How to Do Payroll for a Small Business

Learning how to do payroll for a small business is one of the most important — and most stressful — things you'll tackle as an owner. According to SCORE, roughly 40% of small businesses get fined an average of $850 per year for improperly handling payroll-related taxes. And that's not counting the hours lost to manual calculations, chasing down timesheets, or correcting errors before payday.

This guide walks through exactly how to set up payroll for a small business and run it each pay period — from getting your EIN to filing quarterly tax forms. Whether you're about to pay your first employee or you're switching from a manual process, you'll know what to do and in what order. 

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What you need to know about small business payroll

Doing payroll for a small business comes down to a repeatable process: set up your accounts once, collect the right paperwork from each new hire, then calculate pay and taxes every period and file on time. It's more manageable than it looks once you know the steps.

• You'll need an Employer Identification Number (EIN), state tax registrations, and completed employee W-4s before running your first payroll.
• Every pay period, calculate gross wages, withhold federal and state taxes — including FICA, federal income tax, and any state income tax — and pay employees the net amount.
• Deposit taxes on time through EFTPS. Missing a deadline triggers IRS penalties starting at 2% of the unpaid amount.
• For hourly teams, connecting time tracking to payroll is the biggest lever for cutting errors and saving time every pay period.

Juggling timesheets and payroll calculations manually eats hours every pay period. When time tracking and payroll live in the same app, hours flow straight into paychecks automatically — no re-entering data, no overtime surprises. That's how Homebase payroll works.

What you need before you run payroll

Before your first payroll run, there are a handful of one-time setup steps to complete. Getting these right from the start means you won't be scrambling to fix missing registrations or paperwork when your first payday arrives.

Get your EIN

Your Employer Identification Number is required to report and pay payroll taxes with the IRS. Think of it as a Social Security number for your business. You can apply for an EIN free at IRS.gov and receive it immediately online.

Register for EFTPS

The Electronic Federal Tax Payment System is how you'll deposit federal payroll taxes going forward. Registration is free at EFTPS.gov. Set this up early — you'll need it every time you run payroll.

Register with your state

Most states require employers to register separately for state income tax withholding and state unemployment insurance. The process varies by state, so check with your state's Department of Revenue and Department of Labor for the specific steps.

Collect employee paperwork

Before you can run payroll for any team member, you need a few completed forms on file. For every new hire, collect the following:

• W-4 (federal income tax withholding elections)
• I-9 (employment eligibility verification)
• State withholding form (varies by state — check your state tax agency)
• Direct deposit authorization (if paying electronically)

Tools like Homebase hiring and onboarding send a digital packet to new hires automatically, so paperwork is complete before day one.

Choose a payroll schedule

Your payroll schedule sets how often employees are paid. The most common options are weekly, biweekly, semimonthly, and monthly. Biweekly is the most widely used in the US. Note that some states restrict which schedules are permitted, so confirm your state's requirements before you finalize anything.

Report new hires to your state

Most states require employers to report new hires to a state agency within 20 days of the hire date. This is typically handled through your state's Department of Labor website. If you use a payroll service, they'll often complete this step for you.

Once you've handled the setup, here's how to actually run payroll each pay period.

How to do payroll for a small business in 7 steps

These are the core payroll process steps you'll repeat every pay period. Knowing how to run payroll correctly the first time means fewer corrections and less stress on payday. The first few times will take longer as you get the hang of it — after that, it becomes a routine.

Step 1: Calculate gross pay

Gross pay is the total amount an employee earns before any deductions are taken out. Knowing how to calculate payroll starts here — get this number wrong and every line that follows is off. 

For hourly workers, multiply hours worked by the hourly wage. Under the FLSA, any hours over 40 in a workweek must be paid at 1.5 times the regular rate. For example, if an employee earns $15/hour and works 45 hours in a week, the first 40 hours are paid at $15 and the last five at $22.50.

For salaried workers, divide the annual salary by the number of pay periods in the year. An employee earning $52,000 on a biweekly schedule receives $2,000 per pay period.

For tip-based workers — including anyone on your team at a bar, restaurant, or other tipped position — tips count as taxable wages and must be included in gross pay calculations. Tracking tips accurately keeps your payroll compliant and your team paid correctly. Homebase's tip manager handles this automatically for hourly teams.

Also add in any bonuses or commissions owed for the pay period.

