Everything to know about small business payroll

Small business payroll may seem simple at first, but as your payroll needs grow, the process becomes more complex. That complexity is a sign your business is growing.

You’ll need more staff and with that come more payroll tasks and responsibilities. Many small and midsize businesses outsource payroll services to save time. Understanding how small business payroll works and what you need to do helps you get started, and when it’s time to outsource, you’ll know what to look for in a payroll provider.

Getting started with payroll

If your business has hired employees before, you’re probably familiar with payroll. However, payroll also involves a lot of moving parts and compliance standards.

Payroll can become complicated for growing businesses. You have to consider federal, state, and local withholding, overtime, benefit deductions, and more to get it right.

Here are a few core responsibilities and considerations you have when managing payroll.

• Hiring staff as an employee or a contractor: you run payroll for employees, while independent contractors invoice for their work. Under the IRS common-law rules, a worker is generally an employee if you can control what will be done and how it will be done, so check the IRS guidance before you decide.
• Records you need to keep: you’ll need to record personal information, pay rates, hours worked, deductions, and more.
• Withholding and payroll taxes: are you withholding the right federal, state, and local taxes, and depositing them on time?
• Type of payroll software to use: the right software helps you automate time tracking, calculate withholding, prepare your filings, and integrate with your accounting software.
• Payroll services: outsourcing payroll to a trusted third party can save you time and help you meet your obligations. You remain the employer and stay responsible for them.

In addition to these basic requirements, you’ll also need to be aware of payroll compliance.

Requirements for payroll compliance

To operate a business in the United States, you need to comply with federal, state, and local wage and payroll laws. At the federal level, the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA) set minimum standards, and many states and cities set higher ones. Where both apply, you must comply with both.

They include:

• Minimum wage: the federal minimum wage is $7.25 an hour. Many states set a higher minimum, and employees are owed the higher rate.
• Overtime: unless an employee is exempt, the FLSA requires overtime pay of at least one and a half times their regular rate for hours worked over 40 in a workweek.
• Family and medical leave: eligible employees of covered employers can take up to 12 workweeks of unpaid, job-protected leave in a 12-month period. Private employers are covered once they have 50 or more employees in 20 or more workweeks in the current or previous calendar year.
• Vacation, sick leave, and holidays: the FLSA does not require payment for time not worked, such as vacations, sick leave, or holidays. State and local laws may require more, so check the rules where your employees work.
• Breaks: the FLSA does not require breaks or meal periods, except unpaid break time and a space for nursing employees to express breast milk for one year after a child’s birth. State laws may require more.

Along with these standards, the FLSA requires you to keep payroll records for at least three years and the time cards and wage rate tables behind them for two years. It does not require pay stubs, though your state may. Check the Department of Labor’s recordkeeping rules for what the records must include.

Payroll withholding and taxes

Employers must withhold federal income tax from their employees’ pay and deposit it with the IRS. How much you withhold depends on what each employee earns and what they claim on their Form W-4. Use the methods in IRS Publication 15-T, or payroll software that applies them, to work it out. You also withhold the employee’s 6.2% social security tax and 1.45% Medicare tax, and pay the same amounts again as the employer.

States run their own payroll taxes, and the taxes and rates differ. In California, for example, employers deal with four state payroll taxes: unemployment insurance and employment training tax, which the employer pays, and state disability insurance and personal income tax, which are withheld from employees’ wages. Check your state’s labor and revenue departments for the taxes that apply to you.

Income taxes

Federal income tax rates range from 10% to 37%, depending on the employee’s taxable income and filing status. Here are the 2026 rates for a single filer:

Taxable income	Tax rate
$12,400 or less	10%
Over $12,400 up to $50,400	12%
Over $50,400 up to $105,700	22%
Over $105,700 up to $201,775	24%
Over $201,775 up to $256,225	32%
Over $256,225 up to $640,600	35%
Over $640,600	37%

Married couples filing jointly have wider brackets. You don’t apply this table to each paycheck directly; the withholding methods in Publication 15-T build it in. The IRS publishes the 2026 rates.

