How to Do Payroll for a Small Business: 2026 Guide

Learning how to do payroll for a small business is less about math and more about sequence: get the right accounts open, classify your workers correctly, withhold the right amounts, pay people on a predictable schedule, and remit taxes on time. Do those five things in order and payroll stops being scary. Here is the full process, step by step.

Step 1: Get Your Tax IDs and Accounts in Place

You can't legally pay an employee until the government can track the taxes attached to that paycheck. Before your first pay date, set up:

Federal EIN — your Employer Identification Number, free from the IRS and usually issued instantly online.
State withholding and unemployment accounts — nearly every state with an income tax requires you to register as an employer.
Local tax accounts — some cities and counties levy their own payroll or wage taxes.
A separate business bank account — never run payroll out of a personal account; it muddies your books and your tax records.

Getting these wrong is the single most common reason a first payroll run goes sideways. Open them all before you hire, not the week you need to cut a check.

Step 2: Classify Every Worker Correctly

Before anyone gets paid, decide whether they are an employee or an independent contractor — because the two are handled completely differently.

Employees get taxes withheld from each paycheck and receive a Form W-2 at year-end. You complete a Form I-9 (work eligibility) and collect a Form W-4 (withholding) for each one.
Independent contractors handle their own taxes. You collect a Form W-9 and issue a 1099-NEC if you pay them $600 or more in a year.

Classification depends on how much control you have over how the work gets done — not on what you call the person. Misclassifying an employee as a contractor to save on payroll taxes is one of the most expensive mistakes a small business can make, because back taxes and penalties stack up fast.

Quick gut-check: If you set the hours, provide the tools, and direct the day-to-day work, that person is almost always an employee. When in doubt, treat them as one or ask your accountant — the cost of getting it wrong dwarfs the cost of asking.

Step 3: Choose a Pay Schedule and Pay Method

Pick a cadence and stick to it. The four common options:

Weekly — 52 paychecks a year; common in trades and hourly work.
Bi-weekly — 26 paychecks; the most popular schedule in the U.S.
Semi-monthly — 24 paychecks on fixed dates (e.g., the 15th and last day).
Monthly — 12 paychecks; simplest to run, but harder on employees' cash flow.

Check your state's pay-frequency rules — some states mandate a minimum frequency for certain workers. For pay method, direct deposit is now the default; it's cheaper and safer than paper checks and most employees expect it.

Step 4: Calculate Gross Pay, Then Withholdings

Every paycheck moves from gross pay to net pay in the same order:

Start with gross pay — salary for the period, or hours worked times the hourly rate (plus any overtime, which is generally 1.5x for non-exempt employees over 40 hours in a week).
Subtract pre-tax deductions — things like 401(k) contributions or certain health premiums.
Withhold federal income tax — based on the employee's W-4, using the IRS withholding tables in Publication 15.
Withhold FICA — Social Security and Medicare. You withhold the employee's share and pay a matching employer share.
Withhold state and local income tax — where applicable.
Subtract any post-tax deductions — wage garnishments, Roth contributions, etc.

What's left is the employee's net pay — the number on the check. What you withheld doesn't belong to you; you're holding it in trust until you deposit it with the tax authorities. Treat those withheld dollars as untouchable, never as spending money.

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Step 5: Deposit Payroll Taxes On Schedule

This is the step that trips up owners doing payroll by hand. You don't just withhold taxes — you have to deposit them with the IRS and your state on a set schedule.

Federal deposits — the IRS assigns you a monthly or semi-weekly schedule based on your prior tax liability and notifies you which applies. Deposits go through the Electronic Federal Tax Payment System (EFTPS).
Quarterly Form 941 — most employers report federal income tax and FICA withheld each quarter.
Federal unemployment (FUTA) — reported annually on Form 940.
State deposits and filings — schedules and forms vary by state.

Late deposits trigger penalties that escalate the longer they sit. This is precisely why most small businesses let payroll software or a provider handle deposits automatically — the cost of the software is almost always less than one missed-deadline penalty.

