Overview
Setting up payroll in 2025 means getting registrations, systems, and routines in place so you can pay employees accurately and handle taxes on time. This guide focuses on U.S.-based small employers and the ops or finance admins standing up payroll for the first time.
You’ll learn what to register, which forms to collect, your options to run payroll, how deposits and filings work, what it costs, and the exact first-run steps. You’ll also see the controls and KPIs that keep payroll clean all year.
What does “setting up payroll” include for a new employer?
It covers IDs and registrations, onboarding, calculations, payments, deposits, filings, and records. You’ll need to secure federal and state IDs, configure a pay schedule, onboard hires with the right forms, run gross-to-net calculations, pay employees, remit taxes, and retain compliant records.
In practice that means obtaining an EIN and registering for state withholding and unemployment, choosing a payroll system and schedule (weekly, biweekly, or semimonthly), collecting Form I‑9 and Form W‑4 from each hire, tracking time, classifying workers correctly (employee vs contractor; exempt vs nonexempt), calculating taxes such as FICA, FUTA, and SUTA, funding and releasing pay (often via direct deposit), remitting taxes electronically, and maintaining records to support filings.
Why does payroll compliance matter from day one?
Because paying the right amounts on the right schedule avoids tax penalties, wage claims, and costly rework; a solid setup prevents errors from compounding. Noncompliance often creates bigger problems at quarter‑end and year‑end.
The Fair Labor Standards Act requires overtime for nonexempt employees after 40 hours in a workweek, which can trigger back pay and penalties if missed (see the U.S. Department of Labor’s FLSA overview: https://www.dol.gov/agencies/whd/flsa). On the tax side, late or incorrect deposits can accrue penalties and interest; federal deposit rules and lookback periods are summarized in IRS Publication 15 (https://www.irs.gov/publications/p15). Establish accurate classifications, schedules, and controls early so your first payroll scales into reporting periods without drama.
What registrations, forms, and accounts are required before you run payroll?
You need federal and state tax accounts, employee onboarding forms, and banking rails ready to pay people and deposit taxes. Gather these items before your first pay date to avoid rushed corrections.
- Employer Identification Number (EIN)
- State payroll tax IDs: withholding and unemployment (SUTA)
- New‑hire reporting to each employee’s work state within required timelines
- Employee onboarding forms: Form I‑9 and Form W‑4 (collect and retain; I‑9 completion guidance is on USCIS: https://www.uscis.gov/i-9)
- Pay schedule (weekly, biweekly, or semimonthly) and a timekeeping process
- Enrollment in EFTPS for federal tax deposits
- Workers’ compensation policy (as required by your state)
- Separate payroll bank account and direct deposit setup with your bank
- Local tax accounts if operating in local‑tax jurisdictions
Once these items are in place, test your banking connections and map your deductions and benefits. Run a penny test or dry run to confirm calculations and funding.
Where do you get an EIN and enroll in EFTPS?
Apply for an EIN online directly with the IRS; the process is quick and free (https://www.irs.gov/businesses/small-businesses/self-employed/apply-for-an-employer-identification-number-ein-online). Enroll in the Electronic Federal Tax Payment System (EFTPS) to make federal tax deposits electronically (https://www.eftps.gov/eftps/).
The online EIN application provides your federal tax ID immediately during IRS operating hours. EFTPS enrollment requires verification steps, so complete it early and secure access with role‑based credentials.
Which state registrations and new-hire reporting are required?
Register for state income tax withholding and state unemployment (SUTA) in every state where you have tax nexus, including states where remote employees work. Most states also require you to report new hires shortly after hire.
Use the federal Office of Child Support Enforcement directory to find your state’s new‑hire reporting portal and deadlines (https://www.acf.hhs.gov/css/employers/state-new-hire). Check state rules for E‑Verify and any local tax obligations before onboarding.
Which payroll options should you consider: DIY, software, or full-service provider?
Choose the approach that matches your complexity, risk tolerance, and available time. DIY gives control but requires mastery of tax rules; software automates calculations and filings; full‑service providers offload compliance for a higher fee.
DIY can work for very small, single‑state teams comfortable with IRS rules and updates. Cloud payroll software automates withholding rates, handles e‑filings, and integrates time tracking for most small businesses. Full‑service providers or PEOs add HR and benefits administration and can absorb multi‑state or local complexity, at the cost of higher fees and less flexibility. Consider future plans—remote hires, benefits, or multi‑state growth—so you don’t outgrow your initial setup.
