Handling small business payroll includes having to consider everything, from setting up your business as an employer to paying your employees, tax agencies, and other applicable entities. When learning how to do payroll, there are several steps you must follow to ensure that you’re fully compliant with federal and state laws.
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If you’d rather learn how to do payroll yourself, follow our eight steps below. We’ve also prepared an instructional video and a free downloadable checklist to help you.
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Step 1: Set Up Your Business as an Employer
Assuming you’ve already established your business and applied for any required licenses, the first step in doing payroll is ensuring that your business has met all the legal requirements to operate as an employer. Consider any industry-specific payroll rules you may have to follow as well.
- Apply for a Federal Employer ID Number (EIN).
- Verify your state tax identification number is the same as your federal one; if not, determine whether you need to apply for one or if it’s automatically assigned.
- Sign up for an account with the Electronic Federal Tax Payment System.
- Start a bank account solely for payroll transactions (separate from your main business account).
- Sign up for any applicable state electronic tax payment accounts.
- Purchase workers’ comp insurance; most states require it.
Step 2: Establish Your Payroll Process
Now, you will need to make some decisions that will impact how you run payroll each period. You’ll need to determine what will work for your business so you can ensure your team is trained on the process properly.
Explore the “why” behind each area. Be sure to consider the needs of both your employees and your business, in addition to any legal requirements.
- Pay period: Will you pay weekly, biweekly, or semimonthly?
- Types of employees (not contractors): Full time vs part time? Exempt vs nonexempt?
- Tracking work time: Will you need to track work hours? If so, how will you do it, and when will they need to be reported to you? Make time tracking easier with one of our top time clocks for small businesses.
- Benefits: Will you be offering benefits? Who will pay for them? If employees are paying for them partially or in full, how will you manage the payroll deductions?
- Taxes: How often will you need to pay taxes, and which ones are you subject to? Will you need to pay state taxes? Local? Find out the rates in advance so you know how much to withhold. You can also check this guide on what federal and state taxes employers need to pay.
- Payroll processing and calculations: Will you calculate and process payroll using Excel, by hand, with a calculator, or with a payroll service? Take note, however, that calculating your payroll on Excel is only ideal for a business with 10 or fewer employees—check our guide on how to do payroll in Excel for more information.
- Paychecks: Will you be cutting checks or paying via direct deposit? Pay cards? Cash?
Consider using a payroll provider to help make the process easier. The right provider can be the difference between investing three days to run payroll vs an hour. To learn how easy it is to do payroll with some of our recommended software, check out provider-specific payroll guides below:
- How to do payroll with QuickBooks
- How to do payroll with Gusto
- How to do payroll with Patriot
- How to do payroll with OnPay
Step 3: Collect Your Employees’ Payroll Forms When Hired
You’ll need some important payroll documents from your employees to run payroll properly—and these are best collected during their onboarding. These include tax and work authorization forms, which the employees need to sign.
You’ll use the data on the forms described below to add the employee to your HR or payroll system if you have one. It’s a good idea to store this information as a paper document or an electronic personnel file.
- Federal W-4: This is a federal tax withholding document that tells you what tax rate to use for the employee. For more in-depth information about W-4, here’s a layman’s guide to W-4 and how it compares with the W-2.
- State W-4 (or equivalent): It is similar to the federal form and may be called by a different name in your state.
- I-9 Form: It verifies an employee’s identity and eligibility to work in the US with a passport or two forms of identification. It should be collected within three days of the employee’s start date.
- Other Payroll Forms: Employees who want to use direct deposit should fill out a form that gives their employers permission to deposit into their bank account. They also need to either provide a voided check or a letter from their bank with their account and routing numbers.
Also, you’ll need to register your employee in your state’s New Hire Reporting Program (generally within 20 days). Make sure that you report all new or rehired employees to your state. Payroll software, like QuickBooks, often files these reports automatically.
For more state-specific details on forms and employee onboarding, check out our state payroll guides—just click on your state in the map below and you’ll be redirected to our state payroll guide.