How do I set up payroll for my business?

To set up payroll, you need an EIN, a registered business bank account, completed W-4 forms from each employee, and enrollment in the IRS Electronic Federal Tax Payment System (EFTPS) to deposit withheld taxes. Most small businesses use payroll software or a payroll service to handle calculations and filings.

Setting up payroll correctly from the start protects you from IRS penalties, which escalate quickly for missed deposit deadlines. Understanding what payroll involves before you hire your first employee saves significant time and money. The IRS Small Business and Self-Employed Tax Center is the authoritative starting point for federal obligations.

Step 1: Get an EIN

An Employer Identification Number (EIN) is your business's federal tax ID. You need one before you can withhold taxes, file payroll returns, or open a business bank account in your company's name. Apply free at IRS.gov — you receive the EIN immediately online. See how to get an EIN for the full walkthrough.

Step 2: Register for state payroll taxes

Every state that collects income tax requires employers to register to withhold state income tax from employee wages. Most states also require separate registration for state unemployment insurance (SUI). Registration is done through your state's department of revenue or department of labor — the SBA's state tax resources page links to each state. Complete this before your first payday.

Step 3: Collect employee forms

Form W-4 (Employee's Withholding Certificate) — determines how much federal income tax to withhold from each employee. Employees complete this on day one. Current version at IRS.gov.
Form I-9 (Employment Eligibility Verification) — required by the Department of Homeland Security to verify every new hire's identity and right to work in the U.S. Complete within 3 days of the hire date.
State withholding forms — most states have their own equivalent of the W-4. Check your state's department of revenue.
Benefits enrollment forms — health insurance, 401(k), FSA elections affect pre-tax deductions and change the net pay calculation.

Step 4: Choose a pay schedule and enroll in EFTPS

Common pay schedules are weekly, biweekly, semimonthly, or monthly. Once you decide, enroll in the Electronic Federal Tax Payment System (EFTPS) — this is how you'll deposit withheld taxes. New employers are typically monthly depositors: deposit all withheld federal income tax and FICA by the 15th of the following month. As your payroll grows, the IRS may reclassify you as a semi-weekly depositor. Missing a deposit triggers a penalty of 2–15% of the unpaid amount.

Step 5: Run payroll and file quarterly returns

Each pay period: calculate gross pay, apply withholding from the W-4s, subtract benefit deductions, remit net pay to employees, and deposit the withheld taxes plus your employer FICA match. Each quarter, file Form 941 to report wages, withholding, and FICA. At year-end, issue W-2s to all employees by January 31 and file the W-2 copies with the Social Security Administration by the same date. Most small businesses use payroll software or a professional payroll service to automate this — manual payroll errors are common and audits are costly.

IRS payroll setup facts

Employers must deposit withheld federal income tax and FICA taxes on either a monthly or semi-weekly schedule based on total tax liability during a lookback period. — IRS — Depositing and Reporting Employment Taxes
The penalty for failure to deposit payroll taxes on time ranges from 2% (1–5 days late) to 15% (more than 10 days after the first IRS notice). — IRS — Deposit Penalties
Employers must file Form 941 quarterly and issue W-2s to all employees by January 31 of the following year. — IRS — Form 941
Form I-9 must be completed for every new hire within 3 business days of the first day of employment. — USCIS — I-9 Central

Key takeaways

Get your EIN first — you cannot legally withhold taxes or file payroll returns without one.
Register with your state for income tax withholding and unemployment insurance before your first payday.
Collect a W-4 and I-9 from every new hire — keeping these on file is a legal requirement.
Enroll in EFTPS immediately; missing the deposit deadline triggers penalties that compound fast.
File Form 941 quarterly and issue W-2s by January 31 — these are non-negotiable federal deadlines.