How much does it cost to set up and run payroll in 2025?
Costs fall into three buckets: employer taxes, system or service fees, and operational time. Employer taxes include the employer share of FICA (Social Security and Medicare), FUTA, and state unemployment; some states add local payroll taxes.
System costs vary by DIY versus cloud software versus full‑service provider and often scale by employee count and features. Operational costs include setup time, bank fees for direct deposit, and ongoing reconciliation. Factor in potential downstream savings from fewer errors, automated deposits, and simplified year‑end processing when comparing options.
What are the step-by-step actions to run your first payroll?
Start with clean data, clear schedules, and a test run before you fund anything. Use a checklist to ensure nothing is missed on the first cycle.
- Confirm worker classification (employee vs contractor; exempt vs nonexempt) and set pay types.
- Collect and store I‑9 and W‑4; add state/local withholding forms if required.
- Register for federal/state payroll accounts and enroll in EFTPS.
- Set your pay schedule and cutoff dates; enable time tracking and PTO policies.
- Gather hours, salary changes, and taxable benefits; apply overtime rules.
- Enter or import pre‑tax and after‑tax deductions (e.g., Section 125 health premiums, 401(k)).
- Calculate gross‑to‑net pay and employer taxes (FICA, FUTA, SUTA, plus state/local).
- Review a pre‑pay register; get manager approvals and fix anomalies.
- Fund your payroll bank account and release direct deposits/checks.
- Make federal deposits via EFTPS and state/local deposits by their due dates.
- File required returns (e.g., Form 941 quarterly) when due.
- Archive pay statements, registers, and tax confirmations in your payroll records.
After the first run, reconcile wage and tax totals to your bank and general ledger. Note any adjustments for the next cycle and update your checklist with lessons learned.
How do you handle taxes, deposits, and filings on the right schedule?
Follow IRS and state schedules for deposits and returns and lock a calendar with automated reminders. Federal rules for withholding, FICA, FUTA, and deposit timing are summarized in IRS Publication 15 (https://www.irs.gov/publications/p15).
Most small employers deposit federal employment taxes on a monthly or semiweekly schedule based on their lookback period and remit those deposits through EFTPS. You’ll generally file Form 941 quarterly and Form 940 annually for FUTA; the IRS provides details for both forms (Form 941: https://www.irs.gov/forms-pubs/about-form-941; Form 940: https://www.irs.gov/forms-pubs/about-form-940). States set their own deposit and filing cadences for income tax and unemployment, so align your state calendars to avoid mismatches.
When are federal payroll tax deposits due?
Deposits are due monthly or semiweekly depending on your lookback period, with next‑day rules when liabilities exceed thresholds. The IRS explains deposit schedules and lookback rules in Publication 15 (https://www.irs.gov/publications/p15).
Monthly depositors typically deposit by the 15th of the following month; semiweekly depositors follow weekdays after payroll. Determine your status before your first payroll and set EFTPS reminders accordingly.
Which payroll forms are due quarterly and annually?
Quarterly federal employment taxes are reported on Form 941 (https://www.irs.gov/forms-pubs/about-form-941). Federal unemployment tax is reported annually on Form 940 (https://www.irs.gov/forms-pubs/about-form-940).
Year‑end wage reporting uses Forms W‑2 for employees and Form W‑3 as the SSA transmittal; file via the Social Security Administration’s employer portal (https://www.ssa.gov/employer/). Contractors you pay $600 or more for services generally receive Form 1099‑NEC. Align these due dates with your W‑2 process for a cleaner close.
How should you structure ongoing payroll operations and controls?
Treat payroll like a recurring financial close with clear inputs, approvals, and reconciliations. Simple controls catch errors early and create an audit trail.
- Time capture and approvals: lock a weekly cutoff and require manager sign‑off before payroll.
- Change management: route pay rate, deduction, and bank changes through a documented approval.
- Payroll calendar: publish all pay dates, cutoffs, deposit dates, and filing deadlines.
- Bank hygiene: use a separate payroll account and fund via just‑in‑time transfers to reduce risk.
- Reconciliations: tie payroll registers to bank debits and GL each run; do a month‑end roll‑forward.