Tracking hours manually opens the door to gross pay errors that ripple through every line of payroll. With a time tracking app like Homebase, clock-in data flows directly into payroll calculations — no spreadsheet required.

Step 2: Subtract pretax deductions

Before calculating taxes, subtract any pretax deductions from gross pay. Common pretax deductions include:

• 401(k) or retirement plan contributions
• Health, dental, and vision insurance premiums
• HSA and FSA contributions

These reduce the employee's taxable income, which means both the employee and employer pay less in taxes.

Step 3: Withhold federal taxes

With taxable gross pay established, you'll withhold three federal taxes from each employee's paycheck. This is the most technical part of how to calculate payroll, so use the IRS resources linked below rather than estimating. 

Social Security — Withhold 6.2% of wages up to $184,500 for 2026. (This wage base is set annually by the IRS; see IRS Tax Topic 751 for the current figure.)

Medicare — Withhold 1.45% on all wages. Employees earning more than $200,000 in a calendar year owe an additional 0.9%, which you're required to withhold but not match.

Federal income tax (FIT) — The amount varies based on the employee's W-4 elections, filing status, and pay frequency. Use the withholding tables in IRS Publication 15-T to determine the correct amount for each employee.

Step 4: Withhold state and local taxes

Most states require employers to withhold state income tax from employee paychecks. Rates and rules vary significantly — some states have a flat rate, others use graduated brackets, and a handful (including Texas, Florida, Washington, and Nevada) have no state income tax at all.

Check your state's tax agency website for current withholding tables and any local income tax requirements that may apply.

Step 5: Calculate net pay and pay your team

Net pay is what your employee actually receives. The formula is:

Net pay = gross pay − pretax deductions − federal taxes withheld − state taxes withheld − any post-tax deductions

Post-tax deductions include things like Roth 401(k) contributions or court-ordered wage garnishments.

Once net pay is calculated, you can pay your team via direct deposit, check, or pay card. Direct deposit is the most common method and the one most employees prefer. Knowing how to pay employees efficiently — and on the schedule you've committed to — builds trust with your team.

Chasing down net pay math manually means double-checking every line and hoping nothing was missed. Homebase payroll calculates net pay automatically and runs direct deposits in a few clicks.

Step 6: Calculate and pay employer taxes

As an employer, you're also responsible for taxes that don't come out of your employees' pay — they come out of your own pocket.

Employer FICA match — You pay a matching 6.2% Social Security and 1.45% Medicare on every employee's wages. This is separate from what you withhold from employees.

FUTA (Federal Unemployment Tax) — 6.0% on the first $7,000 of each employee's wages per year. In practice, most employers pay an effective rate of around 0.6% after the state unemployment tax credit is applied.

SUTA (State Unemployment Tax) — Rates vary by state and by your company's claims history (called an "experience rating"). Check your state's Department of Labor for your assigned rate.

Deposit all federal employer taxes through EFTPS on your assigned deposit schedule — either monthly or semiweekly, based on your payroll tax liability from the prior year.

Step 7: Keep records and file tax forms

Running payroll correctly also means keeping the right records and filing on time.

Every quarter, file Form 941 — the Employer's Quarterly Federal Tax Return. This reports the income taxes and FICA taxes you withheld and deposited.

Every year, file Form 940 (the FUTA return) and distribute W-2s to all employees by January 31.

For records, hold onto payroll documentation for at least three years to meet FLSA requirements, and four years to satisfy IRS requirements. Keep both — the longer window covers you for both.

Running payroll by hand every pay period means recalculating taxes, chasing timesheets, and hoping nothing slips through. Homebase payroll automates tax calculations and direct deposits from the same app where your team clocks in. Get started with Homebase for free.

Small business payroll taxes explained

Managing payroll for a small business means understanding which taxes you're responsible for, who pays them, and what the rates are. Here's a plain-English breakdown.

Social Security tax Rate: 6.2% withheld from the employee, plus a 6.2% employer match. Applies to wages up to $184,500 per employee in 2026.

Medicare tax Rate: 1.45% withheld from the employee, plus a 1.45% employer match — on all wages with no cap. Employees earning over $200,000 pay an additional 0.9%; employers don't match that extra amount.

Federal income tax Rate: Varies. The amount you withhold depends on each employee's W-4, filing status, and pay frequency. Use the current IRS withholding tables to calculate.

