How to Run Payroll for the First Time

Set up payroll systems, calculate taxes, and process payments for your first employee hiring cycle.

1. Get your federal and state employer IDs. Apply for an Employer Identification Number (EIN) from the IRS if you don't have one. Register with your state's employment department for unemployment insurance and workers' compensation. Most states require registration within 30 days of hiring your first employee.
2. Collect employee tax forms and setup data. Have each employee complete Form W-4 for federal withholding and your state's withholding form. Get their Social Security number, address, and bank details for direct deposit. Set their pay rate, schedule, and benefit deductions in writing.
3. Calculate gross pay and pre-tax deductions. Multiply hourly rates by hours worked, or use salary amounts divided by pay periods. Subtract pre-tax deductions like health insurance premiums or 401(k) contributions before calculating taxes. This gives you taxable gross pay for each employee.
4. Calculate and withhold payroll taxes. Withhold federal income tax based on W-4 data and IRS Publication 15 tables. Deduct Social Security (6.2%) and Medicare (1.45%) from employee pay. Add your matching employer portions and any state income tax, unemployment, or disability withholdings.
5. Process payments and generate pay stubs. Pay employees their net amount via direct deposit or check on your established pay date. Provide pay stubs showing gross pay, all deductions, taxes withheld, and net pay. Keep copies of all payroll records for at least three years.
6. Remit taxes and file required reports. Deposit federal taxes electronically through EFTPS, typically within 1-2 business days for new employers. File quarterly Form 941 and annual Form 940 with the IRS. Submit state unemployment and income tax reports according to your state's schedule.