Payroll Setup Checklist for Small Businesses

Setting up payroll can feel overwhelming when you’re running a small business. Between tax registrations, employee paperwork, and compliance requirements, missing a step can lead to costly mistakes. This Payroll Setup Checklist will walk you through everything you need to get started the right way. At the end, you can also download the free PDF version to keep handy.

Step 1 – Register Your Business for Payroll

• Apply for an Employer Identification Number (EIN) with the IRS.
• Register with your state tax authority for payroll tax accounts.
• Check if you need to register for local payroll taxes.

Step 2 – Classify Your Workers

• Decide if each worker is a W-2 employee or 1099 contractor.
• Follow federal and state guidelines for correct classification.
• Misclassification penalties can be expensive — review carefully.

Step 3 – Collect Employee Paperwork

• Form W-4 (federal income tax withholding)
• Form I-9 (eligibility to work in the U.S.)
• Direct deposit authorization form
• State-specific forms (where applicable)

Step 4 – Choose a Payroll Schedule

• Weekly, bi-weekly, semi-monthly, or monthly pay runs.
• Ensure compliance with state wage payment laws.
• Pick a schedule that aligns with your cash flow.

Step 5 – Select a Payroll System

• Decide whether you’ll manage payroll in-house or with a payroll provider.
• Look for features like direct deposit, tax filing support, and compliance tracking.
• Integration with bookkeeping makes payroll much easier to manage.

Step 6 – Set Up Payroll Deductions

• Federal income tax withholding
• State/local income tax withholding
• Social Security & Medicare (FICA)
• Employee benefits (health insurance, retirement)
• Wage garnishments if applicable

Step 7 – Establish Recordkeeping Practices

• Store payroll records securely (digital or physical).
• Retain records for at least 4 years (federal requirement).
• Maintain timekeeping, pay stubs, tax filings, and employee forms.

Download the Payroll Setup Checklist PDF

Want a printable version of this checklist? Download the Payroll Setup Checklist PDF to share with your team.

FAQs

How long does payroll setup take?
Typically 1–2 weeks, depending on how quickly state accounts are approved.

Do I need payroll software?
While very small businesses can process payroll manually, software or a provider reduces errors and handles tax filing automatically.

Can I run payroll without an EIN?
No – you must have an EIN to file payroll taxes with the IRS.

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Related Checklists

If you’re handling payroll for multiple states, you may also need our Payroll Tax Compliance Checklist and Payroll Recordkeeping Checklist