How Payroll Works for Small Law Firms

Setting up law firm payroll follows a defined sequence: register as an employer, gather the right credentials, classify the people you pay, and run payroll on a consistent schedule. The decisions you make during setup determine how much manual work you carry each pay period and each quarter.

This applies whether you are hiring your first paralegal, adding associates to a growing practice, or paying yourself as an S-corp owner-employee. The Bureau of Labor Statistics projects lawyer employment to grow 4% from 2024 to 2034. Firms that add headcount without a payroll system absorb that growth as manual work.

SurePayroll® By Paychex is built for small businesses running lean.

How to register as an employer with federal and state agencies

Before you run payroll, you need to be a registered employer in your state. Business formation and employer registration are two separate events: Your small law firm can have a fully organized limited liability company (LLC), limited liability partnership (LLP), or professional corporation and still not be registered to withhold payroll taxes or fund unemployment insurance.

Start with four registrations.

Employer Identification Number (EIN): Your EIN is your federal tax ID. The Internal Revenue Service (IRS) does not charge businesses to apply for an EIN and issues the number immediately when you apply online. You need this before you start a payroll system or hire your first team member.

State income tax withholding registration: Most states require a separate registration with the state revenue agency before you can withhold employee income taxes. Enter your state withholding account number in your payroll setup so your deposits reach the right agency on schedule.

State unemployment insurance (SUI) account: Register with your state’s labor or workforce agency. Your state assigns your SUI rate after registration. In most states, you do not withhold it from employee paychecks. Three states currently require employees to contribute as well: Alaska, New Jersey, and Pennsylvania.  

New hire reporting: Federal law requires you to report each new hire within 20 days of their start date. State deadlines may differ.

The new hire reporting requirement applies to you as a new employee of your law firm if you elect S-corp status and put yourself on payroll as an owner-employee. Most online payroll systems include automatic new hire reporting.

What to gather before your first payroll run

Set everything up before your first payroll run. Missing one credential mid-setup means stopping to track it down before you can continue.

Gather these before you start to set up your payroll account:

Registration credentials. Your EIN, state income tax withholding account number, and SUI account number. With these credentials, you connect your payroll system to the correct federal and state agencies so deposits and filings route correctly.

Employee documents. A completed Form W-4 for every person you are paying, including yourself if you are an S-corp employee-owner. Your employee indicates their federal income tax withholding elections on this form. On Form I-9, you verify each hire’s identity and employment eligibility. Your state may require its own withholding form as well.

Your pay schedule decision. Bi-weekly and semi-monthly are the two most common pay schedules in professional and business services. Roughly 72% of firms use them, according to U.S. Bureau of Labor Statistics data.

Some states set minimum pay frequency requirements. If your small law firm bills on retainer, your cash flow may not align neatly with a bi-weekly schedule, for example. Within compliance requirements, consider building your pay schedule around your firm’s cash position before you finalize it.

Bank account information. Collect account and routing numbers for your firm’s operating account and for each person receiving direct deposit, including yourself. Collecting this upfront helps your first payroll run deposit on schedule.

How to classify the people your firm pays

You’re responsible for two classification determinations: whether someone is an employee or independent contractor, and whether employees are exempt from minimum wage and overtime requirements. Both affect your payroll taxes, your year-end tax forms, and your obligations under the U.S. Department of Labor (DOL), IRS and state labor reviews.

The IRS applies a degree-of-control test to determine whether a worker is an employee for tax purposes. The DOL applies a separate economic reality test under the Fair Labor Standards Act (FLSA) to determine whether a worker is an employee or independent contractor for minimum wage and overtime purposes. The IRS and DOL analyze worker classification under different legal frameworks, so businesses should evaluate worker status under each applicable standard. For questions about how a specific arrangement should be classified under either test, consult an employment attorney or CPA.

Associates and paralegals

Associates and paralegals are almost always employees. Your firm assigns their work, sets their schedule, and directs their day-to-day activity. Under the IRS behavioral control test, that degree of direction is a strong indicator of employment.  

Federal and state overtime rules and minimum wage requirements apply to non-exempt employees, including most paralegals and administrative support staff. Whether those protections apply depends on a worker's status under the FLSA and an applicable exemption, not solely on a job title or employment agreement.

