Running payroll for the first time is one of those milestones that makes a business feel genuinely real. It’s also one of the most anxiety-inducing tasks for new small business owners — a process that involves tax withholding, government filings, deadlines, and real legal obligations that can result in penalties if handled incorrectly.
The good news is that payroll, done right, is a straightforward process. The complexity comes from not knowing the steps — not from the steps themselves. This guide walks you through every stage of running payroll for the first time, from initial setup to your first pay run to what happens at year-end.
Before You Run Payroll — Setup Requirements
Several things need to be in place before you can legally run payroll. If you skip these steps, your payroll will be non-compliant regardless of how accurately you calculate the numbers.
Get Your Employer Identification Number (EIN)
Your EIN is your business’s tax identification number — the equivalent of a Social Security number for your company. You need one to hire employees and run payroll. If you don’t have one, apply at IRS.gov — it’s free and you can get it immediately online.
Register with Your State Tax Agency
Most states require employers to register before withholding state income tax. Registration requirements and processes vary by state — check your state’s department of revenue or department of taxation website. Some states have no income tax and don’t require registration.
Set Up a Dedicated Payroll Bank Account
While not legally required, maintaining a separate bank account for payroll protects your business by keeping payroll funds separate from operating funds. This makes reconciliation easier and reduces the risk of accidentally spending funds earmarked for employee wages or tax deposits.
Collect Required Employee Documents
Before running your first payroll every employee needs to complete:
Direct deposit authorization — if you’re paying via direct deposit, which is strongly recommended for accuracy and convenience
- Form W-4 — federal income tax withholding elections. Updated W-4s are not required annually but employees should update theirs when their tax situation changes
- State withholding form — most states have their own withholding form equivalent to the federal W-4
- Form I-9 — employment eligibility verification. Must be completed by the employee’s first day of work and verified by the employer within three business days. See our guide to [building a compliant hiring process →] for I-9 requirements in detail
- Direct deposit authorization — if you’re paying via direct deposit, which is strongly recommended for accuracy and convenience
Your job description should include:
You need to decide how frequently you’ll pay employees before you run your first payroll. Common options:
- Weekly — 52 pay periods per year
- Biweekly — 26 pay periods per year, most common for hourly workers
- Semi-monthly — 24 pay periods per year, common for salaried employees
- Monthly — 12 pay periods per year
Some states have minimum pay frequency requirements — check your state’s labor laws before setting your schedule. Once set, consistency is important — changing pay frequency requires notice to employees and may have tax implications.
Step 1 — Calculate Gross Pay
Gross pay is what an employee earns before any deductions. How you calculate it depends on whether the employee is salaried or hourly.
Salaried employees: Divide the annual salary by the number of pay periods. A $52,000/year employee on a biweekly schedule earns $2,000 gross per pay period.
Hourly employees: Multiply hours worked by the hourly rate. Don’t forget overtime — federal law requires overtime pay at 1.5x the regular rate for hours worked over 40 in a workweek. Some states have daily overtime requirements as well.
Commissioned employees: Add any commissions earned during the pay period to any base salary.
Step 2 — Calculate and Withhold Federal Taxes
Three federal taxes must be withheld from employee paychecks:
Federal income tax — calculated based on the employee’s W-4 elections, filing status, and the IRS tax tables. The amount varies by employee. Payroll software handles this calculation automatically.
Social Security tax — 6.2% of gross wages up to the annual wage base limit ($168,600 in 2024). Both the employee and employer pay 6.2% — you withhold 6.2% from the employee’s paycheck and pay an additional 6.2% yourself as the employer’s share.
Medicare tax — 1.45% of all gross wages, no wage base limit. Again both employee and employer pay 1.45%. Employees earning over $200,000 are subject to an additional 0.9% Additional Medicare Tax — you withhold this but do not pay an employer match on it.
Step 3 — Calculate and Withhold State and Local Taxes
State income tax withholding is calculated based on your state’s tax tables and the employee’s state withholding form. Nine states have no income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Some cities and counties also impose local income taxes — Philadelphia, New York City, and many Ohio cities are common examples. If your employees work in a jurisdiction with a local tax, you may need to withhold it.
