Payroll 101: What New Employers Need to Know
- Miranda Kishel
- Aug 29
- 2 min read
Managing payroll is one of the most important responsibilities for a new employer. Done correctly, it ensures employees are paid accurately and on time, builds trust, and keeps your business compliant with tax laws. Done poorly, it can lead to costly mistakes, penalties, and unhappy employees. This guide walks you through payroll basics and helps you set up the right foundation.
Step-by-Step Instructions
1. Complete Employer Setup
Apply for an Employer Identification Number (EIN) with the IRS.
Register with your state for employer accounts (income tax withholding, unemployment insurance).
Verify whether your city or county requires additional registration.
2. Classify Employees Correctly
Decide if workers are employees or independent contractors.
Misclassification can result in penalties and back taxes (IRS.gov provides clear guidelines).
3. Collect Employee Documentation
Have employees complete Form W-4 for federal income tax withholding.
For state taxes, collect the state equivalent (if applicable).
Complete Form I-9 to verify employment eligibility.
4. Choose a Payroll System
Options include:
Manual payroll (spreadsheet-based—only for very small operations).
Payroll software (QuickBooks, Gusto, ADP, etc.).
Outsourcing to a payroll provider or accountant.
Consider your budget, number of employees, and compliance needs.
5. Track Hours and Wages Accurately
Set up time tracking (digital tools, punch clocks, or software).
Apply overtime rules under the Fair Labor Standards Act (FLSA).
6. Calculate Payroll Deductions
Withhold:
Federal income tax (based on W-4).
Social Security & Medicare (FICA).
State/local taxes where applicable.
Add employer contributions (your share of FICA, unemployment insurance, benefits).
7. Pay Employees
Decide on a schedule (weekly, biweekly, semimonthly, monthly).
Provide pay stubs that clearly show gross pay, deductions, and net pay.
8. File and Deposit Taxes
Deposit withheld taxes to the IRS on a monthly or semiweekly schedule, depending on your filing status.
File quarterly reports (e.g., Form 941) and annual filings (e.g., Form W-2, W-3).
File and pay state unemployment taxes on time.
Source: IRS.gov – Understanding Employment Taxes
9. Maintain Records
Keep payroll records (time sheets, pay stubs, tax filings) for at least three years.
Store securely but ensure they are accessible if audited.
Real-World Example
Case: A café hires three employees. The owner sets up an EIN, registers for state unemployment insurance, and uses Gusto for payroll. Each employee completes a W-4 and I-9. The café tracks hours through a POS system, processes payroll biweekly, and ensures federal and state taxes are filed electronically. By automating payroll, the owner saves time and avoids compliance mistakes.
Common Mistakes to Avoid
Misclassifying workers as contractors to avoid payroll taxes.
Forgetting to register with the state before paying employees.
Missing tax deposit deadlines, leading to IRS penalties.
Not providing accurate pay stubs.
Ignoring overtime rules.
Summary of Best Practices
Start with proper employer setup (EIN, state registrations).
Use reliable payroll software or outsourcing to reduce errors.
Stay compliant by classifying workers correctly and filing taxes on time.
Communicate clearly with employees about pay schedules and deductions.
Keep thorough records for legal compliance and financial clarity.
When handled correctly, payroll becomes less of a headache and more of a smooth, repeatable process that supports your business growth.
