How do I set up payroll for my business?

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.