Step 4 — Calculate Other Deductions
Beyond taxes, payroll deductions may include:
- Health insurance premiums — employee’s share of benefit costs
- Retirement contributions — 401(k) or SIMPLE IRA employee contributions
- Garnishments — court-ordered wage garnishments for child support, student loans, or other obligations. If you receive a garnishment order, you are legally required to comply
- Flexible spending account contributions
Pre-tax deductions like health insurance premiums and 401(k) contributions reduce the employee’s taxable income — they’re deducted before tax calculations. Post-tax deductions like certain garnishments are deducted after taxes.
Step 5 — Calculate Net Pay
Net pay is what the employee actually receives:
Gross pay − all taxes − all deductions = Net pay
This is the amount that hits the employee’s bank account via direct deposit or appears on their check.
Step 6 — Pay Your Employees
Direct deposit is strongly recommended — it’s faster, more accurate, and eliminates the risk of lost or stolen checks. Most payroll software initiates direct deposit two banking days before the pay date, so account for this lead time when scheduling payroll runs.
If you pay by check, ensure checks are dated on the actual pay date and that funds are available.
Step 7 — Deposit Payroll Taxes
This is where many first-time payroll operators get tripped up. Withholding taxes from employee paychecks is only half the job — you also need to deposit those taxes with the IRS on schedule.
Federal tax deposit schedule depends on your total tax liability:
- Monthly depositor — if your total tax liability was $50,000 or less in the prior lookback period, deposit taxes by the 15th of the following month
- Semi-weekly depositor — if your total tax liability exceeded $50,000, deposits are due within 3 banking days of each payday
For most new small businesses, monthly deposits apply initially. Late deposits trigger penalties — don’t skip this step.
State tax deposit schedules vary by state — check your state agency’s requirements.
Step 8 — File Payroll Tax Returns
In addition to depositing taxes, you must file regular tax returns reporting your payroll activity:
Form 941 — Employer’s Quarterly Federal Tax Return. Filed four times per year, reporting wages paid and taxes withheld during the quarter. Due the last day of the month following the end of each quarter.
State payroll returns — most states require quarterly payroll tax returns as well. Requirements vary by state.
Form 940 — Annual Federal Unemployment Tax (FUTA) return. Filed once per year by January 31.
Payroll software typically handles these filings automatically — one of the primary reasons using software rather than manual calculations is strongly recommended for small businesses.
Year-End Payroll Responsibilities
At year-end, additional obligations apply:
W-2s — must be provided to employees by January 31 and filed with the Social Security Administration by the same date. W-2s report annual wages and taxes withheld for each employee.
1099-NEC forms — for contractors paid $600 or more during the year. Must be provided to contractors and filed with the IRS by January 31.
Reconciliation — verify that your quarterly 941 filings, annual 940 filing, and W-2/1099 totals all reconcile to your payroll records.
Why Payroll Software Makes This Manageable
Doing all of this manually — calculating withholdings from tax tables, tracking deposit deadlines, filing quarterly returns — is time-consuming and error-prone. A single miscalculation in tax withholding multiplies across every paycheck for the entire year.
Modern payroll software automates every step covered in this guide — tax calculations, deposit scheduling, quarterly filing, W-2 generation — and flags errors before they become penalties. For most small businesses the monthly software cost is far less than the time and risk of managing payroll manually.
OpsLab Pro’s guide to the best payroll tools for small businesses covers the platforms that handle this most effectively for growing teams — including options with free plans for very small businesses.
A Final Note on Legal Counsel
Payroll compliance involves overlapping federal, state, and local obligations that vary by location and change regularly. This guide provides a general framework — not legal or tax advice. For businesses with complex payroll situations — multiple states, mixed employee and contractor workforces, or garnishment questions — consulting with a CPA or employment attorney before running your first payroll is a worthwhile investment.
Key Takeaways: Running Payroll for the First Time
- Setup comes first — EIN, state registration, employee documents, and pay schedule must all be in place before your first pay run
- Gross pay calculations differ for salaried, hourly, and commissioned employees — don’t forget overtime requirements
- Three federal taxes must be withheld from every paycheck: federal income tax, Social Security, and Medicare
- Tax deposits and quarterly filings are separate obligations from payroll itself — missing deposit deadlines triggers penalties
- Year-end W-2s and 1099s are required by January 31 for all employees and qualifying contractors
- Payroll software automates most of this — the monthly cost is almost always less than the time and risk of manual payroll
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