How to process payroll for a small business, step by step

Learning how to process payroll comes down to one repeatable routine: turn the hours people worked into gross pay, subtract the right taxes and deductions, pay the difference on time, and then send the withheld taxes and your own employer taxes to the IRS and your state by their deadlines. The math is not the hard part. The hard part is the setup, the deadlines and the records. This guide walks a US small business through each step, from getting an EIN to filing W-2s, then runs a full 2026 payroll for one hourly employee so you can see every number.

The payroll process at a glance

The payroll process has three layers. You do the first layer once, the second every payday, and the third on a calendar set by the IRS and your state.

Before anything else, make sure the people you are paying are employees, not independent contractors. Contractors do not go through payroll; they get a Form 1099-NEC instead. Our guide to 1099 vs W-2 workers covers the tests the IRS and the Department of Labor use.

Set up before the first payroll

Step 1: Get an employer identification number (EIN)

Your EIN is the federal tax ID that goes on every payroll deposit, return and W-2. The IRS issues it for free; it says you never have to pay a fee for an EIN, and sites that charge are not the IRS. If your business is based in the US and the responsible party has a Social Security number or ITIN, you can apply online and get the number immediately once the application is approved.

Federal tax deposits must be made electronically, so also enroll in the IRS Electronic Federal Tax Payment System (EFTPS) or set up another electronic payment method before your first deposit is due.

Step 2: Register for state withholding and unemployment accounts

Most employers need two state accounts:

• State income tax withholding account, usually with the state department of revenue or taxation. States without a wage income tax, such as Texas and Florida, do not have one. Some cities and counties, for example in Ohio and Pennsylvania, also have local income taxes with their own registration.
• State unemployment insurance (SUI or SUTA) account, usually with the state labor or workforce agency. The state assigns you a tax rate and a taxable wage base. In Texas, for example, the Texas Workforce Commission taxes the first $9,000 of each employee’s wages per year and gives newly liable employers a set entry-level rate until they build a history.

Some states add other programs run through payroll, such as state disability insurance or paid family and medical leave contributions. Register in the state where the employee works, which is not always the state where the company is based. Registration can take a few days to a few weeks, so start before you hire.

Step 3: Report new hires

Federal law requires employers to report each new and rehired employee to the state new hire directory within 20 days of the hire date, according to the federal Office of Child Support Services at the Administration for Children and Families. States may set a shorter deadline, and some do, so follow your state’s rule. The report includes the employee’s name, address and Social Security number, the hire date, and the employer’s name, address and EIN. The IRS adds that a former employee counts as a new hire if they were separated for at least 60 consecutive days. States use the data for child support enforcement and to catch improper unemployment claims.

Collect new hire forms: W-4, I-9 and state forms

Every new employee needs a short stack of paperwork before the first pay run. Our new hire paperwork guide lists all of it; the payroll pieces are:

• Form W-4. Tells you how much federal income tax to withhold. The 2026 version adds lines for the new deductions available when filing, and a checkbox below Step 4(c) replaces writing “Exempt.” If an employee does not return a W-4, withhold as a single filer with no adjustments. Our W-4 form guide walks through each step.
• Form I-9. Confirms identity and work authorization. USCIS requires the employee to complete Section 1 no later than the first day of work for pay, and the employer to complete Section 2 within three business days of that date. The current edition is dated 01/20/25. See our I-9 form guide for the document lists. You keep the I-9; you do not file it.
• State withholding certificate, in states that use their own form instead of, or alongside, the federal W-4.
• Direct deposit authorization, plus any benefit and retirement plan elections that create deductions.

Also set each person’s pay rate and whether they are exempt or non-exempt from overtime. Paying a salary does not by itself make someone exempt; our guide to exempt vs non-exempt employees explains the salary and duties tests.

Pick a pay schedule

The four common schedules are weekly (52 paydays a year), biweekly (26), semimonthly (24, often the 15th and last day) and monthly (12). The federal Fair Labor Standards Act does not set how often you must pay, but most states do, and the rules vary by state and sometimes by job. A few examples from the Department of Labor’s state payday table:

• California: most wages must be paid at least twice a month on regular paydays set in advance.
• New York: manual workers are generally paid weekly, unless the employer has approval to pay semimonthly.
• Texas: employees who are exempt from FLSA overtime must be paid at least monthly; other employees at least twice a month.
• Florida: listed as having no state pay frequency rule.

Biweekly is popular with hourly teams because each check covers exactly two workweeks, which keeps overtime simple. Semimonthly pay periods split workweeks, so overtime still has to be figured week by week. Whatever you pick, write it down, tell employees, and keep paydays consistent. Check your state labor department for the current rule before you commit.

