Small Business Payroll: Complete Setup Guide for 2025

Setting Up Payroll for Your Small Business

Running payroll is one of the most important responsibilities for any small business owner. Getting it right ensures your employees are paid accurately and on time while keeping you compliant with tax laws.

Step 1: Get Your Employer Identification Number (EIN)

Before you can run payroll, you need an EIN from the IRS. This 9-digit number is used to identify your business for tax purposes. You can apply for free at IRS.gov.

Step 2: Collect Employee Information

For each employee, you'll need:

• Completed W-4 form
• Completed I-9 form (employment eligibility)
• Social Security number
• Address and contact information
• Direct deposit information (optional)

Step 3: Choose a Pay Schedule

Select a pay schedule that works for your business and meets state requirements:

Schedule	Frequency	Best For
Weekly	52 times/year	Hourly workers, construction
Bi-weekly	26 times/year	Most businesses
Semi-monthly	24 times/year	Salaried employees
Monthly	12 times/year	Executive positions

Step 4: Calculate Gross Pay

For Hourly Employees:

• Regular pay: Hours × Hourly Rate
• Overtime: Hours over 40/week × 1.5 × Hourly Rate
• Don't forget to track and pay for overtime!

For Salaried Employees:

• Annual salary ÷ Number of pay periods = Gross pay per period

Step 5: Calculate and Withhold Taxes

Employee Taxes (you withhold from their pay):

• Federal income tax (based on W-4)
• State income tax (if applicable)
• Social Security: 6.2%
• Medicare: 1.45%

Employer Taxes (you pay in addition to wages):

• Social Security: 6.2% (matching)
• Medicare: 1.45% (matching)
• Federal Unemployment (FUTA): 6% on first $7,000
• State Unemployment (SUTA): Varies by state

Step 6: Make Tax Deposits

You must deposit withheld taxes according to IRS schedules:

• Monthly: Deposit by the 15th of the following month
• Semi-weekly: Larger employers deposit Wednesday/Friday based on payday

Step 7: Provide Pay Stubs

Most states require you to provide employees with a detailed pay stub showing:

• Gross pay and how it was calculated
• All deductions itemized
• Net pay
• YTD totals
• Pay period dates

Create professional pay stubs that include all required information.

Annual Reporting Requirements

• W-2 forms: Send to employees by January 31
• Form 940: Annual FUTA return
• Form 941: Quarterly federal tax return
• State reports: Vary by state

Common Payroll Mistakes to Avoid

1. Misclassifying employees as contractors
2. Missing tax deposit deadlines
3. Not paying overtime correctly
4. Incorrect tax calculations
5. Missing state-specific requirements

Get Started with Professional Pay Stubs

Running payroll correctly starts with accurate documentation. Use our pay stub generator to create professional, compliant pay stubs in minutes. We calculate all taxes automatically so you can focus on running your business.