How to Run Payroll: A Step-by-Step Guide
How to run payroll for a small business: what to do before your first run, the nine steps of a payroll run, the deadlines, and what to check every time.
How to Run Payroll
The actual procedure, for the owner doing it themselves: what to have ready, the nine steps, the deadlines that generate penalties, and what to check every time
You have hired someone, payday is on Friday, and you have realized that you do not actually know what running payroll involves. Not conceptually. Procedurally. What do you do, in what order, and by when.
That is what this page is. Not what payroll is, which is covered in the payroll guide. This is the procedure: what has to exist before your first run, the nine steps of an actual run, the calendar you have to work backwards from, and the checklist to go through every single time.
The single most useful thing I can tell you before you start is this: payroll does not end when your employees are paid. It feels like it does. It is not true, and that gap between how it feels and what it is accounts for most of the penalties small businesses collect. I build FirstHR, which holds the employee records payroll consumes. One caveat: this is tax territory, figures change annually, and I am not a tax professional.
What a Payroll Run Is
A payroll run is one complete cycle of paying your employees for a pay period: calculating what each person earned, withholding the correct taxes and deductions, paying them the remainder, and remitting the withheld money plus your employer contribution to the IRS and your state.
Note where that sentence ends. Not at paying them. The run includes handing the government its money, and that step happens on a completely different schedule from the one you just paid people on.
Before Your First Run
None of the nine steps can happen until this list exists. And two items on it take days or weeks, not minutes, which is why the correct time to start is when you decide to hire rather than the week the person shows up.
The registrations themselves are covered in the employer identification number guide, and the work-authorization form in I-9 documentation.
The one people forget entirely is the state filing. Every state requires new hires to be reported to a state directory, generally within about twenty days, and it is covered in new hire reporting. It takes minutes and it carries penalties.
The two amber rows are the ones that break timelines. State registration can take days to weeks depending on the state, and you need one set per state where an employee actually works, which is their location and not your office. EFTPS enrollment involves a mailed PIN, so it is measured in days. If your first employee starts in two weeks and you have not begun either, you are going to be late for something.
The red row has the tightest clock. Form I-9 is due within three business days of the start date, and it does not extend because you were busy hiring. Collect it, along with the W-4 and the bank details, during onboarding rather than chasing it afterwards. Practically, all of this lives in new hire paperwork, and getting it right there is what makes the first payroll run boring instead of frightening.
The Nine Steps
Every payroll run at every business in the country is a version of this. The order matters, because each step feeds the next and getting the sequence wrong changes the answer.
Step two has a wrinkle worth knowing before you hit it: overtime is 1.5 times the regular rate, not 1.5 times the hourly wage, and the two diverge the moment a nondiscretionary bonus or a shift differential enters the week. And it only applies to non-exempt employees.
Steps two through seven are arithmetic, and they are the part everybody worries about. They are not the risk. A spreadsheet does them, a payroll system does them better, and if you get one wrong you find out quickly because someone's paycheck looks odd.
Step nine is the risk. It is invisible, it happens weeks after the visible work is done, and nothing about your day reminds you it is due. The details of the calculation steps are in gross pay versus net pay, and the reason the order matters is that pre-tax and post-tax deductions hit different tax bases.
Working Backwards From Payday
Payroll is not a payday activity. It is a process that ends on payday, and running it as though payday is the starting gun is how people end up paying their staff late.
The submission timing is the thing nobody tells you. Direct deposit is not instant. Depending on your bank and your method, the transfer typically needs to be initiated one to three business days before payday to actually land on payday. Run payroll on Friday morning intending to pay people Friday, and you have already missed.
Step one depends on something outside payroll entirely: your timesheets. If the hours are wrong, everything downstream is wrong, and no amount of care in step five fixes a bad number in step one.
Find out your bank's lead time before your first run, not during it. Then build your payroll calendar backwards from payday: if payday is Friday and your bank needs two business days, your submission deadline is Wednesday, which means your hours have to be closed and approved by Tuesday. That is your actual schedule, and it starts earlier than you think.
What You Withhold
The rates, for 2026. These are the numbers you apply in steps four through six, and they are worth having in one place because a surprising number of published pages are still showing last year's.
Federal income tax is the one that is not a rate. It comes from the employee's W-4 and the tables in IRS Publication 15-T, and for manual payroll the Wage Bracket Method is the practical approach: find the table for your pay frequency, find the row for their wages and the column for their filing status, and the number in that cell is what you withhold.
One trap worth naming: if there is no W-4 on file, you do not withhold zero. You withhold as single with no adjustments, which is generally more than the employee expected. A missing form does not mean a missing obligation.
Then You Deposit It
Step nine, and the whole reason this article keeps hammering the same point. The money you withheld has a deadline, and the deadline has nothing to do with when you paid your employees.
