How to Set Up Payroll for Your Business

Setting up payroll for your business means completing a fixed set of registrations and decisions before your first pay run: tax IDs, employee classification, pay structure, a withholding process, and a system for tax deposits and filings. Miss one piece, and the rest doesn’t work correctly.

Here’s the setup in order.

Register for federal and state tax accounts

Start with an EIN from the IRS, which identifies your business on every payroll filing you’ll ever submit. Then register with your state for income tax withholding and unemployment insurance, both of which are typically required even if you’re only hiring one or two people.

Decide who’s an employee and who’s a contractor

This decision shapes your entire payroll setup. Employees have taxes withheld from every paycheck and receive a W-2 at year-end. Independent contractors handle their own taxes and receive a 1099-NEC instead, with no withholding on your end.

Misclassifying a worker is one of the most common and most expensive payroll mistakes a new business makes, since the IRS can reclassify the worker and assess back taxes, penalties, and interest.

Choose your pay structure

Decide how each employee is paid:

• Hourly, based on time worked

• Salaried, a fixed amount per pay period regardless of hours

• Commission or bonus-based, layered on top of either

Then set your pay frequency. Weekly, biweekly, semimonthly, and monthly are the four standard options, and some states set minimum frequency requirements by law.

Build your withholding process

Every paycheck requires the same core calculation:

1. Start with gross pay

2. Subtract federal income tax withholding, based on the employee’s W-4

3. Subtract FICA taxes: 6.2% Social Security (up to the 2026 wage base of $184,500) and 1.45% Medicare, both matched by you as the employer

4. Subtract state and local taxes, if applicable

5. Subtract voluntary deductions, like benefits or retirement contributions

6. What’s left is net pay

Set up a system for tax deposits and filings

Payroll doesn’t end when the paycheck is issued. You’re responsible for depositing withheld taxes through EFTPS on a schedule determined by your total tax liability, and filing:

Note: Deposit schedules for Form 941 taxes are either monthly or semiweekly, determined by the total tax reported during a prior lookback period, not by how often you run payroll.

Choose how you’ll actually run payroll

At this point, you have three broad options:

• Manual payroll, tracking everything in spreadsheets and filing forms yourself

• Payroll software, which calculates withholding and often files taxes automatically

• A payroll service or accountant, who handles the process on your behalf

The right choice depends on how many employees you have and how much time you want to spend on compliance instead of running your business. Manual payroll works for a single employee if you’re diligent about deadlines. Once you’re managing multiple employees or multiple states, the risk of a manual error, or a missed deposit, grows fast.

Don’t forget onboarding paperwork

Before anyone’s first paycheck, collect a Form W-4 and Form I-9, and submit a new hire report to your state within the required window. These aren’t payroll tax forms exactly, but skipping them creates compliance gaps that surface later, often during an audit or a state unemployment claim.

The setup only happens once

Everything above is front-loaded work. Once your tax accounts are registered, your classification decisions are made, and your withholding process is built, running payroll each period becomes a matter of repeating a process you’ve already gotten right, not rebuilding it from scratch.

Every step above, from tax registration to your first withholding calculation, is what PayWow sets up for you. Instead of building this process from scratch, run your first payroll in minutes with the compliance work already handled.