Step 6: Issue Pay Stubs and Keep Records

Each pay run, give every employee a pay stub showing gross pay, each deduction, and net pay. Many states require it. Then keep your records:

Payroll registers and individual earnings records.
W-4s, I-9s, and W-9s on file.
Proof of every tax deposit and filing.

The IRS generally expects you to keep employment tax records for at least four years, and some states ask for longer. Good records are also what make tax season — and any audit — painless instead of panic-inducing.

Year-End: W-2s, 1099s, and Reconciliation

At year-end you wrap up the cycle. By January 31, send each employee a Form W-2 and each qualifying contractor a 1099-NEC, and file the corresponding copies with the government. Reconcile your quarterly 941s against your annual totals so nothing is off. If you've been depositing correctly all year, year-end is mostly a formality.

Software vs. DIY vs. a Provider

You have three realistic paths to actually running payroll:

By hand — viable only for a single employee or owner-only S-corp, and even then risky. You're personally on the hook for every calculation and deadline.
Payroll software — the sweet spot for most small businesses. It calculates withholdings, files and deposits taxes, generates pay stubs, and produces year-end forms automatically.
A full-service payroll provider or PEO — hands payroll off almost entirely; costs more but buys back your time and shifts compliance burden.

For the vast majority of owners, software pays for itself the first time it prevents a single late deposit. The right choice is whatever keeps your people paid accurately and your filings on time without consuming your week.

The Cash-Flow Side of Payroll

Payroll is usually the largest, least-flexible bill a small business has — people expect to be paid on the dot, regardless of whether your customers have paid you yet. That timing mismatch is where many otherwise-healthy businesses run into trouble.

Tight payroll weeks are almost always a cash-flow timing problem, not a profitability problem. When a slow season or a late invoice threatens a pay cycle, the answer isn't to skip payroll — it's to bridge the gap. A business line of credit gives you a reusable buffer to draw on for exactly these moments, while a merchant cash advance can deliver a lump sum quickly when revenue is choppy. If you're weighing options, our overview of how working capital financing works breaks down which tool fits which situation.

The Broker Shop is a broker, not a lender. We take one application to 50+ competing funders so you can compare real offers against each other rather than accepting the first one you find, and checking your options won't affect your credit score.

How Much Are Payroll Taxes for a Small Business?

As the employer you pay 7.65 percent of each employee's wages in FICA — 6.2 percent for Social Security up to the 2026 wage base of $184,500, plus 1.45 percent for Medicare with no wage cap — and 6.0 percent federal unemployment tax on the first $7,000 of each employee's wages, which drops to 0.6 percent once you claim the full state credit.

The employee pays a matching 6.2 percent and 1.45 percent out of their own gross pay, which you withhold rather than owe. Counting both sides, Social Security runs 12.4 percent of wages and Medicare 2.9 percent. Employees paid more than $200,000 in a calendar year also owe an Additional Medicare Tax of 0.9 percent, which you must start withholding in the pay period that crosses the threshold and continue through year-end — there is no employer match on that piece.

State unemployment tax is what makes any national estimate useless. SUTA rates and wage bases are set state by state and then adjusted by your own claims history, so two identical businesses in different states can owe very different amounts. What you can plan against is the federal floor: 7.65 percent FICA plus 0.6 percent FUTA puts the employer's federal share at roughly 8.25 percent of wages within the applicable caps, with SUTA stacked on top. Confirm your actual SUTA rate with your state agency rather than assuming a national figure.

Which Payroll Taxes Does the Employer Pay vs. the Employee?

There are three buckets. Taxes you withhold from the employee and remit for them: federal income tax, their 6.2 percent Social Security and 1.45 percent Medicare, and any state or local income tax. Taxes you owe yourself: your matching 7.65 percent FICA, FUTA, and SUTA. Only FICA is split down the middle.

The distinction is not academic, because the two buckets carry very different consequences if you fall behind. Money you withheld was never yours — it is held in trust for the employee and the government. Under the Trust Fund Recovery Penalty the IRS can assess that unpaid withheld portion personally against any individual responsible for collecting and remitting it who willfully failed to do so. Operating as an LLC or a corporation does not shield an owner or bookkeeper from that assessment, which is why withheld payroll taxes should be the very last dollars in your business you ever consider borrowing against.

