How to set up payroll step by step

Hiring your first employee is a big milestone. It also means you’re officially stepping into the role of employer—and that comes with new tax, legal, and reporting responsibilities.

Setting up payroll requires more than cutting a paycheck. You need to register with the right agencies, collect the correct forms, configure tax settings properly, and build a system that keeps you compliant from day one.

If you skip steps or rush the setup, small mistakes can turn into tax penalties, delayed registrations, or incorrect pay. The good news: once your payroll foundation is built correctly, every future pay cycle becomes predictable and manageable.

This guide walks you how to set up payroll for the first time so you can pay your team confidently and stay compliant from day one.

Table of contents

What information do you need to set up payroll?

Before you can run payroll, you’ll need to gather specific business and worker information. This is a one-time setup you need to do for each employee. Once entered correctly, future payroll becomes much faster.

What you collect depends on whether the worker is an employee (W-2) or an independent contractor (1099). Misclassifying workers can lead to penalties, so confirm the classification before moving forward (see more in “Step 2” below).

Employee information

To pay employees accurately on their first check, collect required personal, tax, and pay details during onboarding—not after payroll begins.

This information includes:

• Full name, home address, email, and Social Security number.
• Bank account and routing numbers for direct deposit.
• Federal and state tax withholding certificates (such as the W-4).
• Any applicable garnishment orders or voluntary deductions, like health insurance.
• Worker classification (exempt or nonexempt status) and job title.
• Agreed pay rate (hourly or salary) and official hire date.

Contractor information

If you work with independent contractors, payroll setup is simpler, but still requires accurate records.

Because contractors manage their own taxes, your responsibility is accurate tracking and year-end reporting—not withholding.

You’ll typically need:

• Contractor’s legal name, address, and email
• Taxpayer identification number (TIN)
• Agreed payment method and rate
• A signed W-9 form on file

Business information

You’ll also need a few details about your business so taxes and filings are handled correctly. Most payroll systems will require these credentials to file on your behalf:

• Legal business name, address, and any “doing business as” (DBA) names.
• Federal, state, and local tax ID numbers.
• Business bank account and routing numbers.
• State unemployment (SUTA) account number and your specific rate.
• Workers’ compensation account number and rate.
• Summaries for any benefits plans or insurance rates you provide.

Having these ready before system setup reduces delays when activating payroll.

Step 1: Register your business for payroll taxes

Before you can legally issue a paycheck, your business must be registered with federal and state tax agencies. This step must happen before your first payday.

If you’ve only worked with contractors before, some of these federal and state requirements may be new. 

Apply for an EIN

An Employer Identification Number (EIN) identifies your business for federal tax purposes. It’s required for payroll tax filings, employee tax forms, and reporting wages to the IRS. Sole proprietors without employees can use their Social Security numbers instead, but many still choose to apply for an EIN to keep personal and business information separate. 

You’re required to have an EIN if you:

• Hire any employees.
• Withhold payroll taxes from paychecks.
• Offer benefits or retirement plans.

The IRS issues EINs for free online.

Register with state and local agencies

Most states require employers to register with one or more agencies before running payroll. These registrations allow you to report wages, pay state taxes, and carry necessary insurance. Because requirements vary by location, you should check your state’s labor department website to confirm local wage reporting rules.

Common state-level registrations include:

• State income tax withholding accounts.
• State unemployment insurance (SUTA) accounts.
• Workers’ compensation insurance.

Pro tip: Save confirmation emails and account numbers in one secure location. You’ll need them every time you file taxes or update your payroll system. 

Step 2: Classify your workers correctly

Worker classification determines how you pay someone, what taxes you owe, and which forms you must file. Getting this wrong is one of the most common first-time employer mistakes.

Employees vs. independent contractors

Employees and independent contractors are paid and taxed differently.

• Employees work under your direction and control. You set their schedule, provide tools or equipment, and dictate how the work gets done. You must withhold payroll taxes and contribute to Social Security, Medicare, and unemployment insurance for them.
• Independent contractors run their own businesses. They control how they complete the work, they use their own tools, and invoice you for services. You don’t withhold payroll taxes, but you handle year-end reporting.

In home service businesses, misclassification often happens when a worker looks like a contractor on paper but functions like an employee in daily operations. For example, if you call someone a contractor but require them to wear your branded uniform, follow your daily schedule, and use your tools, they likely meet the definition of an employee—even if they submit invoices.

Always check federal guidelines and your state’s labor agency rules. Some states apply stricter standards than the federal government, particularly for trades and field work.

Step 3: Collect required employee and pay information

Before running payroll, collect and verify all required tax and authorization forms. Missing paperwork can delay pay or cause filing errors. If you followed the earlier checklist in “What information do you need to set up payroll?,” this is where you make sure everything is fully completed and ready to go.