- Records and retention: keep employment tax records for at least four years under IRS guidance, and time/wage records per FLSA rules.
These basics reduce off‑cycle corrections, protect against fraud, and simplify audits and year‑end reconciliations.
How do you measure payroll accuracy and efficiency?
Track a small set of KPIs so you can spot issues and improve over time; measure and review trends quarterly. Focus on operational metrics that show timing, errors, and cost.
- On‑time payroll rate: percent of payrolls paid on or before pay date.
- Error rate: percent of paychecks needing correction within the same period.
- Re‑run rate: percent of cycles requiring an off‑cycle run to fix issues.
- Cost per paycheck: total payroll admin cost divided by paychecks processed.
- Tax notice count: number of government notices per quarter, categorized by cause.
Set baselines from your first two cycles and target steady improvement. Pair metrics with a simple root‑cause log so recurring issues get process fixes, not one‑off patches.
What special cases and multi-state issues should you prepare for?
Remote and multi‑state work expands registrations, withholding rules, and sometimes local taxes, so plan ahead to pay compliantly where employees live and work. Document state‑specific rules in your payroll playbook.
If an employee works in another state, you typically register for that state’s withholding and unemployment; withhold based on work location unless a reciprocity agreement applies. Local income taxes in some areas require separate accounts and filings. Final pay, pay stub content, and direct deposit rules vary by state, so capture those differences early. Use state directories and agency portals to confirm requirements.
How do you pay one employee or pay in multiple states?
For one employee, you still need the core items: EIN, state registrations, onboarding forms, and a deposit and filing plan. Payroll software can reduce manual overhead even for a single W‑2.
For multiple states, map where work is performed, register for withholding and unemployment where required, and check reciprocity and local taxes. Align timekeeping and pay schedules to capture the correct work location. Consider a full‑service provider if multi‑state volume grows beyond light admin capacity.
Do contractors go through payroll or 1099 processes?
Contractors are paid via accounts payable and generally receive Form 1099‑NEC if they meet the payment threshold; they are not paid through payroll. Employees belong on payroll with tax withholding and a W‑2 at year‑end.
When classification is unclear, review the IRS common‑law factors and consider Form SS‑8 to request a worker status determination (https://www.irs.gov/forms-pubs/about-form-ss-8). Misclassification can trigger back taxes and wage liabilities, so document your reasoning and revisit roles as duties evolve.
What common mistakes cause penalties—and how do you avoid them?
Most penalties stem from repeatable errors that are preventable with basic controls and schedules. Avoid these pitfalls early to reduce audit and penalty risk.
- Missing or late federal/state tax deposits (set EFTPS and calendar reminders; follow IRS Publication 15 schedules).
- Misclassifying workers or exempt status (use IRS/DOL tests; revisit when duties change).
- Skipping state new‑hire reporting (use the OCSE state directory and add it to onboarding: https://www.acf.hhs.gov/css/employers/state-new-hire).
- Miscalculating overtime for nonexempt employees (FLSA requires overtime after 40 hours: https://www.dol.gov/agencies/whd/flsa).
- Ignoring local taxes or multi‑state registrations (map work locations before first pay).
- Weak change controls leading to wrong pay rates or bank details (require approvals and logs).
- Poor recordkeeping (retain tax records at least four years; archive pay data and filings).
Close gaps with checklists, automation, and simple approvals so each pay cycle becomes predictably correct.
What should you do next to keep payroll running smoothly all year?
Build a living payroll calendar, reconcile every cycle, and prepare for year‑end from day one. A few lightweight habits prevent heavy lifts later.
- Publish a compliance calendar with pay dates, deposit due dates, and filing deadlines (federal, state, and local).
- Do monthly and quarterly reconciliations tying payroll registers to bank/GL and to Form 941 totals.
- Start year‑end prep in Q4: verify legal names/SSNs/addresses and balance W‑2 wages and taxes to your books.
- Bookmark IRS Publication 15 and 15‑T, the Form 941/940 pages, and the SSA employer portal for quick rule checks.
- Review pay schedule fit (weekly, biweekly, semimonthly) as your team grows for accuracy vs admin tradeoffs.
- Train backups on your checklist, test EFTPS credentials, and keep vendor/admin access current.
These next steps harden your payroll runbook, reduce year‑end crunch, and ensure you stay compliant as your workforce and footprint evolve.