Running payroll for the first time feels intimidating, but it's a defined process with a clear sequence. Whether you do it by hand or use software, the same eight steps apply. This guide walks through each one so you can pay your first employee correctly, and stay on the right side of the IRS.
Step 1: Get an EIN & Register With Your State
Before you can pay anyone, you need an Employer Identification Number (EIN) from the IRS, it's free and issued instantly online. Then register with your state's tax and labor agencies for:
- State income tax withholding (if your state has income tax)
- State unemployment insurance (SUTA)
- Workers' compensation insurance, where required
Step 2: Classify Your Workers
Decide whether each worker is an employee (W-2) or an independent contractor (1099). This isn't a preference, it's determined by how much control you have over the work. Misclassification is one of the Department of Labor's top enforcement targets. For employees, you must also determine exempt vs. non-exempt status, which decides overtime eligibility. See our guides on salary vs. hourly classification and 1099 vs. W-2.
Step 3: Collect Forms (W-4, I-9)
Every new employee completes:
- Form W-4, tells you how much federal income tax to withhold.
- Form I-9, verifies eligibility to work in the U.S.
- State withholding form, where applicable.
- Direct deposit authorization and benefit enrollment.
Keep these on file, the I-9 in particular must be retained and available for inspection.
Step 4: Choose a Pay Schedule
Pick a consistent frequency and check your state's minimum pay-frequency law (some require at least semi-monthly):
| Schedule | Paychecks/year | Best for |
|---|---|---|
| Weekly | 52 | Hourly, variable hours |
| Biweekly | 26 | Most common; mixed workforce |
| Semi-monthly | 24 | Salaried staff |
| Monthly | 12 | Very small teams |
Step 5: Calculate Gross & Net Pay
For each employee and each pay period:
- Gross pay: salary ÷ pay periods, or hours × rate plus overtime. (See how to calculate overtime pay.)
- Subtract pre-tax deductions (401(k), health premiums).
- Withhold federal income tax using the employee's W-4 and IRS Publication 15-T.
- Withhold FICA: 6.2% Social Security + 1.45% Medicare = 7.65%.
- Withhold state/local income tax as applicable.
- Subtract post-tax deductions to reach net pay.
For the full walkthrough, read how to calculate take-home pay.
Step 6: Pay Employees
Distribute net pay by direct deposit, check, or pay card by the scheduled payday. Provide each employee a pay stub showing gross pay, each deduction, and net pay, many states legally require an itemized stub.
Step 7: Deposit Payroll Taxes
This is where most penalties happen. The taxes you withheld plus your employer match must be deposited with the IRS on a monthly or semi-weekly schedule (the IRS assigns yours based on your tax history) via the EFTPS system. State withholding and unemployment taxes have their own deposit schedules.
| Tax | Who pays | Deposited via |
|---|---|---|
| Federal income tax withheld | Employee (withheld) | EFTPS |
| Social Security & Medicare | Employee + employer match | EFTPS |
| FUTA (federal unemployment) | Employer | EFTPS (quarterly if over threshold) |
| SUTA (state unemployment) | Employer | State agency |
Step 8: File Quarterly & Annual Returns
- Form 941, filed quarterly, reports wages and withheld taxes. (Very small employers may file Form 944 annually instead.)
- Form 940, filed annually for FUTA.
- Form W-2, given to each employee and filed with the SSA by January 31.
- Form W-3, transmittal summary that accompanies the W-2s.
- State returns, quarterly wage and unemployment reports.
DIY vs. Payroll Software
You can run all eight steps by hand, and with one or two employees it's manageable. But the moment deposit schedules, multi-state withholding, or year-end W-2s enter the picture, the time and penalty risk usually outweigh the savings. Payroll software automates the calculations, files and deposits taxes on time, and generates W-2s, typically for $20–$50/month plus a small per-employee fee.
| Manual / DIY | Payroll software | |
|---|---|---|
| Cost | $0 software | ~$20–$50/mo + per employee |
| Time per run | High | Minutes |
| Tax deposits & filings | You handle | Automated |
| Penalty risk | Higher | Lower (often guaranteed) |
Comparing providers? See our breakdown of the best payroll software for small businesses, with pricing and features.
Frequently Asked Questions
Can I do payroll myself for my small business?
Yes, many owners run payroll manually, especially with few employees. You need an EIN, W-4s, accurate time records, and a system to withhold, deposit payroll taxes on time, and file quarterly and annual forms. Software automates most of it cheaply.
What are the steps to do payroll?
Get an EIN and register with your state, classify workers, collect W-4/I-9 forms, set a pay schedule, calculate gross and net pay, deposit payroll taxes by the deadline, and file Form 941 quarterly and W-2s annually.
What payroll taxes does an employer have to pay?
You withhold federal income tax and the employee's 7.65% FICA, then pay a matching 7.65% plus federal (FUTA) and state (SUTA) unemployment tax. State and local income taxes may also apply.
Is it cheaper to do payroll yourself or use software?
Manual payroll has no software cost but takes time and carries penalty risk. Software runs ~$20–$50/month plus a per-employee fee and automates calculations, deposits, and filings, often paying for itself by avoiding penalties.