Required tax and onboarding forms

Use the following table to track which forms you need for each worker type:

Required form	Worker type	Purpose
W-4	Employee	Determines federal income tax withholding
I-9	Employee	Verifies identity and U.S. work authorization
State tax form (if required)	Employee	Determines state income tax withholding
Direct deposit form	Employee	Authorizes electronic payment and provides bank details
W-9	Independent contractor	Provides taxpayer information for year-end reporting

Note: Some businesses may need additional forms based on state laws, benefits offered, or job requirements. Some states require separate new hire reporting or additional tax documents. For example, California requires employers to submit a New Employee Registry Report within 20 days of hire.

Step 4: Understand employer payroll tax responsibilities

You don’t need to be a tax expert to set up payroll, but you do need a basic understanding of what’s being withheld and what you’re responsible for paying. Once payroll is set up correctly, most of this becomes a repeatable process. 

Federal payroll taxes

When you pay employees, you’re responsible for withholding certain federal taxes from their paychecks and contributing employer taxes as well. These taxes are reported and paid on a regular schedule set by the IRS. This often includes:

• Federal income tax withholding: Based on each employee’s W-4.
• Social Security and Medicare taxes (FICA): Split between the employer and employee.
• Federal unemployment tax (FUTA): Paid by the employer

The amounts are calculated automatically once pay rates and withholding details are in place. 

State and local payroll taxes

State and local payroll taxes vary depending on where your business and employees are located. For example, states like Texas don’t collect state income tax, but others require both income tax withholding and separate employer contributions. Because requirements differ, it’s best to confirm details through your state tax or labor agency when setting up payroll. 

Payroll recordkeeping requirements

Employers are required to retain payroll records for a set period. These records protect your business during audits and help resolve employee wage questions quickly. Typical records include:

• Hours worked and wages paid
• Payroll tax filings and payments
• Employee tax forms and authorization documents
• Deductions and benefit contributions

Step 5: Choose a payroll system

Next, decide how you’ll run payroll. 

Manual payroll involves calculating wages and taxes yourself. It can work temporarily, but increases the risk of compliance mistakes.

Payroll software automates calculations, tax withholdings, and reporting. It can also connect payroll to time tracking and job data, which helps ensure employees are paid accurately for the work they perform.

At a high level, payroll software helps you:

• Calculate wages, overtime, and deductions automatically.
• Reduce manual data entry and math errors.
• Keep payroll records organized and accessible.
• Stay on track with tax filings and deadlines. 

Manual payroll may be realistic if you have one employee and a simple pay structure. However, as your team grows or pay becomes more complex, things get complicated quickly. Automating from day one can reduce compliance risk and administrative strain so you can focus on running your business and scale faster later.

Pro tip: If you want payroll built specifically for home service businesses, explore Housecall Pro Payroll to simplify setup and tax filings. Watch this video to see what the workflow looks like in practice.

Step 6: Set a payroll schedule, process, and policy

Before you start running payroll regularly, create a repeatable system so you’re not left scrambling each pay period. All you need is a consistent schedule and a documented process.

Common payroll schedules

Payroll schedules determine how often employees are paid. There’s no single “right” option. The best choice depends on your cash flow, administrative capacity, and employee expectations. Once you choose a schedule, stick with it to avoid confusion and errors.

Common payroll cycles include:

Payroll cycle	Pay frequency	Common use cases	Pros	Cons
Weekly	Every week	Hourly field teams, seasonal work	Easy to track hours, frequent pay	More processing time
Biweekly	Every two weeks	Salaried employees	Consistent pay dates	Less intuitive overtime tracking
Monthly	Once per month	Small salaried teams	Minimal processing	Harder for hourly workers

Creating a repeatable payroll process

A payroll process outlines what happens each pay period. It doesn’t have to be complicated, just consistent. 

A basic payroll process often includes:

1. Reviewing time worked and job hours.
2. Confirming pay rates, overtime, and deductions.
3. Submitting payroll before a set cutoff time.
4. Paying employees and saving your payroll records.

Some businesses also create a simple internal payroll policy that documents pay schedules, cutoff times, and correction procedures. It’s not a legal document, just a reference that keeps everyone on the same page. 

Step 7: Run your first payroll

Your first payroll run should include a full review before paychecks go out. 

Double-check:

• Hours worked and time entries
• Regular and overtime pay rates
• Deductions for benefits or garnishments
• Payment methods and bank information

If your payroll system allows previews, run a test payroll first. Catching an issue now is much easier than correcting it later.

Once approved, your employees get paid via direct deposit or check, and your tax filings are generated automatically if you use a payroll system. Always save a copy of the payroll summary for your records.

Housecall Pro Payroll saves summaries and reports automatically, making it easier to reference past pay runs and answer employee questions later.

What happens after your first payroll?

Once payroll is set up, the hard part is behind you. Payroll becomes a repeatable process that gets easier with every cycle. However, you still need to be compliant.

Before your next cycle:

• Confirm upcoming tax deposit deadlines
• Ensure new hire reporting requirements are complete
• Maintain organized payroll records

Learn how to process payroll regularly in our guide, or give our payroll software a try with a free 14-day trial.

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