How to Do Payroll in 7 Steps

Running payroll means calculating employee wages, withholding federal and state taxes, paying employees through direct deposit or check, and filing tax forms with the IRS and state agencies, on a weekly, biweekly, or monthly schedule.

Running your first payroll or evaluating your current process, this covers the setup, the 7-step execution, and system options for your team size.  

You can run payroll manually or use SurePayroll By Paychex, which automates the payroll calculations, tax deposits, and filings each pay period.

Payroll is a two-phase process: one-time setup tasks you complete before your first run, and the recurring 7-step execution process you follow every pay period after that. Once setup is complete, you run the same process on your schedule.  

Before your first payroll run

Before you run your first payroll, you need to have seven things in place. These are one-time setup tasks, not part of the recurring payroll process. Complete them once and you’re ready to execute.

Federal employer identification number (EIN)

Your employer identification number (EIN) is your business’s federal tax ID. Apply free through IRS.gov, it takes 10 to 15 minutes online. Use your EIN to report payroll taxes to the IRS.  

State and local tax registration

Register for state unemployment insurance (SUTA) and state income tax withholding before your first pay date. Some cities and counties also require local tax registration; each state and locality runs its own process.

Business bank account

A separate business bank account keeps payroll transactions organized. You need it for direct deposit and the Electronic Federal Tax Payment System (EFTPS).

Employee documentation

Collect these from every new hire before their first paycheck:

•   Form W-4 (federal withholding): Form W-4 tells you how much federal income tax to withhold from each employee’s paycheck based on their filing status, dependents, and other income. Employees complete this. Collect it and enter it into      your payroll system before the first run.

•   State W-4 equivalent: If your state has income tax, it likely has its own withholding form.

•   Form I-9 (employment eligibility): Complete Form I-9 within three days of hiring a new employee.  

•   Direct deposit authorization: Collect each employee’s bank account and routing number if you’re paying via direct deposit.  

Payroll frequency

Decide how often you’ll pay your employees: weekly (52 times per year), biweekly (26 per year), semi-monthly (24 per year), or monthly (12 per year). Some states have minimum pay frequency requirements under their wage and hour laws. Check your state’s rules before locking in your pay schedule.

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"Running payroll for the first time ever was a daunting task. SurePayroll made this easy and smooth. I was very impressed with the individual attention that was given to me throughout the whole process." - Britt & Kyle J, Google review

Workers’ compensation insurance

Know your state's threshold before you hire. Most states require workers' compensation coverage, but the trigger point varies: your first employee in some states, your third or fourth in others.

Time tracking system

If you have hourly employees, you need a reliable method to track hours worked. Timesheets, timecards, time clocks, and time tracking software all work. Accurate records matter: you calculate gross pay from hours worked, and overtime for any hours over 40 in a workweek.

Once you complete these setup tasks, you’re ready to run payroll.

Your 7-step payroll run

Every time you run payroll, you’ll run the same 7-step payroll process.  

Step 1: Track employee hours or confirm salaried amounts

For hourly employees, collect timesheets or pull your time tracking data to confirm hours worked, including any overtime hours over 40 in a workweek. For salaried employees, confirm the salary amount hasn’t changed due to raises, bonuses, or other adjustments.

Step 2: Calculate gross pay

Gross pay is total wages before any deductions. For non-exempt hourly employees, multiply hourly rate × hours worked, including overtime at 1.5× the regular rate for hours over 40. For salaried employees, divide annual salary by the number of pay periods per year.

Step 3: Withhold federal and state taxes

For each employee, withhold federal income tax based on their Form W-4. Withhold Federal Insurance Contributions Act (FICA) taxes: Social Security (6.2%) and Medicare (1.45%). Withhold state income tax if your state requires it. Employer-side taxes (matching FICA, Federal Unemployment Tax Act (FUTA), State Unemployment Tax Act (SUTA) are your responsibility but aren’t deducted from employees’ wages.