How to do payroll each pay period

Once setup is done, how to process payroll each pay period is the part you repeat every payday. In order:

Step 4: Collect and approve hours

For non-exempt employees, pay depends on hours worked, so the pay run starts with time records. Close the pay period, make sure every shift has a clock-in and clock-out, fix missed punches with the employee, and have a manager approve each timesheet. Add approved PTO, holiday and sick hours separately, because paid time off is paid but is not hours worked for overtime. A time clock app and PTO tracking that feed the same record make this step a review instead of a hunt. If you still use paper, the time card calculator adds up punches and breaks.

Step 5: Calculate gross pay

Gross pay is everything earned before deductions: regular hours × rate, overtime, PTO, holiday pay, bonuses, commissions, tips and any shift differentials. Under the FLSA, non-exempt employees get at least 1.5 × their regular rate for hours over 40 in a workweek, counted per workweek and not across the pay period. Some states add daily overtime, such as California. Our guide on how to calculate overtime covers the regular rate with bonuses and multiple rates, and the overtime calculator checks a week in seconds. For salaried employees, divide the annual salary by the number of pay periods.

Approved expense reimbursements under an accountable plan are added to the payment but are not wages, so they are not taxed.

Step 6: Subtract pre-tax deductions

Pre-tax deductions come out before some or all taxes. Health, dental and vision premiums under a Section 125 cafeteria plan, and HSA and FSA contributions, usually lower wages for federal income tax and for Social Security and Medicare. Traditional 401(k) deferrals lower wages for federal income tax only; Social Security and Medicare still apply. That is why one paycheck can have two different taxable wage figures.

Step 7: Withhold employee taxes

• Federal income tax: figured from the employee’s W-4 using the IRS Publication 15-T wage bracket or percentage method tables. The 2026 tables reflect the One Big Beautiful Bill Act (P.L. 119-21).
• Social Security: 6.2% of wages up to the 2026 wage base of $184,500, according to IRS Publication 15.
• Medicare: 1.45% of all wages, plus a 0.9% Additional Medicare Tax on wages over $200,000 paid to an employee in a calendar year.
• State and local income tax, using your state’s withholding tables, and any employee-paid state programs.

One 2026 detail: overtime is still subject to income tax withholding, Social Security and Medicare. The new deduction for qualified overtime is something employees claim on their own return, and employees can reflect it in withholding through an updated W-4. For 2026, the IRS requires employers to report the total qualified overtime on Form W-2 in box 12 with code TT, and only the “half” of time-and-a-half counts. Track that premium amount on every pay run so year-end is not a reconstruction project.

Step 8: Calculate employer taxes

Employer taxes are paid on top of wages, not taken from them:

• Social Security and Medicare match: 6.2% and 1.45%, the same as the employee share.
• FUTA: the IRS sets the 2026 rate at 6.0% on the first $7,000 of each employee’s wages, with a credit of up to 5.4% for paying state unemployment tax, which usually leaves 0.6%. Employers in a credit reduction state get a smaller credit.
• SUTA: your state-assigned rate on wages up to the state wage base.

Step 9: Subtract post-tax deductions and find net pay

Post-tax deductions come out after taxes: Roth 401(k) contributions, wage garnishments such as child support, and some union dues or voluntary deductions. What is left is net pay. Net pay = gross pay − pre-tax deductions − employee taxes − post-tax deductions, plus any non-taxable reimbursements.

Step 10: Pay employees and issue pay stubs

Pay by direct deposit or check on the scheduled payday. Federal law does not require a pay stub, but many states require an itemized statement each payday showing hours, rates, gross pay, deductions and net pay. Our guide on how to read a pay stub shows a complete sample and the state rules.

A worked payroll example for one hourly employee (2026)

Here is how to process payroll for one person from start to finish, using 2026 IRS figures. Dana Brooks is a barista at Northfield Coffee in Austin, Texas, hired on Monday, November 2, 2026, at $18.25 an hour, paid biweekly. The pay period is November 1–14 and the pay date is Friday, November 20. Dana filed a 2026 Form W-4 as single with nothing else entered, and elected a 3% traditional 401(k) deferral. This is Dana’s first paycheck from Northfield Coffee, so year-to-date wages are $0.00 before this run and $1,528.44 after it, well under every wage base. FUTA applies only to the first $7,000 and Texas SUTA only to the first $9,000 of each employee’s wages in a calendar year; once year-to-date wages pass those amounts, those taxes stop for the rest of the year, so a longer-serving employee paid in November would usually owe neither.

Hours: week 1 (November 1–7): 42.5 hours. Week 2 (November 8–14): 40 hours. That is 80 regular hours and 2.5 overtime hours, all in week 1.

