Setting up payroll for the first time is one of the biggest operational steps a small business takes after hiring its first employees. It also introduces responsibilities that go well beyond simply calculating wages and sending paychecks.
Employers need to gather employee information, establish the appropriate tax accounts, understand worker classifications, choose a pay schedule, withhold and remit payroll taxes, maintain records, and meet federal, state, and local requirements.
The good news is that you don't have to manage every part of the process manually.
Payroll software can automate many repetitive tasks, while accountants, bookkeepers, and HR professionals can provide additional support when a business's payroll needs become more complicated.
This guide explains how to set up payroll for the first time, what information you'll need, what decisions you need to make, and how payroll software such as Gusto can simplify the ongoing process.
What Is Payroll?
Payroll is the process of calculating and paying employees while handling the taxes, deductions, records, and reporting associated with employee compensation.
For an employer, payroll can involve:
- Calculating employee wages
- Withholding federal income taxes
- Withholding Social Security and Medicare taxes
- Paying the employer's share of applicable payroll taxes
- Managing deductions and benefits
- Filing payroll tax returns
- Paying federal, state, and local taxes
- Issuing employee tax forms
- Maintaining employment tax records
- Reporting new hires
- Managing employee payment information
The IRS requires employers to withhold certain taxes from employee wages and pay the employer share of Social Security and Medicare taxes. Employers who pay wages subject to federal income tax withholding or Social Security and Medicare taxes generally must file Form 941 quarterly.
That makes payroll an important part of both financial management and HR compliance.
What Do You Need Before Setting Up Payroll?
Before running your first payroll, gather the information you'll need to establish your employer accounts and add your employees.
The exact requirements can vary depending on your business structure, location, employees, and state regulations, but common requirements include:
- Employer Identification Number (EIN)
- Business legal name
- Business address
- State and local tax registration information
- Employee names and addresses
- Employee Social Security numbers or other applicable tax identification numbers
- Employment start dates
- Compensation information
- Federal Form W-4 information
- Form I-9 employment eligibility documentation
- Contractor Form W-9 information, when applicable
- Business bank account information
- Pay schedule
- Previous payroll information, if applicable
If you are setting up payroll for the first time, it is worth gathering this information before opening your payroll account. Doing so can make the setup process considerably smoother.
Step 1: Get an Employer Identification Number
An Employer Identification Number, commonly called an EIN, is a federal tax identification number used by businesses when dealing with the IRS and other agencies.
If you are becoming an employer, make sure you have the appropriate federal identification information before setting up payroll.
You should obtain an EIN directly through the IRS rather than paying a third party simply to submit the application on your behalf.
You may also need state or local employer accounts depending on where your business and employees are located.
Step 2: Register for State and Local Payroll Requirements
Federal payroll requirements are only part of the process.
Depending on your location, you may need to register for state income tax withholding, unemployment insurance, local taxes, or other employer accounts.
Requirements can differ significantly from one state or locality to another.
This is one reason payroll setup shouldn't be treated as a one-size-fits-all process. Before your first payroll, check the requirements that apply to every location where your employees work.
If you have remote employees, don't assume that your business's physical location is the only jurisdiction that matters.
Step 3: Gather Employee Information
Your payroll system will need information about each employee.
Common information includes:
- Full legal name
- Address
- Social Security number or applicable tax identification number
- Employment start date
- Compensation
- Work location
- Tax withholding information
- Bank account information for direct deposit
- Applicable deductions
- Benefits information
You'll also need to make sure you have the appropriate employment forms and documentation.
The source material for this guide specifically identifies employee names, start dates, tax identification numbers, birth dates, addresses, compensation information, I-9s, W-4s, and W-9s as important payroll-related information.
Step 4: Classify Your Workers Correctly
One of the most important payroll decisions is determining whether someone is an employee or an independent contractor.
This distinction matters because employees and contractors are treated differently for tax and employment purposes.
You may also need to determine whether employees are exempt or nonexempt under applicable wage and overtime rules.
Worker classification can become complicated, particularly when someone performs work independently or has a flexible relationship with the business.
Don't classify someone as a contractor simply because it seems easier or less expensive.
The IRS provides resources for determining worker status, including Form SS-8 in situations where the classification isn't clear.
Getting classification wrong can result in additional taxes, amended filings, interest, and potential penalties.