Federal deposits must be made electronically, through EFTPS. There is no paper option for most employers, which is why the enrollment is on the pre-flight checklist rather than something you sort out later.
| What | When | What it covers |
|---|---|---|
| Federal tax deposit | Monthly by the 15th, for most small employers | Withheld income tax plus both halves of Social Security and Medicare |
| Form 941 | Quarterly, by the end of the month after the quarter | The quarter's wages and employment taxes. Most employers file this |
| Form 940 | Annually, by January 31 | Federal unemployment tax for the year |
| W-2 to employees and the SSA | By January 31 | One per employee, showing the year's wages and withholding |
| 1099-NEC to contractors | By January 31 | For contractors paid at or above the reporting threshold |
| State deposits and filings | On the state's own calendar | A separate set for every state where you have an employee |
How often you pay is a separate decision from all of this, and it should be made deliberately rather than by default. The options are in pay schedule, and biweekly is the reasonable default for most small businesses.
Put every one of those dates on a calendar, today, for the whole year. Not in your head. The calendar is what keeps you compliant; the spreadsheet only does the arithmetic. The single most common way a new employer gets a penalty is not that they refused to pay their taxes. It is that the deadline arrived while they were busy and nobody had written it down.
Your First Run
The first one is different, because nothing is routine yet and you have no prior period to compare against. Three things to do differently.
Every input to that first run came from onboarding, not from payroll: the W-4, the pay rate, the work location, the bank details. Those are collected in tax forms for new employees, and a payroll system will not tell you one is missing until the run fails or, worse, succeeds on the wrong number.
And expect the first paycheck to look strange to the employee, because it usually does. A mid-period start means they are paid for the days they worked rather than a full period. A benefit that has not begun yet means a deduction they expected is missing. Say so in advance, because an unexplained first paycheck is a worried message you did not need to receive.
Running It Manually
Entirely legal, and genuinely workable at one to five employees in a single state. Nothing requires you to use software or a service. The IRS cares that the numbers are right and deposited on time; it does not care who did the arithmetic.
What you need: the current withholding tables from IRS Publication 15 and Publication 15-T, a spreadsheet you trust, an EFTPS enrollment, and a calendar with every deadline already on it. That last item is not optional and it is not decoration. It is the thing that actually keeps you compliant.
| Manual | Software | |
|---|---|---|
| Calculates gross, withholding, and net | ||
| Updates the tax tables each January | ||
| Deposits the taxes on schedule | ||
| Files 941, 940, and W-2s | ||
| Retains a payroll register per run | ||
| Costs nothing in fees | ||
| Catches a wrong pay rate you entered | ||
| Carries the legal liability for your taxes |
The bottom two rows are the honest part. Neither column has a check mark. Software does not catch a wrong rate you typed, and it does not assume your legal liability. If a provider fails to deposit your taxes, the IRS pursues you. Outsourcing moves the work; it does not move the obligation.
Manual payroll stops working at a fairly predictable point: when you add hourly staff with overtime, when you add a second state, or when the run starts taking long enough that the fee is obviously cheaper than your time. The full case is in payroll automation, and the honest summary is that you are buying deadline compliance rather than arithmetic.
The Every-Time Checklist
Five minutes, every run, before you release it. This catches most of what goes wrong.
If you find an error after the run has gone out, the correction is retro pay, and it has its own arithmetic and its own tax treatment. Catching it before you release beats fixing it afterwards every time.
The first item is the highest-value thing in this entire article after the deposit calendar. Compare this run to the last one. Payroll is remarkably stable period to period, which means anything that moved is either explicable or wrong, and finding out which takes about a minute.
What Goes Wrong
Six recurring failures, and the first one accounts for more penalties than the rest combined.
The last one is the one that ends businesses, and it needs saying plainly. The money you withhold from an employee's paycheck is trust fund money. It is not revenue and it is not working capital. When a business hits a cash crunch, that money is sitting in the account looking exactly like every other dollar, and it is not yours. Unpaid trust fund taxes can be assessed against the individuals responsible personally, which means the corporate form does not protect you the way it does for ordinary debts.
The employer share you owe on top of wages, meaning the matching FICA and the unemployment tax, is the statutory benefits floor, and it lands at roughly 8 to 10 percent of payroll before you offer a single voluntary benefit.
If you are ever choosing between paying the taxes and paying a vendor, pay the taxes. That is the one bill where the consequence of not paying follows you home.
Frequently Asked Questions
How do you run payroll?
In nine steps. Collect and approve hours for the pay period. Calculate gross pay, including overtime at one and a half times the regular rate for non-exempt employees. Subtract pre-tax deductions. Withhold federal income tax using the employee's W-4 and the current IRS tables. Withhold Social Security at 6.2 percent and Medicare at 1.45 percent. Withhold state and any local taxes. Subtract post-tax deductions to arrive at net pay. Pay the employee and issue an itemized pay stub. Then deposit the withheld taxes plus your employer share with the IRS and your state on your deposit schedule, which is not the same as your pay schedule.
