How to Set Up Payroll for Your Small Business

A Step-by-Step Guide

Setting up payroll is one of the most important (and legally risky) tasks when you hire your first employee. Do it wrong and you can face IRS penalties, state fines, unhappy employees, or even personal liability. Do it right and it runs quietly in the background every pay period.

Here’s the playbook many small businesses follow to get payroll running smoothly, compliantly, and affordably.

Step 1: Get Your Legal House in Order

• Register your business properly Obtain a Federal Employer Identification Number (EIN) from IRS.gov. If you’re a sole proprietor with employees, you still need an EIN — your SSN won’t work.
• Register with your state’s Department of Revenue / Taxation for withholding taxes. Some states also require a separate state employer account number.
• Register with state unemployment agency (SUTA). Rates vary by state and your industry/experience rating.
• Get workers’ compensation insurance. This is required in almost every state, except Texas, as soon as you have employees.

Step 2: Collect Required Employee Paperwork

Every new hire must complete on or before their first day:

• Form W-4 (federal withholding)
• State withholding form (if your state has income tax)
• Form I-9 (employment eligibility verification) — keep on file, do NOT send to IRS. Be sure to collect the backup documents needed for this form.
• Direct deposit authorization + voided check or bank letter (optional but 90%+ of employees want it)

Step 3: Decide How You Will Run Payroll

Three main options:

1. Full-service provider like ADP, Sure Payroll or Paychex. This is best for most small businesses with 1-100 employees
2. A Professional Employer Organization (PEO). This is a third-party company that provides outsourced human resources and payroll services to small and mid-sized businesses, often through a co-employment arrangement.
3. Manual / Spreadsheet – not recommended.

There are cost-effective solutions available at a reasonable cost to fit your budget.

At Wendy P Corp, we help our clients choose the right payroll options, help them with needed admin to stay compliant with the law, and help them to set up their payroll.

Payroll keeps your employees working but can be a huge liability for your business. Make the right choice and use the right people to keep your business running.