Step 5: Choose a Payroll Schedule
Next, decide how frequently employees will be paid.
Common payroll schedules include:
- Weekly
- Biweekly
- Semimonthly
- Monthly
Your choice may be affected by state requirements, cash flow, administrative workload, and employee expectations.
Before choosing a schedule, check whether your state imposes requirements on how frequently certain employees must be paid.
You'll also want to consider your business's cash flow. Payroll can represent one of a company's largest recurring expenses, so the timing of payroll should fit your financial operations.
Most importantly, communicate the schedule clearly to employees.
Step 6: Choose a Payroll System
At this point, you need to decide how you'll actually process payroll.
A very small business could theoretically manage some payroll responsibilities manually, but payroll quickly becomes complicated as the number of employees, states, deductions, benefits, and reporting requirements increases.
An online payroll platform can help centralize many of these responsibilities.
When comparing payroll software, consider:
- Ease of use
- Payroll tax calculations
- Tax filing support
- Direct deposit
- Employee self-service
- New-hire reporting
- Benefits administration
- Time tracking
- Accounting integrations
- Reporting
- Multi-state payroll
- Customer support
- Scalability
The goal isn't simply to find the cheapest payroll system.
The better question is:
Which system can handle the business's current needs while reducing administrative work as the company grows?
Why Small Businesses Consider Gusto for Payroll
Gusto is one payroll platform small businesses can consider when they want to combine payroll with other HR functions.
Gusto currently offers payroll, automated federal, state, and local tax calculations and filings, W-2 and 1099 support, new-hire reporting, direct deposit, employee onboarding, benefits administration, time-tracking integrations, and payroll reporting.
The platform also supports different pay schedules, hourly and salaried employees, contractors, multiple states, deductions, reimbursements, and accounting integrations.
For a growing business, the integration between payroll and HR can be particularly useful. Instead of treating payroll as an isolated accounting function, businesses can connect it with hiring, onboarding, benefits, time tracking, and employee management.
Explore Gusto Payroll and HR Solutions →
Step 7: Set Up Your Payroll Account
Once you've selected a payroll provider, you'll typically enter your business and employee information into the system.
For Gusto, the setup process can require information such as business addresses, employee information, federal tax information, state registration information, bank details, pay schedules, payroll history when applicable, and authorized signatory information.
Take your time during this stage.
A payroll system can automate calculations and filings, but automation is only useful when the information entered into the system is accurate.
Review:
- Business legal name
- EIN
- Business address
- State registrations
- Employee classifications
- Compensation
- Tax information
- Bank account information
- Pay schedule
- Deductions and benefits
Watch: Setting Up a Gusto Account
If you're considering Gusto for your business, our Gusto account setup video provides a visual walkthrough of the process.
A video can be particularly useful alongside a written guide because readers can follow the explanation while seeing how the software works.
Step 8: Run Your First Payroll
Before processing your first payroll, review everything carefully.
Check:
- Employee names
- Pay rates
- Hours worked
- Salaried compensation
- Overtime
- Bonuses
- Deductions
- Benefits
- Tax withholding
- Bank information
- Pay dates
Then review the payroll summary before submitting it.
Don't assume that because payroll software performs the calculations automatically, the employer has no responsibility for reviewing the information.
The software can process the information you provide. You still need to make sure that information is accurate.
What Happens After You Set Up Payroll?
Setting up payroll is only the beginning.
Once payroll is running, employers need to maintain a regular process for reviewing payroll, making tax payments, filing required returns, maintaining records, and handling employee changes.
Federal payroll responsibilities can include reporting wages and taxes through forms such as Form 941 and Form 940, depending on the employer's circumstances.
State and local requirements vary.
That's why payroll should become part of your company's regular administrative calendar rather than something you think about only on payday.
Payroll Best Practices for Small Businesses
Run Payroll on Time
Establish a consistent payroll process and build enough time into your schedule to review payroll before the deadline.
Last-minute payroll processing increases the likelihood of mistakes.
Review Payroll Before Submitting It
Look for unusual changes in:
- Employee hours
- Compensation
- Overtime
- Bonuses
- Deductions
- New employees
- Departing employees
Some modern payroll systems are adding tools designed to identify unusual payroll amounts before submission. Gusto, for example, describes an Assisted Payroll Prep feature that can flag unexpected payroll amounts and irregular timecards for review.