Step 4: Deduct benefits and other withholdings

Deduct employee contributions to health insurance, retirement plans, and other benefits. Apply any required wage garnishments (child support, tax levies) per court order. Some payroll deductions are pretax (reduce taxable income before withholding); others are post-tax (deducted after tax withholding).

Step 5: Calculate net pay

Net pay is take-home pay: gross pay minus taxes minus deductions. This is the amount each employee receives on payday.

Step 6: Pay employees

Deliver payment via direct deposit, paper checks, or pay card on your scheduled pay date. Direct deposit requires an employee bank account and routing numbers. Pay employees by the pay date you’ve committed to.

Step 7: Deposit and file payroll taxes, and maintain payroll records

Deposit taxes you withheld plus employer-side taxes to the IRS and state agencies electronically through EFTPS on your assigned schedule. File quarterly payroll tax returns (Form 941) for federal withholding and FICA taxes, and annual returns (Form 940 for federal unemployment tax). Keep payroll records (pay stubs, timesheets, tax forms, employee W-4s) for at least three years per IRS record keeping requirements.

These 7 steps repeat every time you run your payroll. The first run takes longer while you confirm your calculations and get familiar with the process.

How to calculate employee pay

Payroll calculations break into two categories: hourly and salaried. Hourly employees are paid based on hours worked, with overtime at 1.5× the regular rate for hours over 40 in a workweek. Exempt salaried employees receive a fixed amount per pay period regardless of hours worked.

Calculating hourly employee gross pay

For standard hours: multiply hourly rate × hours worked.

Example: An employee earns $18 per hour and works 80 hours in a biweekly pay period. Gross pay = $18 × 80 = $1,440.

The Fair Labor Standards Act (FLSA) requires overtime pay at 1.5× the regular rate for hours over 40 in a workweek. Calculate overtime by workweek, not by pay period.

Example: An hourly employee earns $18 per hour and works 50 hours in one week.

•          Regular pay: 40 hours × $18 = $720

•          Overtime pay: 10 hours × $27 (1.5 × $18) = $270

•          Total gross pay for the week: $990

Some states require overtime after a set number of daily hours, not just weekly ones. California, for example, requires overtime after 8 hours in a day and double time after 12. Check your state's wage and hour laws for requirements that go beyond the federal standard.

SurePayroll calculates gross pay for hourly and salaried employees — including overtime — based on your pay frequency and rates. Enter hours worked or confirm salary amounts; the system automates the calculations

Calculating salaried employee gross pay

Divide annual salary by the number of pay periods per year.

•          Weekly: 52

•          Biweekly: 26

•          Semi-monthly: 24

•          Monthly: 12

Example: An employee earns $52,000 per year, paid biweekly. Gross pay per paycheck = $52,000 ÷ 26 = $2,000.

Salaried employees may be exempt (not eligible for overtime) or nonexempt (eligible for overtime). Exempt status depends on both salary level and job duties, not just the fact that someone is salaried. Nonexempt salaried employees must receive overtime pay for hours over 40 in a workweek.

Paying independent contractors (1099 workers)

Independent contractors are paid the invoiced amount. You don’t withhold employment taxes or calculate overtime for them. Contractors handle their own self-employment tax and income tax. If you pay a contractor $2,000 or more in 2026 (indexed for inflation every year), you file Form 1099-NEC by January 31 of the following year.  You may run contractor payments on the same payroll schedule or in the same system as employees for consistency.

Bonuses, commissions, and tips

Add bonuses and commissions to gross pay and withhold federal and state taxes on both. For tips, employees report any month they receive $20 or more in cash tips, and you include those reported amounts in gross pay for withholding purposes.

