Payroll Basics for Growing Teams

The first paycheck can create a tax bill you did not plan to pay. The IRS treats employee wages and contractor payments differently. The label on the invoice does not pick the rule.

Payroll basics for a small business are the habits that keep the worker paid and the tax sent. The SBA says you build that structure before you choose the person. Hiring and payroll travel together.

Who is on payroll

Employee vs contractor payroll is the first decision because it changes the cash you must send. The IRS says you withhold and deposit income tax and Social Security tax and Medicare tax on an employee’s wages. You pay the matching employer share of Social Security and Medicare. You pay unemployment tax on those wages. In the usual case you do not withhold or pay those taxes on payments to an independent contractor.

The IRS says the person can be an independent contractor or a common-law employee or a statutory employee or a statutory nonemployee or a government worker. This small business payroll guide stays with the common-law test. Household workers and farmworkers sit under extra rules in Publication 15. This article does not cover those rules.

Three groups of facts decide the common-law case.

• Behavior. Do you control what the worker does and how the worker does it? A remote worker can be your employee if you hold that right. The IRS says the worker’s choice to work away from your office does not erase the right.
• Money. Do you control how the worker is paid? Do you reimburse expenses? Do you supply the tools?
• The relationship. Is there a written contract or a pension or insurance or vacation pay? Will the work continue? Is the work a key part of the business?

The IRS says no set number of factors makes the call. One factor does not stand alone. You weigh the whole relationship and you write down the factors you used.

The SBA describes a contractor as someone who works under a separate business name and invoices you. The SBA says that person can meet the legal test for an employee. If that happens, the SBA says you may owe back taxes and penalties. You may owe benefits. You may owe wages the Fair Labor Standards Act requires.

SCORE’s August 2026 payroll article calls misclassification a major red flag. SCORE sorts the paperwork as Form W-2 for an employee and Form 1099 for a contractor. SCORE says Form 1099-NEC applies when you pay an independent contractor two thousand dollars or more starting in 2026. SCORE says that dollar line is adjusted for inflation after 2026. SCORE says some states may keep a lower line. Confirm the current line before you skip a form.

If the facts are unclear, either you or the worker may file Form SS-8. The IRS reviews the facts and makes the status call. The IRS says a determination can take at least six months. File the form when the same kind of role keeps coming back. Write the factors down when you see them. Do not wait on that letter.

If you treat an employee as a contractor and you have no reasonable basis, the IRS says you can be liable for the employment taxes. Publication 15 points to section 3509 for the way that bill is figured. When the tax is paid under that section, Publication 15 says you cannot recover the employee’s share from the worker. That share includes Social Security tax and Medicare tax and income tax withholding. You owe the full employer share of Social Security and Medicare. You owe the income tax withholding even when the worker paid income tax on the wages. The worker can use Form 8919 to report uncollected Social Security and Medicare tax. The IRS describes relief in Publication 1976 if you had a reasonable basis and you filed information returns in line with that treatment. That relief requires that you did not treat a worker in a substantially similar job as an employee for any period that began after 1977. Relief does not turn the worker into a contractor.

What comes out of the check

Payroll taxes basics split into money you take from the worker and money you add from the business.

Payroll withholding basics for federal income tax come from Form W-4. SCORE says you calculate that tax person by person. A flat rate for the whole team misses the form. Filing status and dependents and pay frequency all sit on that certificate.

Publication 15 states these 2026 amounts. SCORE prints the same rates and tells you to confirm them on IRS.gov before you run payroll.

A state unemployment credit can cut the FUTA bill. Publication 15 says the credit may reach 5.4 percent. If you qualify for that full credit, the rate after the credit is 0.6 percent. You qualify when you paid the state tax in full and on time and on the same wages FUTA covers, and when your state is not a credit-reduction state. In a credit-reduction year, Publication 15 says the extra amount is due with the fourth-quarter deposit. Your state wage base can differ from seven thousand dollars.

SCORE says state unemployment rates vary by state and by your claims history. SCORE says state or county or city income tax can depend on where you operate and where employees live. The SBA says state employment taxes differ and tells you to ask the state tax office what to withhold and when to send it. SCORE says withholding and unemployment follow where the employee works. SCORE says that duty does not follow your headquarters. SCORE says a worker who lives or works in another state can require a registration in that state.

A deduction is not the same thing as a tax. SCORE separates pre-tax amounts from post-tax amounts.

SCORE’s illustration uses one thousand dollars of gross wages and a one-hundred-dollar contribution. A traditional 401(k) contribution makes federal income tax run on nine hundred dollars. The same one hundred dollars in a Roth 401(k) leaves the tax calculation on the full one thousand dollars. Those figures are SCORE’s example. They are not your paycheck.