How to pay payroll taxes

Federal payroll taxes are deposited by electronic funds transfer, for example through the Electronic Federal Tax Payment System (EFTPS). Each year the IRS rules decide whether you deposit monthly, by the 15th of the following month, or semiweekly, within days of each payday. A new employer that files Form 941 is a monthly depositor for its first calendar year. You report the taxes on Form 941 each quarter, unless the IRS has notified you to file the annual Form 944 instead. State payroll taxes are registered for, filed, and paid with your state agencies.

Other tax considerations

There are other considerations to think about when handling your small business payroll. Income tax isn’t the only thing to get right.

You must also pay federal unemployment (FUTA) tax for your employees, on top of their wages. For 2026 the rate is 6.0% on the first $7,000 you pay each employee, and you can generally take a credit of up to 5.4% for state unemployment tax paid in full and on time, which brings the rate down to 0.6%. You report it on Form 940 each year, due January 31. Once an employee’s wages pass $200,000 in a calendar year, you must also withhold a 0.9% Additional Medicare Tax. Payroll taxes are more complex than a few rates, and mistakes are common, so it can be worth seeking an expert.

Tips for setting up and managing payroll

Your business is growing and you’re ready to make your first hire. Before you do, you’ll need to set up your payroll. Here’s what you’ll need to get started:

• EIN: as an employer, you’ll need an employer identification number (EIN) from the IRS. If you already have one, you’re one step ahead.
• State registration: next, register with your state for its payroll taxes, such as state income tax withholding and unemployment insurance.
• Gather employee information: you’ll need your employee’s Form W-4 and Form I-9, as well as their bank details.

1. Get your EIN and register with your state

Before you pay your first employee, get your EIN and set up your state payroll tax accounts. You use the EIN on the returns and payments you send to the IRS and the Social Security Administration.

2. Collect employee information

Next, collect your employee’s information and check it for accuracy. You’ll need:

• Identification and work eligibility: complete Form I-9 to verify your employee’s identity and that they are authorized to work in the United States, and keep it on file.
• Form W-4: your employee completes a Form W-4 so you can withhold the correct federal income tax. Keep it on file, and make it effective with their first paycheck.
• State withholding form: many states have their own certificate, such as California’s Form DE 4, which sets state income tax withholding.
• Bank details: get your employee’s bank details if you pay by direct deposit.
• Benefit elections: if you offer benefits such as health insurance or a 401(k), record each employee’s elections, which change their deductions.

3. Report new hires and file on time

Federal law requires you to report each new or rehired employee to the state where they work within 20 days of hire, and some states require it sooner. After that, the main federal filings run on a fixed calendar: Form 941 by the last day of the month after each quarter, Form 940 by January 31, and Forms W-2 to employees and the Social Security Administration by January 31. For 2026 wages the W-2 deadline is February 1, 2027.

Payroll software can prepare these filings from your pay runs, and full-service payroll products file them for you. You stay responsible for them either way.

4. Choose the right payroll software

There are several different types of payroll software available. The software you choose will determine if payroll is a simple process or a constant source of headaches. When you choose your software, consider how it handles overtime and multiple states, the tools the software has to make your life easier, whether it deposits and files your taxes, and other integrations.

Visory works with a range of major payroll and accounting software. Software is only one part of doing payroll. It makes the job easier, but it doesn’t remove the need for review. Someone who knows payroll should still check your pay runs are accurate.

5. Use a payroll service

To get payroll done on time and accurately, consider working with an outsourced payroll service provider. A good provider runs your pay cycle, checks it, and prepares the filings, while you approve pay runs and stay responsible as the employer. That frees up time for you to focus on other areas of your business and lowers the risk of costly mistakes.

Visory runs bookkeeping, payroll, accounts payable, and receivable for growing businesses, with a dedicated team and its AI, Delphi, overseen by that team. If you’re ready to get help managing your payroll, book a discovery call.