‍"To start payroll for the first time can be intimidating. SurePayroll made this process as simple as possible. I just followed the step-by-step process and before I knew it my employee was added and my first payroll was done."  - Roger A, Trustpilot review

Tax withholding and filing requirements

Tax withholding means deducting federal and state taxes from employees’ paychecks, then sending those amounts plus your employer-side taxes to the IRS and state agencies. You withhold federal income tax, Social Security, and Medicare based on each employee’s Form W-4 data. You also owe employer-side taxes: matching Social Security and Medicare contributions, plus federal unemployment and state unemployment taxes.

Federal income tax withholding

Calculate federal income tax withholding from each employee’s Form W-4 (filing status, dependents, additional withholding amounts) using the IRS withholding tables for the current tax year. The IRS publishes updated tables annually in Publication 15 (Circular E). Payroll software and services apply current IRS tables automatically.

FICA taxes: Social Security and Medicare

FICA covers Social Security and Medicare taxes. Withhold 6.2% for Social Security and 1.45% for Medicare (7.65% total) from each employee’s paycheck. You match that amount as the employer: another 6.2% + 1.45%.

Social Security has an annual wage base limit; wages above that amount are not subject to Social Security tax. Medicare has no wage limit; high earners pay an additional Medicare tax on wages above a set threshold.  

SurePayroll automates federal income tax, Social Security, Medicare, and state income tax withholding calculations using employee W-4 data and current withholding tables — no manual rate lookups required.

State income tax withholding

Nine states do not have income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If your business operates in a state with income tax, confirm your registration and withholding requirements before your first payroll run.

FUTA

FUTA is an employer-only tax. You don’t deduct it from employees’ wages. The current rate is 6.0% on the first $7,000 of each employee’s wages per year, with a 5.4% credit available for timely state unemployment tax payments in eligible states.

SUTA

The SUTA, sometimes called State Unemployment Insurance (SUI), is an employer-only tax that funds state unemployment benefits. You don’t deduct it from employees’ wages. Rates vary by state, industry, and your company’s unemployment claims history. New employers receive an initial rate that adjusts annually based on claims experience.  

State payroll tax returns

Most states require quarterly wage and withholding reports. Frequency and due dates vary by state.

Required tax forms and filing deadlines

Every employer files these federal tax forms.

•         Form 941 (Employer’s Quarterly Federal Tax Return): Report federal income tax, Social Security, and Medicare you’ve withheld from paychecks, plus your employer-side FICA. Due quarterly on April 30, July 31, October 31, and January 31.

•        Form 940 (Employer’s Annual Federal Unemployment Tax Return): Report your annual FUTA liability. Due January 31 of the following year.

•          Form W-2: Issue a Form W-2 to each employee by January 31, showing total wages and taxes withheld for the year. Also filed with the Social Security Administration.

•          Form 1099-NEC: File for contractors you’ve paid above the reporting threshold in a calendar year. Due January 31 of the following year.

Tax deposit schedule

Deposit withheld taxes electronically through EFTPS. Your deposit schedule (monthly or semiweekly) depends on your annual tax liability. Minimize IRS penalties by meeting your deposit deadlines.

SurePayroll automated payroll service includes filing your federal and state payroll tax returns — and depositing withheld taxes to the IRS and state agencies on your assigned schedule.

Your payroll system options: manual, software, or service

You have three options for running payroll: manage it yourself using manual payroll, use payroll software, or work with a payroll service provider. You’ll use the same 7-step process in each. The difference is how much you calculate and file yourself versus how much you automate. The right choice depends on your team size, pay structure, and how much time you want to spend on payroll administration.

Manual payroll

Calculate employee wages, tax withholdings, and payroll deductions yourself using spreadsheets or paper ledgers. You write paper checks or initiate direct deposits manually. You file tax forms (Form 941, Form 940, W-2s) and make tax deposits through EFTPS on your schedule.

