How to Run Payroll for the First Time: A Complete Guide for Small Businesses

Hiring your first employee is exciting. Running payroll for that employee is where most small business owners realize nobody actually taught them how this works.

Running payroll for the first time means completing a specific sequence of setup steps before you ever process a paycheck: registering for tax IDs, collecting employee paperwork, choosing a pay schedule, calculating withholdings correctly, and staying on top of tax deposits and filings. Skip a step, and you’re not just risking a delayed paycheck. You’re risking IRS penalties.

Here’s what actually needs to happen, in order.

Get your federal and state tax IDs first

Before you pay anyone, you need an Employer Identification Number (EIN) from the IRS. This is what identifies your business on every payroll tax form you’ll ever file, including Forms 941, 940, and W-2.

You’ll also likely need a state employer tax account, since most states require separate registration for state income tax withholding and unemployment insurance. Requirements vary by state, so check with your state’s department of revenue and labor department before your first pay run.

Note: If you already have an EIN from setting up your business, you don’t need a new one to start payroll. The same EIN covers both.

Collect the right paperwork from every employee

Before someone’s first paycheck, you need two forms on file:

• Form W-4, so you know how much federal income tax to withhold from each paycheck

• Form I-9, which verifies the employee is legally authorized to work in the U.S.

Most states also require a new hire report within a set number of days of an employee’s start date. This isn’t optional. States use new hire reporting to enforce child support orders and detect unemployment fraud, and penalties apply for missing the deadline.

Choose a pay schedule

Your pay frequency determines how often you run payroll and how many pay periods you’ll manage per year. The four common options are:

Some states set minimum pay frequency requirements by law, meaning you can’t legally pay certain employees monthly even if you’d prefer to. Check your state’s labor department before locking in a schedule.

Calculate gross pay, then work down to net pay

Every paycheck starts with gross pay, the full amount earned before anything is taken out. From there, you subtract:

• Federal income tax withholding, based on the employee’s W-4 elections

• FICA taxes, which fund Social Security and Medicare

• State and local income tax, where applicable

• Voluntary deductions, like health insurance premiums or retirement contributions

What’s left after all of that is net pay, the amount that actually lands in the employee’s bank account.

FICA is worth understanding on its own, since it applies to every paycheck regardless of state. For 2026, employees and employers each pay 6.2% for Social Security, up to a wage base of $184,500, and 1.45% for Medicare with no wage cap. Employees earning above $200,000 also owe an additional 0.9% Medicare surtax, which employers must withhold but don’t match.

Set up direct deposit or another payment method

Most employees expect direct deposit, which requires collecting bank account and routing numbers and setting up the transfer through your bank or payroll provider ahead of each pay date. If you’re paying by check instead, make sure your state doesn’t require electronic payment or specific pay stub disclosures, since several states do.

Deposit and file payroll taxes on time

This is the step that trips up first-time employers the most, because the responsibility doesn’t end once the paycheck is issued.

After each pay run, you’re responsible for depositing withheld taxes with the IRS, typically through the Electronic Federal Tax Payment System (EFTPS), on either a monthly or semiweekly schedule depending on your total tax liability. You’ll also need to file:

• Form 941 quarterly, reporting income tax and FICA withholding

• Form 940 annually, reporting federal unemployment tax

• State withholding and unemployment filings, on whatever schedule your state requires

Missing a federal tax deposit deadline can trigger penalties starting at 2% of the unpaid amount, increasing the longer the deposit is late.

What happens at year-end

Once tax season rolls around, you’ll need to issue a Form W-2 to every employee by January 31, summarizing their annual wages and withholding. If you paid any independent contractors during the year, they may need a Form 1099-NEC instead, which follows a different set of rules entirely.

Running payroll manually versus using software

Some small businesses run payroll by hand for their first employee or two. It’s possible, but it means personally tracking tax rate changes, filing deadlines, and wage base limits every year, on top of running the actual calculations correctly each pay period.

Payroll software handles the calculations, tax deposits, and filings automatically, which removes most of the risk of a missed deadline or a miscalculated withholding. For a first-time employer, that trade-off is usually worth it, since a single late deposit penalty can cost more than a year of software fees.

Running payroll for the first time doesn't have to mean learning all of this the hard way. PayWow calculates withholding, handles your tax deposits, and files Form 941 and 940 automatically, so your first pay run looks like your hundredth.