Keep Accurate Payroll Records
Recordkeeping is an important part of payroll compliance.
The IRS says employers generally need to keep employment tax records for at least four years after filing the fourth-quarter return for the year. Records can include wage payments, employee information, W-4s, tax deposits, filed returns, and other supporting documentation.
Keep payroll records organized and secure, and make sure access is limited to people who need the information.
Don't Ignore State Requirements
Federal requirements are only one part of payroll compliance.
State and local requirements can differ, particularly around:
- Minimum wage
- Pay frequency
- Paid leave
- Unemployment insurance
- New-hire reporting
- Final paychecks
- Local taxes
- Overtime
If your business operates in multiple states, payroll can become significantly more complicated.
First-Time Payroll Checklist
Use this checklist as a starting point before running your first payroll:
Business setup
□ Obtain an EIN
□ Confirm business legal information
□ Register for required state and local tax accounts
□ Confirm business bank information
Employee setup
□ Collect employee information
□ Obtain required tax forms
□ Complete required employment eligibility procedures
□ Determine employee or contractor classification
□ Determine applicable exempt/nonexempt status
Payroll setup
□ Choose pay frequency
□ Select payroll software
□ Add employees
□ Enter compensation information
□ Configure tax information
□ Add deductions and benefits
□ Set up direct deposit if applicable
□ Review payroll settings
First payroll
□ Verify hours and compensation
□ Review deductions
□ Review tax withholding
□ Review payroll summary
□ Confirm pay date
□ Submit payroll
Ongoing
□ Process payroll on schedule
□ Make required tax deposits
□ File required payroll returns
□ Issue required employee and contractor tax forms
□ Maintain payroll records
□ Update employee information when circumstances change
Should You Use Payroll Software?
For many small businesses, payroll software can be a practical way to reduce repetitive administrative work.
The value becomes more apparent as a company adds employees, operates in multiple states, offers benefits, uses hourly workers, pays contractors, or needs to integrate payroll with accounting and HR systems.
Gusto, for example, positions its platform as an integrated payroll and HR system rather than payroll alone. Its current offerings include payroll, benefits, hiring and onboarding, time tracking, employee management, and other HR functions.
However, payroll software isn't a substitute for professional advice.
If you're unsure about worker classification, tax treatment, state requirements, or another compliance issue, consider consulting a qualified accountant, payroll professional, employment attorney, or appropriate government agency.
How Payroll Connects With HR
Payroll is often viewed as an accounting responsibility, but it is closely connected to HR.
Employee compensation, benefits, onboarding, time off, hiring, termination, tax forms, and employee records can all intersect with payroll.
As a business grows, integrating these processes can reduce duplicate data entry and make employee administration easier.
This is one reason all-in-one business platforms have become increasingly popular among small businesses.
Related Business Training Media Resources
Setting up payroll touches more than employee payments. Small businesses also need to manage HR processes, employee development, business software, workplace compliance, and day-to-day operations. These BTM resources can help you build a stronger foundation:
- Human Resources — Explore HR practices, employee management, workplace policies, and essential knowledge for managing a growing workforce.
- Business Software — Discover software and technology that can help businesses streamline payroll, HR, training, operations, and other essential processes.
- Training & Development — Learn how to build effective employee training and professional development programs as your organization grows.
- Compliance — Explore workplace compliance topics that can help employers understand their responsibilities and reduce organizational risk.
- Employee Training — Find practical resources for onboarding, developing, and training employees throughout the employee lifecycle.
- Management — Develop the management skills needed to lead employees, improve performance, and build effective teams.
- Workplace Productivity — Explore strategies and tools that can help businesses improve efficiency and create more productive workplaces.
Explore Gusto for Small Business Payroll
Choosing a payroll system is an important decision for a growing business. If you're looking for a platform that combines payroll with HR and employee-management tools, Gusto is one option worth exploring.
Explore Gusto Payroll and HR Solutions →
About the Business Training Media Editorial Team
This article was researched and written by the Business Training Media Editorial Team. We publish expert content covering business strategy, leadership, workplace skills, artificial intelligence, cybersecurity, compliance, career development, online learning, professional certifications, business software, and organizational excellence. Our goal is to provide practical, research-backed insights that help professionals, business leaders, and organizations make informed decisions.