Use manual payroll when:

•          You have 1 to 2 salaried employees with stable pay rates and no frequent adjustments

•          You have accounting or bookkeeping experience and understand payroll tax calculations

•          You have time to manage quarterly and annual tax filing deadlines yourself

•          Your team structure is straightforward: all employees, no contractors or overtime complexity

Manual payroll requires consistent attention to detail. Tax calculations must use current IRS and state withholding tables. Deposit deadlines are not flexible. The Paychex 2025 Business Leader Priorities survey found that one in three small business leaders spends more than 10 hours a week on HR administration, including payroll. As your team grows, so does that time investment. When payroll starts consuming your schedule, that's the signal to move to software or a service.

Payroll software

Automate wage calculations, tax withholdings, and paycheck generation based on the employee information you input (hours worked, salary amounts, W-4 data). Your software applies current tax tables to calculate federal and state taxes. You still file and make deposits: software generates the forms, but you submit them to the IRS and state agencies.

Use payroll software when:

•          You have 3 to 10 employees with straightforward pay structures

•          You want to automate calculations but keep control of the filing process

•          Your team is primarily employees with consistent pay periods

•          You’re comfortable managing tax filing deadlines independently

Payroll service

A payroll service calculates wages, withholds taxes, processes payments via direct deposit or checks, files tax forms, and makes tax deposits to the IRS and state agencies. You approve payroll each period and provide accurate employee data: hours worked, new hires, terminations, and any changes to pay rates.

Choose a payroll service when:

•          You have 3 or more employees, or any mix of employees and independent contractors

•          You have hourly employees with overtime pay calculations

•          You’re a first-time employer and want your setup to be right from the start

•          You’re an S corporation owner who needs to pay yourself through payroll (separate from distributions)

•          You have employees in multiple states and need multi-state payroll processing

What you're buying with a payroll service is your time back. Paychex research puts that at up to 120 hours of manual work per year and up to 80% in processing cost savings for businesses that make the switch. (2022 survey of 1,000 HR decision-makers).  

"I am not an accountant, but a great commercial real estate broker. In starting my own company, I was at a loss of how to give someone a paycheck and take out taxes. SurePayroll made it so simple."  - Clell T, Google review

Common payroll mistakes and how to fix them

Missing or incorrect W-4 data

Collect a completed W-4 from every employee before their first paycheck. Review W-4s annually, and when employees report life changes like marriage, divorce, or new dependents. Withholding  accuracy depends on current data.

Misclassifying employees as exempt

Before you classify any salaried employee as exempt from overtime, confirm they meet both the salary test and the duties test. Exempt status requires a minimum salary of $684 per week and job duties that qualify under FLSA criteria. Being salaried alone doesn't establish exemption.

Calculating overtime incorrectly

Calculate overtime by workweek, not by pay period. If an employee works 50 hours in one week of a biweekly pay period, pay 10 hours of overtime at 1.5× their regular rate, even if their total hours for the full pay period are under 80. Pay rate × 1.5 applies to every hour over 40 in that specific week.

Missing tax filing deadlines

Mark your tax filing deadlines on your calendar before your first payroll run. Form 941 is due quarterly, Form 940 annually, and W-2s and 1099-NECs by January 31. If you're running manual payroll, set reminders two weeks before each due date.

Using outdated tax tables

Update to current IRS withholding tables at the start of each calendar year. IRS Publication 15 (Circular E) publishes updated rates annually; check your state agency for state table updates. Payroll software and services update tax rates automatically.

Not tracking contractor payments

Collect Form W-9 from every contractor before your first payment to them. Track total payments per contractor throughout the year and you’ll have everything you need to file Form 1099-NEC by the January 31 deadline for anyone who crosses the $2,000 reporting threshold in 2026.

Payroll software and services automate calculations and deposit and file taxes on schedule.

How SurePayroll runs payroll execution

For three or more employees, a mix of employees and contractors, or S-corp owner payroll: you approve each pay period and keep employee data current — new hires, terminations, pay rate changes.  

SurePayroll automates wages, withholding calculations, direct deposit, and federal and state tax filings and deposits on your schedule.

Get started with a payroll service built for your business.