Payroll processing: how to process payroll, step by step

Payroll processing in one cycle

Employee and employer FICA

7.65% each6.2% Social Security + 1.45% Medicare

Social Security wage base

$184,5002026 (IRS Pub 15)

Q3 2026 Form 941 due

Nov 2, 2026Oct 31 is a Saturday

Software that does it for you

$35 to $180/moplus $5 to $22 per person

Every payroll, by hand or through a provider, runs the same loop: collect hours and changes, turn gross pay into net pay, pay people, deposit the taxes you withheld plus your share, then report it all on quarterly and annual returns. The tax side is where the penalties are, so most small businesses hand at least that part to software. Our guide to outsourcing payroll covers what you can hand off and what stays yours.

Before your first payroll

1. Get your federal EIN and state accounts. You need a state withholding account (in states with income tax) and a state unemployment account. Most providers expect you to register yourself. Gusto is the only one in our research that registers state accounts for you. Our payroll setup guide lists the agencies.
2. Collect new hire paperwork. Form W-4 for federal withholding, the state withholding form where one exists, and Form I-9.
3. Report the new hire. Federal law requires reporting to the State Directory of New Hires within 20 days of hire, and several states set shorter deadlines: Alabama and Maine 7 days, Georgia and Vermont 10 days (state rules in our research files).
4. Pick a pay schedule. Weekly, biweekly, semimonthly or monthly, within your state's minimum pay frequency. See how to choose a pay schedule.
5. Find your deposit schedule. The IRS sets it from your lookback period: $50,000 or less of tax means monthly, more means semiweekly.
6. Classify every worker. Employees go on payroll; true contractors get a Form 1099-NEC if paid $2,000 or more in 2026. Read W-2 vs. 1099 rules before you decide.

How to process payroll each pay period

1. Collect hours and changes. Timesheets, overtime, PTO, new hires, terminations, raises and deduction changes. Lock the cutoff a few days before payday.
2. Calculate gross pay. Hourly rate x hours, plus overtime for nonexempt employees under federal and state rules. Salaried exempt staff must earn at least $684 a week ($35,568 a year) under the federal rule restored on May 15, 2026. See exempt vs. non-exempt.
3. Take pre-tax deductions. 401(k) deferrals (up to $24,500 in 2026), health premiums under a cafeteria plan, HSA and FSA contributions.
4. Withhold taxes. Federal income tax from the W-4, Social Security at 6.2% up to $184,500, Medicare at 1.45%, then state and local income tax where they apply.
5. Take post-tax deductions. Garnishments, Roth deferrals and any other after-tax items.
6. Pay net wages. Direct deposit usually needs funds in the provider's account days before payday. Faster options cost more: Gusto Simple next-day pay is $15 a month plus $3 per person, and same-day pay is $90 per payroll.
7. Record employer taxes. Your matching 6.2% and 1.45%, FUTA at 0.6% net on the first $7,000 per employee, and state unemployment at your assigned rate (2026 SUTA rates by state).
8. Deposit the taxes on schedule. Monthly depositors by the 15th of the next month; semiweekly depositors by the following Wednesday or Friday.
9. Keep the records. Pay registers, tax deposits and filed returns. You will need them if you switch providers.

A worked example

One employee earning $52,000 a year, paid biweekly, so $2,000 per paycheck.

So beyond the $2,000 in wages, each of the year's first three paychecks costs you $165 in federal payroll taxes, the fourth $159 ($124 + $29 + $6) and every later one $153, plus your state unemployment tax. Run your own state and salary through the employee cost calculator, or see how payroll taxes work.

Quarterly and year-end filings

States run their own quarterly wage reports for unemployment insurance. A missed state report can be costly: one owner on Hacker News said their unemployment insurance rate "went from 0.8% to 12.75%" after reports were missed during a provider switch (HN, Aug 2026). Our payroll year-end checklist covers January.

Types of payroll processing

Flat-rate payroll processing usually means one base fee plus one per-person fee, with no extra charge for states or year-end forms. OnPay is the clearest example: $49 a month plus $6 per worker, with W-2s, 1099s and multi-state filings included. Compare all the options on our best payroll software rankings.

Payroll processing services and their prices

Add-ons move these totals. QuickBooks and Patriot each charge $12 a month for every extra state, and SurePayroll $9.99. Square charges $3 per mailed paper W-2 or 1099. The payroll cost guide adds those for more team sizes, and our Gusto pricing page and ADP pricing page cover two of the most-searched providers in detail.

What causes payroll delays and errors

• Late funding. Providers debit your account before payday. A Gusto reviewer reports payroll blocked after the deadline for insufficient funds, with the fee not waived (Trustpilot, Sep 27, 2026).
• Employees who move or work in other states. Gusto and Justworks reviewers describe wages reported to the wrong state, after a move or for someone who never worked there (Gusto Trustpilot, Jun 10, 2026; Justworks Trustpilot, Jun 3, 2025), and an Insperity reviewer describes months of wrong multi-state payroll (Insperity Trustpilot, Sep 3, 2026).
• Benefit changes. Duplicate or wrong deductions after an enrollment change come up for Gusto, Justworks and Rippling (Trustpilot and Capterra, 2025 to 2026).
• Missing state account numbers. The provider cannot file a state return until you give it the ID. ADP's terms exclude penalties caused by late receipt of your ID numbers.
• Corrections after the fact. OnPay reviewers report corrected W-2s taking about five months (Trustpilot, Sep 23, 2026).

Common payroll processing mistakes

• Treating the employer's FICA match as optional. You owe 7.65% on top of wages, up to the wage base for Social Security.
• Missing the 15th-of-the-month deposit because the quarterly Form 941 is not due yet. Deposits and returns have separate deadlines.
• Paying an exempt employee less than $684 a week.
• Forgetting state new hire reporting, which can be as short as 7 days.
• Still sending 1099-NEC forms at $600. For 2026 payments the threshold is $2,000.
• Running payroll in a new state before you have that state's withholding and unemployment accounts.