How do I run payroll for the first time?
Everything before the first run matters more than the run itself. You need an EIN, state withholding and unemployment registrations in every state where an employee works, an EFTPS enrollment for federal deposits, a signed W-4 and completed I-9 for each employee, their direct deposit details, and a new hire report filed with your state. State registration and EFTPS enrollment take days or weeks rather than minutes, so start when you decide to hire rather than the week the person starts. Then run the nine steps, check the numbers twice, and put every deposit deadline on a calendar.
How do I run payroll manually?
It is entirely legal and it is workable at one to five employees in a single state. You need the current IRS withholding tables from Publication 15-T, a spreadsheet you trust, an EFTPS enrollment, and a calendar with every deposit and filing deadline already on it. Calculate gross pay, apply deductions in the correct order, withhold federal income tax from the tables plus Social Security and Medicare, withhold state tax, and pay the net. Then deposit and file yourself. The arithmetic is manageable. The deadlines are what catch people, which is why the calendar is not optional.
How long does it take to run payroll?
Manually, for a small team, typically one to three hours per run once you are practiced, and considerably longer the first few times. With software, generally under thirty minutes, most of which is reviewing rather than calculating. The variable that matters most is not headcount but complexity: hourly staff with variable schedules and overtime take far longer than salaried employees on fixed pay, and every additional state multiplies the work. Multiply your per-run time by 26 to see what biweekly payroll actually costs you across a year.
When should I submit payroll before payday?
Two to three business days before, and this is the step nobody warns first-time employers about. Direct deposit is not instant: depending on your bank and your method, transfers typically need to be initiated one to three business days ahead to actually land on payday. If you run payroll on Friday morning intending to pay people that Friday, you have already missed. Find out your bank's lead time before your first run, then build your payroll calendar backwards from payday rather than forwards from when you get around to it.
What do I need before running payroll?
For the business: an Employer Identification Number, state withholding and unemployment registrations in every state where an employee actually works, and an EFTPS enrollment for making federal tax deposits electronically. For each employee: a signed Form W-4, a completed Form I-9 within three business days of their start date, direct deposit details, their pay rate, and their actual work location. You also have to file a new hire report with your state, generally within about twenty days. Missing any one of these will stop or corrupt your first run.
Is running payroll the same as paying employees?
No, and this is the misunderstanding that produces penalties. Paying employees is one step of running payroll. The run is not finished when everyone has been paid: you still have to deposit the taxes you withheld, plus your employer share, with the IRS and your state, on a deposit schedule that is assigned to you and is separate from your pay schedule. A business can pay every employee on time, every period, and still be penalized for late deposits. Payroll feels finished when the employees are paid. It is not finished until the government is paid too.
What is my payroll deposit schedule?
The IRS assigns it based on the employment tax you reported during a lookback period. If you reported $50,000 or less, you are a monthly depositor and taxes for a given month are due by the 15th of the following month. Above that, you are a semiweekly depositor. New employers are monthly depositors in their first year. There is also a next-day rule if you accumulate $100,000 or more in liability on any day. Your deposit schedule is not your pay schedule and confusing the two is how businesses that paid everyone on time still get a penalty.
What forms do I file after running payroll?
Form 941 quarterly, reporting the wages and employment taxes for that quarter. Form 940 annually by January 31, for federal unemployment tax. W-2s to each employee and to the Social Security Administration, also by January 31. Plus 1099-NECs by January 31 to any contractor you paid at or above the reporting threshold. And every state where you have an employee has its own separate set of filings on its own calendar. The deposits are the recurring obligation; the forms are the periodic one, and both have to be on a calendar.
Can I run payroll myself without an accountant?
Yes. Nothing requires an employer to use payroll software or a payroll service, and plenty of small businesses run payroll manually and correctly. It is genuinely defensible at one to five employees in a single state on a simple schedule. It stops being defensible when you add hourly staff with overtime, a second state, or enough headcount that the arithmetic becomes a weekly chore. Note that using a provider does not transfer legal responsibility either: if they fail to deposit your taxes, the IRS pursues you. The obligation stays with you regardless.
What is the most common payroll mistake?
Confusing the pay schedule with the deposit schedule, which produces a failure-to-deposit penalty at a business that paid every employee correctly and on time. Close behind it are calculating overtime on the hourly wage rather than on the regular rate, which understates what non-exempt employees are owed, and treating withheld tax as available cash, which it is not. Withheld income tax and FICA are trust fund money held on the employee's behalf, and if they go unpaid the IRS can pursue the individuals responsible personally.