Before you run your first payroll, you need a few things in place at the federal and state level. If you don’t already have an Employer Identification Number (EIN), apply for one through the IRS website. It’s free and you’ll get it immediately. You also need to register with your state’s department of revenue and department of labor. In Tennessee, there’s no state income tax on wages, but you still need to register for unemployment insurance and make sure you have workers’ compensation coverage if required for your industry.

Next, collect the right paperwork from each employee before they start working. Every employee needs to complete a W-4 for federal withholding and an I-9 to verify work eligibility. Keep these on file. This is also the time to confirm that the people you’re paying are actually employees and not independent contractors. Misclassifying workers is one of the most common and costly payroll mistakes small businesses make, and the IRS takes it seriously.

Decide on a pay frequency. Most small businesses choose biweekly or semimonthly. Weekly payroll is common in trades and construction but means more processing work. Monthly payroll is simpler to manage but can be tough on employees who need more frequent paychecks. Whatever you pick, stay consistent. Your state may have rules about minimum pay frequency, so check before committing.

Choose how you want to handle the actual payroll processing. You have three main options. You can use payroll software like Gusto, ADP, or QuickBooks Payroll and run it yourself. You can hire a payroll service to handle everything. Or you can work with a bookkeeper or accountant who offers payroll setup and training to get the system configured properly and then decide whether to run it yourself or hand it off. The right choice depends on how many employees you have, how comfortable you are with the tax side of things, and how much time you want to spend on it.

Understand your payroll tax obligations. As an employer, you withhold federal income tax, Social Security (6.2%), and Medicare (1.45%) from employee paychecks. You also pay the employer portion of Social Security and Medicare, plus federal unemployment tax (FUTA) and state unemployment tax. These aren’t optional. Missing a tax deposit deadline results in penalties that add up quickly, and the IRS doesn’t waive them easily.

Once payroll is running, you need to stay on top of quarterly filings (Form 941 for federal, plus any state requirements) and year-end obligations like issuing W-2s by January 31. If you also pay independent contractors, you’ll need to issue 1099s separately.

The setup process itself isn’t overwhelmingly complicated, but the ongoing compliance is where most small business owners get tripped up. Getting payroll right from the start saves you from expensive corrections later. If your small business bookkeeping and payroll are connected from day one, your books stay clean and tax time is straightforward instead of stressful.