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Payroll is not why most people start a business, but once you hire even one person, you have to handle wages, taxes and forms in a clean way.
You do not need to be an accountant. You just need the right setup, a basic understanding of the main taxes, and a simple process you repeat every pay period.
Who This Guide Is For And What Payroll Means
This guide is for United States small business owners with a few employees or regular helpers and no full finance team.
Payroll means
- ✔ Collecting the right details and forms from workers
- ✔ Working out what they earned for the period
- ✔ Withholding the right taxes and paying your share
- ✔ Giving each worker a clear pay stub
- ✔ Filing required tax forms and keeping records for several years
Once you see payroll as this short list of jobs, it becomes easier to manage.
Step 1: Set Your Business Up For Payroll
Before the first paycheck, put a few basics in place.
Get an Employer Identification Number, often called an EIN. This is the number the IRS uses to track your business for tax purposes. You can apply for it online through the IRS Employer Identification Number page and there is no fee.
Check what your state expects from you. Many states want employers to register for state income tax withholding and state unemployment insurance and to report new hires. Your state tax or labour website will explain the rules and how to register.
Once this setup is done, you have an official tax identity and the right accounts open, so you are ready to focus on paying people.
Step 2: Decide Who You Are Paying And Collect The Right Forms
Before you run payroll, decide who counts as an employee and who is a contractor. That choice affects which taxes you withhold and which year-end forms you issue.
Employees are part of your business, and you control how and when they work. Contractors are in business for themselves and usually have other clients. Employees belong on payroll. You withhold income tax and Social Security and Medicare from their pay and you report their yearly wages on Form W-2. Most contractors are paid in full with no tax withheld, and you report certain payments on Form 1099-NEC.
Getting this wrong can be expensive. If you treat someone as a contractor when they should have been an employee, you can face back taxes, interest, and penalties. The IRS explains the difference on the page, ‘Independent contractor or employee’.
You can also read our article on understanding the information on your pay stub, if you want a simple breakdown of what each line means.
Once you know who is an employee and who is a contractor, collect the basic tax forms. For employees, you should have Form W-4 and Form I-9. For contractors, ask for Form W-9. Keep these forms in a safe place. You do not send them with each paycheck, but you rely on them when you calculate tax and prepare year-end forms.
Step 3: Understand The Main Payroll Taxes You Deal With
Each payroll, money flows into a few tax buckets.
For federal taxes, you
- ✔ Withhold federal income tax based on Form W-4 and IRS tables or tools
- ✔ Withhold Social Security and Medicare from the employee and pay a matching amount as the employer
- ✔ Pay federal unemployment tax on part of each employee’s wages
On the state side, many states require state income tax withholding and state unemployment tax. Some cities and counties also charge small local payroll or income taxes.
You do not need to memorise every rate. What matters is knowing which types of tax apply to you and using tools that stay current for the numbers.
Step 4: Choose A Pay Schedule And A Way To Run Payroll
Next, decide how often you will pay people and how you will do the work.
Common pay schedules are weekly, every two weeks, twice a month or once a month. Paying more often helps employees but gives you more admin. Some states have minimum pay frequency rules, so check what your state allows before you choose.
You can handle payroll in a few ways. Very small teams sometimes use spreadsheets and online calculators and send tax payments through government portals. Larger or busier teams often use full payroll software or a payroll service that handles more of the filings.
In between, there are simple tools such as online pay stub generators. With a tool like PaystubsCity, you enter hours, rate, tax information and deductions. The tool calculates gross pay, taxes and take-home pay, then creates a clear pay stub you can download, print or share. You still send tax money to the IRS and your state, but the day-to-day math and record keeping are much easier.
Step 5: Run Each Payroll From Hours To Pay Stub
Once your setup and schedule are clear, payroll becomes a regular routine.
For each period, collect time and pay information. For hourly staff, gather their approved hours and any overtime. For salaried staff, use their fixed amount for the period, plus any bonus if needed.
Work out gross pay. For hourly workers, this is hours times rate, plus overtime at a higher rate where the law requires it. For salaried workers, use the fixed amount, plus extras if they apply.
Apply any pre-tax and post-tax deductions, then calculate the tax amounts to withhold. The amount left is the net pay that goes into the employee’s account.
Each time you run payroll, create a pay stub. A clear pay stub shows the period, gross pay, taxes and deductions, net pay and year-to-date totals. A tool such as PaystubsCity can do the calculations and create these stubs for you.
Step 6: Deposit Payroll Taxes And File Key Forms On Time
Payroll also means moving tax money to the right place and sending in regular reports.
For federal taxes, you send withheld income tax and both sides of Social Security and Medicare through the electronic federal tax payment system. The IRS tells you whether you are on a monthly or semi-weekly deposit schedule. Late deposits can lead to extra charges and interest.
Your state has its own rules for when to send in state income tax and unemployment amounts. Some states combine these payments, others keep them separate. Check the employer guidance on your state tax or labour website.
Most employers file a quarterly return that reports wages and federal taxes withheld, as well as an annual return for federal unemployment tax. Each year you also issue W-2 forms to employees and file copies with the Social Security Administration. If you pay contractors, you may need to issue 1099-NEC forms as well.
Step 7: Keep Good Records And Avoid Common Payroll Mistakes
Good records are the backbone of payroll. They show what you paid, how you calculated it and how you handled tax.
Keep details of hours worked, pay rates, gross pay, taxes and deductions, net pay, tax deposits and copies of key forms such as W-4, I-9, W-2 and 1099-NEC. The United States Department of Labor explains what wage and hour records employers should keep and for how long in recordkeeping requirements under the Fair Labor Standards Act.
Many small employers run into trouble because they misclassify a worker, miss tax deposit or filing deadlines, ignore overtime rules or fail to keep time sheets and pay stubs in a form they can show to an auditor. Most of these problems can be avoided by using a simple process, keeping everything in one place and checking official guidance when you are unsure.
When To Bring In Professional Help And How PaystubsCity Fits In
You do not have to handle every part of payroll alone. It makes sense to bring in an accountant, bookkeeper or full payroll service when things become complex, for example when you hire in multiple states or add many employees and benefits.
Even when a professional files your returns, your business still needs clean payroll data and pay stubs for each worker. This is where PaystubsCity fits in. You can use it to create accurate pay stubs that show earnings, taxes and year-to-date figures, then pass those records on to your accountant or payroll provider.
If you are unsure about what counts as a real pay stub, you can also read our article on how to spot fake paystubs and check stubs for practical signs to watch for.
Final Thoughts
Payroll is about having a clear setup, understanding the main tax pieces, following the same steps each pay period and keeping good records.
If you put the basics in place, choose a method that suits the size of your business and use tools that keep your numbers tidy, payroll becomes a routine task. A pay stub generator can handle most of the calculations and documents so you can focus on running and growing your business.