FUTA (Federal Unemployment Tax) Rate: 6.0% on the first $7,000 in wages per employee per year. The effective rate is typically around 0.6% after the federal credit for state unemployment tax payments. Employers pay this — it's not deducted from employee wages.

SUTA (State Unemployment Tax) Rate: Varies by state and by your business's claims history. Employers pay this tax. Contact your state's Department of Labor for your specific rate.

State income tax Rate: Varies by state. Several states — including Texas, Florida, and Washington — have no state income tax. Where it applies, you withhold it from employee paychecks and remit it to the state.

Understanding your labor cost obligations as an employer is one of the fastest ways to avoid surprises at tax time.

One of the most important things to know about managing payroll taxes: missing a federal deposit deadline triggers IRS penalties starting at 2% of the unpaid amount. That penalty increases to 5% for deposits six to fifteen days late, 10% for deposits more than fifteen days late, and 15% for amounts still unpaid after you receive an IRS notice. 

Keep your EFTPS deposit schedule on your calendar and treat those dates like any other hard deadline.

Should you do payroll yourself or use payroll software?

There are three main ways to handle payroll for a small business: manually, through an accountant, or with payroll software. Each has real tradeoffs.

Doing payroll manually

DIY payroll costs nothing upfront and gives you full control. But if you want to know how to do payroll yourself, understand the real cost is time and accuracy. Fixing a single payroll error costs an average of $291, based on Ernst & Young data — and manual calculations are where most of those errors start. Manual payroll also means handling your own tax filings and deposit deadlines. It's workable for a very small team, but it doesn't scale. 

Hiring an accountant

An accountant handles the full process on your behalf, which is genuinely hands-off. The tradeoff is cost — typically several hundred dollars per month depending on team size and pay frequency — and dependency on a third party for every pay cycle.

Using payroll software

The best payroll software for small businesses automates tax calculations, withholdings, direct deposits, and quarterly filings — and flags compliance issues before they become problems. If you're comparing payroll software for small business, the right question isn't just price; it's whether it fits the way your team actually works. 

For most small teams, software is the most efficient option at the lowest cost per hour saved. The cheapest payroll service for a small team typically runs $20–$100+/month plus a per-employee fee. 

For small businesses with hourly teams, though, the real challenge isn't the math — it's getting accurate hours into the system. When scheduling, time tracking, and payroll live in one app, hours flow into paychecks without re-entering data or manually checking overtime.

Run payroll with confidence

Where most small business owners lose time isn't in understanding the steps — it's in gathering accurate hours and managing everything across multiple systems. For hourly teams, payroll software that connects time tracking to paychecks removes most of that friction.

Hours that would otherwise require manual entry flow straight into paychecks with Homebase payroll. Tax calculations are automatic, direct deposits run in a few clicks, and your team gets paid accurately every time.

Tiana Post, owner of Awaken Bakery, put it simply: "With Homebase and Clover, running payroll takes five minutes. I log in, check the time cards, hit submit, and it's done."

Get started with Homebase for free and, when you’re ready, add on payroll for $39/month plus $6 per employee.

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Frequently asked questions about small business payroll

How do I do payroll for my small business myself?

To do payroll yourself, start by getting an EIN, registering with your state tax agency, and setting up an EFTPS account. Collect a W-4 and I-9 from every employee. Each pay period, calculate gross pay, withhold the correct taxes, pay your team, and deposit taxes on your assigned schedule. File Form 941 quarterly and distribute W-2s every January.

Do I need an EIN to run payroll?

An Employer Identification Number is required to report and deposit payroll taxes with the IRS. You can apply for one free at IRS.gov and receive it immediately online. You'll also need to register separately with your state tax agency before you can withhold and remit state income taxes.

What is the easiest way to do payroll?

The easiest way to handle payroll is to use a payroll app that automates tax calculations, withholdings, and direct deposits. For hourly teams, the biggest efficiency gain comes from apps that connect time tracking to payroll directly — so employee hours flow into paychecks automatically, without manual data entry or re-checking overtime.

What taxes do I need to withhold from employee paychecks?

Withhold federal income tax based on each employee's W-4, Social Security tax at 6.2%, and Medicare tax at 1.45%. Most states require state income tax withholding as well. As the employer, you separately owe matching FICA taxes, FUTA, and state unemployment tax — these are not deducted from employees.