How the federal income tax was figured. Publication 15-T Worksheet 1A, annual percentage method, for a 2020-or-later W-4 with the Step 2 box unchecked:

1. Wages subject to federal income tax: $1,528.44 − $45.85 401(k) = $1,482.59.
2. Annualize: $1,482.59 × 26 pay periods = $38,547.34.
3. Subtract the line 1g amount of $8,600 for a filer who is not married filing jointly: $29,947.34.
4. Apply the 2026 single standard schedule: $1,240.00 + 12% of the amount over $19,900. $29,947.34 − $19,900 = $10,047.34 × 12% = $1,205.68, so $2,445.68 for the year.
5. Divide by 26: $94.06 per paycheck.

What Northfield Coffee owes the IRS for this payday: $94.06 income tax + $94.76 × 2 Social Security + $22.16 × 2 Medicare = $327.90. As a new employer it is a monthly depositor, so this is due by December 15, 2026, together with any other November paydays. The $9.17 of FUTA is tracked and deposited only once the undeposited total passes $500, and the SUTA goes to the Texas Workforce Commission with the quarterly report.

Overtime tracking for the W-2: the qualified overtime premium is 2.5 hours × $9.125 (half of $18.25) = $22.81. It is added to Dana’s year-to-date code TT total.

Deposit payroll taxes and file returns

Withheld taxes are not your money. You hold them in trust and send them to the IRS on a schedule. IRS Publication 15 sets two federal deposit schedules based on a lookback period, which for 2026 runs from July 1, 2024, to June 30, 2025:

• Monthly depositor: reported $50,000 or less in employment taxes during the lookback period. Deposit taxes for payments made in a month by the 15th of the following month. New employers start here.
• Semiweekly depositor: reported more than $50,000. Taxes for Wednesday, Thursday or Friday paydays are due the following Wednesday; for Saturday to Tuesday paydays, the following Friday.
• $100,000 next-day rule: if you pile up $100,000 or more in taxes on any day, deposit by the next business day, whatever your schedule.
• Small employers: if your total tax for a quarter is under $2,500, Publication 15 allows you to pay it with a timely filed return in some cases. Read the exact conditions before relying on it.

All federal deposits must be made by electronic funds transfer, for example through EFTPS. Then file the returns:

The 2026 W-2 has new boxes: box 12 code TT for qualified overtime, code TP for cash tips reported to the employer, and box 14b for the Treasury tipped occupation code. If you employ tipped staff, make sure your payroll records capture both from January.

Keep payroll records

Keep a complete file for every pay run. The rules overlap:

• IRS: employment tax records for at least four years.
• Department of Labor: payroll records for at least three years, and the records wages are based on, such as time cards, wage rate tables and work schedules, for two years. For each non-exempt employee the FLSA requires name, address, occupation, the start of the workweek, hours worked each day and week, regular rate, straight-time and overtime earnings, all additions and deductions, total wages and the pay date.
• USCIS: Forms I-9 for three years after hire or one year after employment ends, whichever is later.
• States: some require longer, so check your state labor department.

Payroll checklist for small business

Use this payroll checklist for small business pay runs. Print it or copy it into your calendar.

One-time setup

• EIN from the IRS and EFTPS enrollment
• State withholding account (if your state has income tax) and local accounts where needed
• State unemployment account and your assigned rate
• Pay schedule that meets your state’s pay frequency law, written down and shared
• A way to record hours, PTO and expenses, and a place to keep payroll records

Each new hire

• W-4, state withholding form and direct deposit details
• I-9 Section 1 by day one, Section 2 within three business days
• New hire report to the state, within 20 days or your state’s shorter deadline
• Pay rate, exempt or non-exempt status, benefit and retirement elections

Every pay period

• Close the period; fix missed punches; approve timesheets, PTO and expenses
• Check overtime by workweek and any state daily overtime
• Calculate gross pay, pre-tax deductions, withholding, post-tax deductions and net pay
• Calculate employer taxes and record the qualified overtime premium
• Review the pay run for rate changes, new hires and terminations
• Pay on time and issue pay stubs

Deadlines after payday

• Federal tax deposit: 15th of next month (monthly) or the following Wednesday or Friday (semiweekly)
• State withholding and SUTA payments on the state’s schedule
• Quarterly: Form 941, state returns, FUTA deposit if over $500
• Yearly: W-2s and W-3, Form 940, state annual reconciliations, verify employee addresses and names

DIY vs payroll service vs payroll software

There are three ways to run the payroll process, and each moves the work and the risk to a different place.

Whichever you choose, most errors start before the math: a missed punch, an approved day off nobody told payroll about, or a receipt that never got entered. That is the gap Workzenly closes. Hours come from the time clock, time off from PTO approvals and expenses from approved claims, and they flow into payroll without retyping. Employees fill out their W-4, I-9 and direct deposit details during onboarding on their own phone, and each pay stub is published to their app on payday. If you want to know how tax deposits and filings work for your account, ask us on the demo call. If you also manage paid time off policies, the same record keeps balances and payroll in step.

Frequently asked questions