You hired your first employee three weeks ago and payday is Friday. Now what? Running payroll for the first time feels complicated — but for a business with 1–10 employees, the entire process takes under an hour once you've done it twice. Here's exactly how to do it right.
- You need an EIN, W-4s, and a state tax ID before you can run payroll legally.
- The six steps: collect hours → gross pay → withholding → deductions → net pay → remit taxes.
- Form 941 is due quarterly; W-2s go out by January 31, 2027.
- The #1 mistake small employers make: misclassifying employees as 1099 contractors.
- Most micro-businesses run payroll biweekly — 26 pay periods per year.
What You Need Before You Run Payroll
Skip this section and you'll hit a wall on step one. Get it done once, and you never have to think about it again.
Here's the setup checklist every employer needs:
- ✓Employer Identification Number (EIN) — your federal tax ID. Free from IRS.gov in minutes.
- ✓Completed W-4 from every employee — this tells you how much federal income tax to withhold.
- ✓State employer tax ID — most states require a separate registration. Check your state's department of revenue.
- ✓Pay period schedule — weekly, biweekly, or semi-monthly. Pick one and stay consistent.
- ✓Bank account for direct deposit — plus your routing/account numbers for EFTPS enrollment.
That's it. Micro-businesses with salaried staff can often run their first payroll in 45 minutes flat. Hourly teams take a bit longer the first time — gets faster every cycle.
Step-by-Step: How to Run Payroll
We'll use a real example throughout: Marcus, who owns a small Chicago print shop with one hourly employee, Jamie, earning $18/hr.
For hourly employees, total regular and overtime hours from your time records. Under FLSA 2026, any hours over 40 in a workweek are overtime. Salaried exempt employees? Skip this step — they get paid the same amount regardless.
Regular pay + overtime pay = gross pay. Jamie worked 45 hours this week: 40 hrs × $18 = $720, plus 5 OT hrs × $27 (1.5× rate) = $135. Gross pay: $855.
Three buckets: (a) Federal income tax — use the 2026 tables in IRS Publication 15-T with the W-4 elections. (b) FICA — Social Security 6.2% + Medicare 1.45% = 7.65% of gross. (c) State income tax — varies by state; nine states have none. On $855 gross, FICA alone is $65.41.
Health insurance premiums, 401(k) contributions, and HSA deposits come out before net pay. Wage garnishments (child support, student loans) come out after taxes. Keep these separate — the order matters for tax treatment.
Send direct deposit or cut a check. And generate a pay stub for every employee, every pay period. This isn't optional in most states — more on that below.
Deposit federal payroll taxes through EFTPS (eftps.gov). Pay state taxes through your state's employer portal. Update your payroll register. This step is where penalties live — don't skip it or delay it.
Payroll Tax Deadlines You Can't Miss in 2026
Honestly, this is where most small employers get into trouble — not the math, the calendar. The IRS doesn't send reminders.
| Form / Filing | Due Date | What It Covers |
|---|---|---|
| Form 941 | Apr 30 / Jul 31 / Oct 31 / Jan 31 | Quarterly federal payroll tax return |
| W-2s to Employees | January 31, 2027 | Annual wage and tax statement |
| W-2s to SSA | January 31, 2027 | Social Security Administration filing |
| Federal Tax Deposits | Semi-weekly or monthly (see lookback period) | EFTPS deposits of withheld taxes |
Three Payroll Mistakes That Cost Small Employers Real Money
We see these constantly. They're all avoidable.
- 1. Misclassifying workers as 1099 contractors. If you control when, where, and how someone works, they're likely a W-2 employee under the IRS behavioral control test — not a contractor. Getting this wrong means back taxes, penalties, and interest. When in doubt, treat them as an employee.
- 2. Missing tax deposit deadlines. Set a calendar reminder for the day after every payday. The deposit is due within days of running payroll for most small employers — not at the end of the quarter.
- 3. Skipping pay stubs. Many owners assume pay stubs are just a courtesy. They're not — in many states they're a legal requirement.
"The fastest way to stay compliant is to make pay stubs automatic — not something you remember to do when an employee asks."
Running payroll for a small business is a six-step process: collect hours, calculate gross pay, apply withholding, subtract deductions, issue net pay with a pay stub, and remit taxes on time. Get the setup right once — EIN, W-4s, state ID, EFTPS enrollment — and the recurring work is straightforward. The employers who get into trouble aren't bad at math; they miss deadlines or skip documentation. Don't be that employer.
Frequently Asked Questions
How often should a small business run payroll?
Biweekly (every two weeks, 26 pay periods per year) is the most common choice for employers with 1–10 employees — it balances cash flow with employee expectations. Some states mandate a minimum pay frequency, so check your state's labor laws before locking in a schedule.
Do I need payroll software to run payroll for 1–2 employees?
No — you can run payroll manually using IRS Publication 15-T for withholding tables, then use a pay stub generator to keep records clean. For micro-businesses, the time savings alone typically justify the cost within the first two pay cycles.
What taxes does an employer pay on top of employee wages?
Employers match the employee's Social Security (6.2%) and Medicare (1.45%) contributions — a total employer FICA cost of 7.65% of gross wages — plus federal unemployment tax (FUTA, 0.6% on the first $7,000 per employee after state credits) and state unemployment tax (SUTA, rate varies). Use our FICA calculator to run the numbers for your specific payroll.
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Generate Your Pay Stub Free →Running payroll gets easier every cycle. The first time is the hardest — after that, it's a checklist you'll finish before your second cup of coffee.