Small Business Payroll Basics: What Every Employer Needs to Know
Running payroll for the first time? Here's everything you need to know — from setting up payroll to withholding taxes and staying compliant with federal and state requirements.
Hiring your first employee is a major milestone — and a major responsibility. Payroll is one of the most compliance-heavy areas of running a business. Get it wrong and you face penalties, back taxes, and unhappy employees. Here's what you need to know.
Step 1: Get Your EIN
Before you can run payroll, you need an Employer Identification Number (EIN) from the IRS. Apply for free at irs.gov — you'll receive your EIN immediately online.
Step 2: Register with Your State
Most states require employers to register for state income tax withholding and unemployment insurance. In Texas, there's no state income tax, but you must register with the Texas Workforce Commission for unemployment insurance (FUTA/SUTA).
Step 3: Have Employees Complete Paperwork
Every new employee must complete:
- Form W-4 — tells you how much federal income tax to withhold
- Form I-9 — verifies employment eligibility
- State withholding form (if applicable)
Step 4: Choose a Pay Schedule
Common options: weekly, bi-weekly (every two weeks), semi-monthly (twice a month), or monthly. Most small businesses use bi-weekly or semi-monthly.
Step 5: Calculate Payroll Taxes
For each paycheck, you must withhold and/or pay:
| Tax | Employee Pays | Employer Pays |
|---|---|---|
| Federal Income Tax | Based on W-4 | — |
| Social Security | 6.2% | 6.2% |
| Medicare | 1.45% | 1.45% |
| Federal Unemployment (FUTA) | — | 6% on first $7,000 |
| State Unemployment (SUTA) | — | Varies by state |
Step 6: Deposit Payroll Taxes
The IRS requires you to deposit withheld taxes on a schedule (monthly or semi-weekly, depending on your payroll size). Missing deposits results in penalties.
Step 7: File Quarterly and Annual Returns
- Form 941 — filed quarterly, reports wages and taxes withheld
- Form 940 — filed annually, reports FUTA taxes
- W-2s — issued to employees by January 31
- W-3 — transmittal form sent to the SSA with W-2s
For a complete calendar of all payroll tax deadlines, see our payroll tax deadlines guide.
Related Resources
- Payroll Tax Deadlines Every Small Business Owner Must Know
- Hiring Your First Employee: A Payroll Setup Checklist
- Payroll Deductions Explained
- 7 Payroll Mistakes Small Businesses Make
- Our Payroll Services
- Contact Us
Payroll is complex — let us handle it. The Gap ProAdvisors offers monthly payroll processing starting at $225/month for 1–5 employees. See pricing or contact us.
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About the author
The Gap ProAdvisorsOwner & Lead Advisor — The Gap ProAdvisors
Angela is a Certified Bookkeeper, QuickBooks ProAdvisor, and IRS Registered Tax Return Preparer (PTIN) with over a decade of experience helping small businesses across Texas get their books right and keep more of what they earn. She founded The Gap ProAdvisors to make professional financial services accessible to every small business owner — no matter where they are.