Independent contractors sit outside all of this. You withhold nothing, match nothing, and pay no unemployment tax on them — which is precisely why misclassification is so tempting and so expensive when the classification is challenged. If a worker is later reclassified as an employee, the back taxes reach across both buckets at once.

When Are Payroll Taxes Due?

Your federal deposit schedule is set by a lookback period, not by your pay dates. Report $50,000 or less in employment taxes during the lookback period and you are a monthly depositor, depositing by the 15th of the following month. Report more than $50,000 and you become a semiweekly depositor on a faster clock.

Semiweekly is tied to your payday, not the calendar. Pay on a Wednesday, Thursday, or Friday and the deposit is due the following Wednesday; pay on a Saturday, Sunday, Monday, or Tuesday and it is due the following Friday. One rule overrides both schedules: if you ever accumulate $100,000 or more in employment tax liability on a single day, that deposit is due by the next business day. At the small end, if your liability for the quarter is under $2,500 you may simply pay it with your timely filed Form 941 instead of making deposits.

Deposits and filings are separate obligations, and both carry penalties. Deposits run on the schedule above; Form 941 reports the quarter, Form 940 reports FUTA annually, and W-2s and 1099-NECs go out by January 31. Late-deposit penalties climb the longer the money sits, and they apply even when the return itself is filed on time. This is the single strongest argument for letting software or a provider handle deposits — the annual cost is almost always less than one penalty.

The bottom line: Payroll is a sequence, not a guess — accounts, classification, schedule, withholdings, deposits, records. Automate the parts that carry penalties, keep clean records, and protect the cash so payday is never in doubt. When timing is the issue, the right financing keeps your team paid without missing a beat.

Frequently asked questions

What do I need before I can run payroll?

At minimum you need a federal Employer Identification Number (EIN), state and local tax accounts where required, a completed Form W-4 and Form I-9 for each employee, and a way to calculate and remit withholdings. Most owners set these up before the first pay date so the first paycheck is correct.

Should I use payroll software or do payroll by hand?

For all but the simplest one-person setups, software is worth it. A modern payroll platform calculates withholdings, files and deposits taxes, and tracks records automatically — which removes the most common and most expensive errors. Doing payroll by hand is possible but exposes you to penalties if a deposit or filing is late.

How often do I have to deposit payroll taxes?

The IRS assigns each employer a monthly or semi-weekly federal deposit schedule based on prior tax liability, and notifies you of yours. State schedules vary. Missing a deposit deadline can trigger penalties, so most owners automate deposits through their payroll provider.

What is the difference between an employee and a contractor?

Employees have taxes withheld and receive a W-2; independent contractors handle their own taxes and receive a 1099-NEC if paid $600 or more in a year. Classification depends on how much control you have over the work, not on what you call the worker. Misclassifying employees as contractors is a common and costly mistake.

Can I use financing to cover payroll during a slow month?

Yes. When revenue is seasonal or a large receivable is late, a business line of credit or short-term working capital advance can bridge a payroll cycle so employees are paid on time. The right move is to match the financing term to how quickly your cash recovers.

How much are payroll taxes for a small business?

The employer share is 7.65 percent of wages for FICA - 6.2 percent Social Security up to the 2026 wage base of $184,500, plus 1.45 percent Medicare with no cap - and 6.0 percent FUTA on the first $7,000 per employee, which falls to 0.6 percent with the full state credit. State unemployment tax is set by your state and your own claims history, so it varies.

When do I have to deposit payroll taxes?

The IRS assigns a monthly or semiweekly schedule based on the taxes you reported during your lookback period. Report $50,000 or less and you deposit monthly, by the 15th of the following month. Report more and you deposit semiweekly, tied to your payday. If you accumulate $100,000 of liability on any single day, it is due the next business day.

Sources: IRS — Topic no. 751, Social Security and Medicare withholding rates · IRS — Topic no. 759, Form 940 and federal unemployment tax (FUTA) · IRS — Topic no. 757, Forms 941 and 944 deposit requirements