Contract and of-counsel attorneys

Independent contractors set their own hours, work with minimal firm direction, and are engaged for a specific project or matter. A freelance researcher you hire for one case, with no oversight beyond the deliverable, may qualify. A contract attorney you supervise daily on billable hours probably does not, regardless of what the engagement letter says.

Of-counsel relationships vary: classification depends on the actual arrangement, not the title. The IRS and DOL evaluate worker classification under different standards, and some states apply additional tests. Evaluate the working relationship at the time of engagement, document the factors that support your classification decision, and retain that record. Thorough documentation can help support your position if questions arise later.

The owner as W-2 employee

If you have elected S-corp status, you pay yourself a reasonable salary from the business. You take profits beyond your salary as shareholder distributions. You run your salary through payroll as wages before taking any distributions. Your CPA or tax attorney can help determine a reasonable salary for your role.

How to set up your payroll system and run your first payroll

You set up your payroll system by entering three categories of information: your company profile (EIN, bank account, pay schedule), each employee’s profile (compensation type, withholding elections from their W-4, direct deposit details, and any employee benefits), and your tax account credentials (federal and state IDs from your registrations). 

Once you enter that information, you verify amounts and approve your first payroll run.

Running payroll manually means owning every step. You determine gross pay for each employee, apply federal income tax withholding using IRS tax tables, and process Social Security and Medicare contributions, withholding the employee’s share from each paycheck and funding the employer match from your firm’s account.  

Federal tax deposits go through EFTPS. You deposit state income tax withholding and unemployment taxes through your state agencies’ online portals. You maintain a payroll register, whether that is a spreadsheet or accounting software, and you own every quarterly Form 941 filing, every state payment, and every W-2 and 1099-NEC at year-end.

For a small firm with straightforward payroll needs, SurePayroll® By Paychex calculates and withholds federal and state taxes, files forms 940s, 941s, W-2s, and 1099-NECs, and runs payroll on your firm’s schedule. You can also process your payroll as an S-corp owner with SurePayroll, no separate system required.  

Your first payroll run checklist: Verify each employee’s information is correct, confirm compensation amounts, review withholding elections, and approve. With that first run, you set the cadence for every payroll run that follows.

“SurePayroll helped me set up payroll for my S-corp. [My rep] was very prompt, patient, courteous, and professional … she walked me through processing my first payroll payment and setting up automatic payroll.” — Jennifer H., Better Business Bureau review

What happens after your first payroll run

You manage three recurring payroll windows: every pay period, every quarter, and every year.

Every pay period: Before you complete each payroll run, review compensation amounts, confirm any updated withholding elections, and verify direct deposit details are current. Complete paid time off (PTO) or accrual adjustments before the run processes as well. For non-exempt staff, confirm time tracking records. Approve when everything is current and correct.

If you added a team member or contractor since your last run, confirm they are in the system before you approve the payroll run. A payroll service automates these tasks once you approve. Then employees receive their pay stubs.

Every quarter: You submit Form 941 to the IRS four times a year to report the wages you paid and taxes you withheld. The IRS assigns your federal tax deposit schedule, monthly or semi-weekly, based on the total payroll taxes you reported during your lookback period — the 12-month window ending June 30 of the prior year. If you are a first-year employer, the IRS automatically places you on a monthly schedule.

You follow your state’s schedules for withholding and state unemployment insurance (SUI) reports. Know your state’s requirements before your first quarter closes. Some jurisdictions also require local tax withholding.

Every year: Your firm distributes W-2s to all employees and 1099-NECs to all independent contractors by January 31. Form 940, your annual federal unemployment tax return, is also due January 31. You submit Form W-3 (Transmittal of Income and Tax Statements) to the Social Security Administration on that date as well. Build these deadlines into your firm’s calendar at setup.

When your firm changes: Before your next run, update payroll for any of these four events: a new hire, a pay change, an updated withholding election, or a benefits deduction adjustment. Handle each one when it happens.

“My first payroll literally took me 5 minutes! Great customer service!” — Bruce M., Better Business Bureau review

You built your payroll system. Now make it work for your firm

The difference between a payroll system that runs without your regular intervention and one that demands attention every pay period comes down to what you automate.

For a firm with one to five employees and straightforward payroll needs, SurePayroll gives you automated federal and state tax filings, W-2s and 1099-NECs at year-end, and 25 years of small business payroll experience — with setup support included at no extra cost.

Get started with SurePayroll.