How to Do Payroll for a Small Business (Step by Step)
Learn how to do payroll for a small business step by step: EIN setup, W-4s, tax withholding, paychecks, and filing - done right and on time.
Running payroll yourself is absolutely doable. Plenty of owners handle it manually for their first few hires, and the process is more mechanical than mysterious once you understand the pieces. The catch is precision: payroll mistakes trigger penalties, and the IRS treats late or missing tax deposits seriously. So the goal isn't just to pay people - it's to pay them, withhold the right taxes, remit those taxes on schedule, and keep clean records.
Here's how to do payroll yourself, broken into the steps that actually matter.
How Do I Do Payroll Myself?
At the highest level, doing payroll yourself means completing five recurring actions: calculate gross pay, subtract the correct taxes and deductions, pay employees the net amount, send the withheld taxes to the government, and file the required forms on time. Before you can run that cycle, you need a few one-time setup items in place. Get the setup right and each pay run becomes routine.
Step 1: Get Your EIN and Register With Tax Agencies
You can't run payroll without an Employer Identification Number (EIN) - it's your business's tax ID with the IRS, and our EIN explainer covers what the number does and who has to have one. If you don't have one yet, you can get an EIN number for free directly from the IRS in a few minutes.
You'll also need to register with your state's tax and labor agencies for state income tax withholding and unemployment insurance. Requirements vary by state, so check your state's department of revenue and labor sites. If you haven't formalized your business yet, sorting out your structure first - whether that's a sole proprietorship or an LLC - makes the tax registration cleaner.
Step 2: Collect Employee Paperwork
Before anyone's first paycheck, each employee must complete:
- Form W-4 (Employee's Withholding Certificate), which tells you how much federal income tax to withhold. Employees fill this out so you withhold the correct amount (IRS).
- Form I-9 to verify eligibility to work in the U.S.
- State withholding forms, where applicable.
- Direct deposit authorization, if you pay electronically.
Classify each worker correctly, too. Employees get payroll and a W-2; independent contractors get a 1099 and handle their own taxes. Misclassifying a worker is one of the most expensive payroll errors you can make. If you're still building your team, our guide on how to hire employees covers onboarding paperwork in more depth.
Step 3: Choose a Pay Schedule and Set Gross Pay
Decide how often you'll pay: weekly, biweekly, semimonthly, or monthly. Biweekly is the most common in the U.S. Consistency matters - many states regulate pay frequency, so confirm your schedule is compliant.
Then calculate gross pay for each employee for the period:
- Salaried: annual salary divided by the number of pay periods.
- Hourly: hours worked multiplied by the hourly rate, plus any overtime (typically 1.5x for hours over 40 in a week under federal law - an overtime pay calculator handles the split for you).
Step 4: Calculate Withholdings and Deductions
This is the step where DIY payroll gets detailed. From each employee's gross pay, you subtract:
Federal payroll taxes (FICA). For 2026, Social Security tax is 6.2% on wages up to the $184,500 wage base, and Medicare tax is 1.45% on all wages with no cap. You withhold these from the employee and pay a matching employer share - so the combined FICA rate is 7.65% on each side. An Additional Medicare Tax of 0.9% applies to employee wages over $200,000 (Social Security Administration wage base, IRS).
Federal income tax. Use each employee's W-4 and the IRS withholding tables in Publication 15-T to determine the amount.
State and local income taxes, where they apply.
Other deductions, such as health insurance premiums, retirement contributions, or wage garnishments.
Don't forget the taxes you owe as the employer beyond the FICA match: federal unemployment tax (FUTA) and state unemployment tax (SUTA). If you want to understand the mechanics behind these deductions more deeply, read our explainer on what payroll tax is. Net pay is what's left after every withholding - that's the number that hits the employee's bank account.
Step 5: Pay Your Employees
Distribute net pay by direct deposit, check, or pay card. Give each employee a pay stub showing gross pay, each deduction, and net pay. Many states legally require an itemized stub, so provide one regardless.
Step 6: Deposit Withheld Taxes on Schedule
This is the step people underestimate. The taxes you withheld aren't yours to hold - you must remit them to the IRS through the Electronic Federal Tax Payment System (EFTPS) on either a monthly or semiweekly schedule, depending on your total tax liability. State agencies have their own deposit rules. Miss a deadline and the penalties add up fast, so calendar these dates the moment you set up payroll.
Step 7: File Payroll Tax Returns
Reporting is separate from depositing. On a recurring basis you'll file:
- Form 941, the Employer's Quarterly Federal Tax Return, reporting withheld income tax plus Social Security and Medicare taxes. It's due the last day of the month after each quarter - April 30, July 31, October 31, and January 31 (IRS Form 941 instructions). Very small employers whose annual employment-tax liability is $1,000 or less may qualify to file Form 944 annually instead.
- Form 940 annually for federal unemployment tax.
- Form W-2 for each employee and W-3 to the Social Security Administration, by January 31.
Step 8: Keep Records
Keep payroll records - time sheets, pay stubs, tax filings, and employee forms - for at least four years. If you're ever audited or an employee disputes their pay, organized records are your protection.
Should You Do Payroll Yourself or Use Software?
Doing payroll by hand is realistic when you have one or two employees and steady schedules. Once you add more people, hourly staff, or multiple states, the manual math and deposit deadlines become a liability. Payroll software automates the calculations, files your forms, and makes the tax deposits for you - usually for a modest monthly fee. If you've outgrown the spreadsheet, compare your options in our roundup of the best payroll services.
The Bottom Line
To do payroll yourself: set up your EIN and tax accounts, collect W-4s and I-9s, pick a pay schedule, calculate gross pay, withhold FICA and income taxes, pay your team, deposit the withheld taxes through EFTPS, and file Forms 941 and 940 on time. The individual steps are simple - the discipline is in hitting every deadline and keeping the numbers exact.
Ready to stop dreading pay day? Map out your pay schedule and deposit deadlines now, and decide whether manual payroll or software is the right fit for where your business is headed.