Running payroll means more than cutting a check. You are responsible for calculating wages, withholding the correct taxes, paying those taxes to the right agencies on time, and reporting everything at year-end. The steps below walk through the full process so nothing slips through the cracks.
1. Get your Employer Identification Number (EIN)
Before you can pay anyone, register your business with the IRS and obtain a federal Employer Identification Number. Many states also require a separate state tax ID and unemployment insurance account. These identifiers tie every tax deposit and filing back to your company.
2. Classify your workers correctly
Decide whether each worker is an employee (W-2) or an independent contractor (1099-NEC). Misclassification is one of the most common and costly payroll mistakes. Employees have taxes withheld and require year-end W-2 forms, while contractors are paid gross and receive 1099-NEC forms.
3. Collect the right paperwork
Have each employee complete Form W-4 for federal withholding and Form I-9 for work eligibility, plus any state withholding forms. Contractors should complete Form W-9. Store these securely, because they drive how much tax you withhold and report.
4. Choose a pay schedule
Pick a consistent pay frequency such as weekly, biweekly, semimonthly, or monthly. Your choice affects cash flow and how often you run calculations. Confirm your schedule complies with your state's pay frequency rules.
5. Calculate gross pay, deductions, and net pay
For each pay period, total hours and wages to find gross pay, then subtract pre-tax items (such as Section 125 health premiums and retirement contributions), federal and state income tax withholding, Social Security, Medicare, and any state programs like California SDI. What remains is the net pay the worker receives.
6. Deposit and file payroll taxes
Send withheld income taxes and the employer and employee share of FICA to the IRS on schedule, and remit state taxes to your state agencies. File the required federal returns (such as Form 941 and Form 940) and your state equivalents on time to avoid penalties.
7. Handle year-end forms
After the calendar year closes, prepare and distribute W-2 forms to employees and 1099-NEC forms to contractors, then file copies with the appropriate agencies. Accurate records throughout the year make this final step straightforward.
Simplify every step with Diversified Payday
The Diversified Payday portal handles worker records, automatic tax calculations, pay schedules, and year-end W-2 and 1099-NEC forms in one secure place, so small business owners can run payroll with confidence.