

In the future, Gusto will notify you via email of any forms that need signing. Likewise, you can add your e-signature with a single click.

Step 8: Purchase Workers Compensation Insurance

If you’re hiring your very first employee, there’s a good chance you also need to buy workers comp insurance. Most states require it as soon as you add 1 employee besides the owners of your business, and coverage usually needs to start on your employee’s first day. To see what the requirements are in your state, check out this table from the National Federation of Independent Businesses (NFIB).

Fortunately, you can sign up for workers comp insurance directly through Gusto. There’s no additional cost (besides the cost of insurance), and premiums will automatically be calculated and deducted each month from your business bank account.

To sign up, go to the “Stay Compliant” tab, then click “I Need A New Policy.” From there, you’ll fill out some details about your business and employees to generate quotes. Their partner, AP Intego, should find you several different offers in your area (see more here).

(Optional) Step 9: Adding Benefits

Gusto also lets you offer certain benefits to your employees. You can sign up to offer health insurance, retirement plans, transportation benefits, charity matching, and more. As with workers comp, payments for these are automatically calculated and deducted each pay cycle (Read more about Gusto’s benefits here).

How to Start Running Payroll

Once you have gone through all of the payroll setup steps, whether it’s with Gusto, another payroll provider, or manually, the next step is to start using the program as it’s intended: for running payroll.

Most payroll softwares, including Gusto, have an option for “auto-pilot.” This means that every month, week, or two weeks, or whatever payroll schedule you set, it will automatically distribute payment via direct deposit (or print checks). If you need to make adjustments, however, like adding hours, bonuses, commission, or sick days, you can do this very easily from the payroll menu, and most software systems have an automated email reminding you of the adjustment deadline.

For more information about running payroll on Gusto, see here.

The Bottom Line

Learning how to do payroll can be a complicated affair. For most small business owners, we recommend using Gusto or another payroll provider. It not only makes employee onboarding much faster, but you have a huge burden lifted off your shoulders when it comes to calculating payroll taxes and sending them to the government, as well as workers compensation and more. Click here for a free 30 day trial.

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