QUICK ANSWER
To set up payroll for the first time as a small business owner in 2026: (1) obtain a Federal Employer Identification Number (EIN) from the IRS, (2) register as an employer with your state tax agency, (3) collect W-4s from new employees, (4) determine your payroll schedule (weekly, biweekly, semimonthly, monthly), (5) choose payroll software (Gusto, QuickBooks Payroll, or ADP), (6) input employee information and tax elections, and (7) run your first payroll. Most small business owners can complete setup in 2–4 hours using modern payroll software.
Key Takeaways
- You need an EIN before running payroll — apply for one free at IRS.gov — the Employer Identification Number (EIN) is your business’s tax ID for federal payroll tax purposes; you can apply online at IRS.gov and receive your EIN immediately; don’t pay third-party services to obtain an EIN, the IRS provides them free.
- State registration requirements vary and can take 2–4 weeks to process — most states require employers to register before withholding state income taxes and paying state unemployment insurance; this registration may take weeks to process, so initiate it as soon as you plan to hire; payroll software typically guides you through state registration requirements.
- Payroll tax deposits have strict IRS deadlines with penalties for late payment — federal payroll taxes (federal income tax withholding + Social Security + Medicare) must be deposited on a semi-weekly or monthly schedule depending on your tax liability; payroll software automates these deposits, eliminating the risk of missed deadlines and the associated penalties.
- Full-service payroll software is worth the monthly cost for most small businesses — full-service payroll providers (Gusto, QuickBooks Payroll) automatically calculate taxes, file quarterly returns (941s), make tax deposits, and issue W-2s at year-end; the cost ($40–$80/month for a small team) is typically far less than the cost of payroll tax mistakes or accountant-prepared payroll.
How to Set Up Payroll for the First Time
Step 1: Obtain Your Employer Identification Number (EIN)
Apply for an EIN at IRS.gov — the application is free and you receive your EIN immediately upon completion for online applications. An EIN is required for all businesses with employees (and for most business entities regardless of whether they have employees). If you’re a sole proprietor hiring your first employee, this is typically your first step. If you already have an EIN for your business, you can use the same number for payroll purposes.
Step 2: Register With Your State for Payroll Taxes
Most states require employers to register for state income tax withholding and state unemployment insurance (SUTA) before running payroll. Registration requirements, timelines, and processes vary by state — your state’s Department of Revenue or Department of Labor website will have the relevant forms. In most states, this registration takes 2–4 weeks to process, so initiate it as soon as you know you’ll be hiring. Modern payroll platforms like Gusto often provide state registration guidance and in some states can handle the registration on your behalf.
Step 3: Collect Required Employee Documents
Before running payroll for any employee, you’ll need: (1) Form W-4 (Employee’s Withholding Certificate) — determines federal income tax withholding; employees complete this themselves; (2) Form I-9 (Employment Eligibility Verification) — verifies the employee’s right to work in the U.S.; you must complete this within 3 business days of the employee’s first day; (3) Direct deposit information — bank account and routing numbers for direct deposit setup; (4) State equivalent of Form W-4 if your state has income tax.
Step 4: Choose Your Payroll Schedule
Common payroll schedules: weekly (52 payrolls/year), biweekly (26 payrolls/year — most common), semimonthly (24 payrolls/year, always on specific dates like the 1st and 15th), or monthly (12 payrolls/year). Biweekly is the most common schedule for small businesses because it’s frequent enough for employees but less administrative overhead than weekly payroll. Note that some states have minimum payroll frequency requirements — check your state’s rules before choosing a schedule.
Step 5: Choose and Set Up Payroll Software
Select a full-service payroll provider that will automatically calculate taxes, make tax deposits, file quarterly returns, and issue year-end W-2s. Gusto ($40/month + $6/employee) and QuickBooks Payroll ($45/month + $5/employee for Core) are the most popular options for small businesses. Setup typically takes 1–2 hours: enter your business information, EIN, state tax IDs, bank account for payroll funding, and add each employee’s personal information, pay rate, withholding elections, and direct deposit details.
Payroll Setup Checklist
| Step | What You Need | Where to Get It |
|---|---|---|
| EIN | Federal Employer ID Number | IRS.gov (free, immediate) |
| State registration | State employer ID number | State Department of Revenue |
| Employee W-4 | Federal withholding election | IRS.gov or payroll software |
| I-9 verification | Employment eligibility docs | USCIS.gov |
| Bank account | Funding account for payroll | Your business bank |
| Payroll software | Full-service provider | Gusto, QBO Payroll, ADP |
Recommended Resources
Accounting All-in-One For Dummies — covers the accounting side of payroll that business owners often overlook: how to record payroll journal entries, track payroll tax liabilities, and reconcile your payroll records to your general ledger.
Bookkeeping Workbook For Dummies — practical exercises for understanding payroll bookkeeping: recording gross wages, tax withholdings, employer payroll taxes, and net pay — the complete payroll accounting cycle explained with hands-on practice.
Frequently Asked Questions
How long does it take to set up payroll?
Most small business owners can set up payroll in 2–4 hours using full-service payroll software like Gusto or QuickBooks Payroll — assuming you already have your EIN and state employer registration numbers. The most time-consuming part is often waiting for state employer registration numbers to arrive (2–4 weeks in most states). Once you have all required IDs and employee information, the actual software setup typically takes 1–2 hours. If you’re setting up payroll while waiting for state registrations, most payroll software allows you to set up the account and run test payrolls before activating live payroll processing.