How to do payroll for a small business

How to set up payroll in 12 steps

This is the order that avoids rework. Steps 1 to 6 happen once, before the first paycheck. Steps 9 to 11 repeat every pay period, quarter and year.

1. Confirm who is an employee. Payroll is for W-2 employees. Contractors are paid by invoice and get a Form 1099-NEC if you pay them $2,000 or more for 2026 work (up from $600). The IRS looks at behavioral control, financial control and the type of relationship; California and Massachusetts use a stricter ABC test. See W-2 vs 1099: how to tell.
2. Get an EIN from the IRS. You need the federal employer identification number for every payroll form, the new hire report and your state registrations. Apply online on IRS.gov before your first hire.
3. Register with your state. Open a state income tax withholding account (skip it in the nine states with no wage income tax: AK, FL, NV, NH, SD, TN, TX, WA, WY) and a state unemployment (SUTA) account. You get a new employer rate, for example 2.70% on the first $9,000 per employee in Texas or 3.4% on $7,000 in California. Add a paid leave account where the state runs one (Colorado, Washington, Oregon, Minnesota and others), and local tax accounts in places like Pennsylvania, Ohio and Philadelphia. Agencies and links are on each state page in the payroll tax hub, and rates are in 2026 SUTA rates by state.
4. Buy workers’ comp if your state requires it. California, New York, Pennsylvania and New Jersey require it from the first employee; Florida from 4 (1 in construction); Georgia and North Carolina from 3; Alabama from 5. Texas lets most private employers opt out. Ohio, Washington, North Dakota and Wyoming sell it only through a state fund. See what workers’ comp costs.
5. Collect new hire forms. Form W-4 for federal withholding, the state withholding certificate (for example Arizona’s A-4 or Connecticut’s CT-W4), Form I-9 to verify the right to work, and a direct deposit authorization.
6. Report each new hire to the state. Federal law sets the outer limit at 20 days after the hire date (42 USC 653a). Several states are faster: Alabama and Maine 7 days, Georgia and Vermont 10, Massachusetts, Rhode Island and West Virginia 14, Iowa 15, Mississippi 15 business days. Many states also want contractors reported.
7. Pick a pay schedule. Weekly (52 paydays), biweekly (26), semimonthly (24) or monthly (12). Many states require at least twice-monthly pay for hourly staff; California requires twice each calendar month. See pay schedules and the 2026 calendar.
8. Choose how you will run it. By hand with IRS tables, with software that files for you, through an accountant, or through a PEO. Costs are below.
9. Run the first payroll. Gross pay, minus pre-tax deductions, minus withholding (federal and state income tax, the employee’s 7.65% FICA, state programs), equals net pay. Then add your own 7.65% FICA, FUTA and SUTA. Our payroll taxes guide works through a $50,000 and a $200,000 example.
10. Deposit the taxes. Most new employers are monthly depositors: federal payroll tax for each month is due by the 15th of the next month. Larger employers deposit semiweekly.
11. File the returns. Form 941 every quarter, Form 940 once a year for FUTA, W-2s to employees and the SSA by January 31 (February 1 in 2027), plus state quarterly wage reports.
12. Keep the records. Payroll registers, time records, W-4s, I-9s, deposit confirmations and filed returns. Download them before you ever cancel a payroll service.

Payroll deadlines for the rest of 2026 and early 2027

Form 941 gets 10 more days when every deposit for the quarter was on time. If your tax for a quarter is under $2,500, you can pay it with a timely 941 instead of depositing. The year-end list is in the payroll year-end checklist.

Doing payroll yourself vs using payroll software: the cost

By hand. No software fee. You work out withholding from each W-4 with the IRS tables, track every wage base, make each deposit, and file each 941, 940, W-2 and state report yourself. It is workable for one or two salaried employees in one state. It breaks down with hourly pay, tips, bonuses, a second state or local taxes.

Software that only calculates. Patriot Basic is $17 a month plus $4 per worker and leaves the tax filing to you. It removes the math errors but not the filing work.

Full-service software. The provider calculates, deposits and files federal and state taxes. For 5 employees, list prices run from $62 to $120.50 a month:

The costs that are not in the headline price:

• Extra states: Gusto Simple covers one state (Plus is $80 + $12 per person); Patriot and QuickBooks charge $12 a month per extra state.
• State registration: Gusto can register you through a partner (price varies by state) or with Business Compliance at $85 per state per month on a 12-month term. QuickBooks does not register state accounts for you.
• Faster pay: next-day pay on Gusto Simple is $15 a month + $3 per person.
• Leaving: if Gusto files your final returns it charges $100 federal, $100 per state and $5 per W-2 or 1099. QuickBooks charges $150 to prepare year-end filings after you cancel.

The full fee breakdown, including ADP and Paychex estimates, is in what payroll services cost. For free options, see free payroll software.

Which payroll provider to start with

For a first payroll in one state, the lowest-cost full-service options are Patriot, Square, Wave, Gusto and OnPay. Our two highest-scored payroll providers are tied at 69 out of 100. Scores weigh published price, tax filing coverage and guarantee terms, features, support and exit terms; see how we score providers.

QuickBooks Payroll (score 52) suits you if your books are already in QuickBooks: $88 a month plus $6.50 per employee includes QuickBooks Online Simple Start accounting. Penalty protection (up to $25,000 a year) comes only with the top Elite plan, extra states are $12 a month each, and you register state accounts yourself. See QuickBooks Payroll pricing.

Also close: OnPay (score 67) includes federal, state and local filings at $49 + $6 per worker. Full rankings are in best payroll software. If you also need health insurance for the first hire, compare a PEO in PEO vs payroll software.

Switching payroll companies mid-year: checklist

A mid-year switch is a common source of tax notices. One employer on Hacker News said a missed state wage report after a switch took their unemployment rate "from 0.8% to 12.75%" (August 2026). Before the last payroll with the old provider:

• Download every payroll register, tax filing, deposit record and W-2 for this year and last. Access after cancellation varies: Wave cuts it off at the end of the month, QuickBooks keeps it for one year, Gusto gives limited read-only access.
• Give the new provider year-to-date wages, withholding and taxes for every employee, including people who left this year, so wage bases and W-2s are right.
• Confirm in writing who files the current quarter’s 941 and state wage reports. Overlaps and gaps both cause notices.
• Move your state account numbers and SUTA rate to the new provider, and file zero-wage reports for any quarter with no payroll if your state requires them.
• Cancel the old service in the way the contract requires: ADP RUN and OnPay ask for 30 days’ written notice.

Common payroll setup mistakes

• Running payroll before the state accounts exist. You still owe the tax; you just cannot deposit it, and the first notice is a penalty.
• Using the federal 20-day new hire limit in a 7-day state such as Alabama or Maine.
• Paying a worker as a contractor who meets the employee tests. Fixing it later means back taxes.
• Choosing monthly pay for hourly staff in a state that requires twice-monthly or weekly pay.
• Not funding the bank account in time. Providers block or delay payroll when the debit fails, and fees follow.
• Assuming the provider pays your penalties. Read its guarantee: most exclude interest or errors from data you entered. See the comparison in our payroll compliance guide.

More in payroll mistakes and how to fix them, and the full cost of a hire in the employee cost calculator.