The SBA lists benefits that can sit beside the tax. You pay Social Security tax at the same rate as the employee. Workers’ compensation is required through a commercial carrier or a self-insured plan or a state program. Disability pay is required in California and Hawaii and New Jersey and New York and Rhode Island and Puerto Rico. Unemployment insurance varies by state and may require a workforce-agency registration. The SBA says most leave is optional outside the Family and Medical Leave Act. The SBA says a business must offer COBRA to workers who are terminated or laid off. That sentence on the SBA page is broad. Confirm whether your headcount changes the duty. This article does not list every coverage exception.

Small business payroll setup

Small business payroll setup is the first time payroll work you finish before the first deposit. The SBA lists the sequence. SCORE fills in the forms.

1. Get an employer identification number. The SBA puts the EIN first. SCORE says you need it to pay employees and to file payroll taxes. Publication 15 says the EIN on every form must match the EIN the IRS assigned. Do not put a Social Security number on a form that asks for an EIN.
2. Find out whether you need state or local tax IDs. SCORE says you register for income-tax withholding and unemployment insurance before the first payroll run.
3. Decide employee or contractor and write down the factors.
4. Collect a signed Form W-4 and make it effective with the first wage payment. The IRS says the withholding follows the filing status and the adjustments on the form. If the new hire gives you no W-4, withhold as if the employee is single. A form that claims exempt status needs a fresh W-4 by February 15 of the next year if the worker wants to stay exempt. A W-4 stays in place until the worker gives you a new one. When a new form replaces an old one, start the new withholding by the start of the first payroll period that ends on or after the 30th day after you received it. The IRS Tax Withholding Estimator helps the worker check the amount. It does not replace the W-4.
5. Complete Form I-9 for every person you hire to work in the United States. The IRS says that includes citizens and noncitizens. You and the worker both complete it. The SBA’s auto-shop example says you examine the documents and you keep the form. You do not send it to the federal government.
6. Record the name and the Social Security number for Form W-2. Publication 15 says you take them from the Social Security card when the worker has it. The IRS says you do not accept an ITIN in place of an SSN. An ITIN is a nine-digit number that starts with 9. A worker who gets an ITIN and then becomes eligible to work must get an SSN.
7. Report the hire to the state new-hire registry. Publication 15 says all 50 states and most territories have one. You report a worker you have not employed before. You report a former worker who has been separated for at least 60 consecutive days. SCORE says the report is required in every state and the usual deadline is 20 days from the start date. The SBA’s shop example uses that 20-day mark because that state’s rule required it. Publication 15 says many states accept a Form W-4 with your information added.
8. Set the pay schedule. SCORE lists weekly and biweekly and semimonthly periods that fit state labor law. The SBA says the periods should line up with the tax you withhold for the IRS. The SBA says you plan holiday pay and vacation and leave as part of setup.
9. Choose who runs the payroll and which records you will keep. Then report the tax on the quarterly and annual forms.

The SBA’s shop example sets each wage at least at that state’s minimum. The story is an illustration. Your state’s wage floor is the number you confirm with the state.

Publication 15 says you remain responsible for the returns and the deposits when a third party runs payroll and misses a step. A certified professional employer organization can be treated as the employer for wages it pays under its contract. That treatment is limited. Read the IRS outsourcing page before you assume the duty moved.

Deposits and the forms

Growing team payroll gets a deposit schedule from the IRS. You do not pick it. Topic 757 says the schedule follows employment taxes you reported in a lookback period. The words monthly and semiweekly describe that rule. They do not describe your payday rhythm.

If you have filed only Form 941, Topic 757 says the lookback is the 12 months that start on July 1 of the second preceding year and end on June 30 of the prior year. Taxes of fifty thousand dollars or less in that window make you a monthly depositor. You deposit the tax on wages paid in a month by the 15th of the next month. January wages are due by February 15. If the 15th falls on a Saturday or a Sunday or a legal holiday in the District of Columbia, the deposit is due the next business day.

Taxes above fifty thousand dollars in the lookback make you a semiweekly depositor. Publication 15 holds the weekday map. This article does not restate that map.

A new employer’s lookback taxes count as zero. Topic 757 says you are a monthly depositor in the first year unless the next-day rule applies. If you accumulate one hundred thousand dollars or more of employment tax on any day in a deposit period, you deposit by the next business day. You then become a semiweekly depositor for the rest of that calendar year and for the next calendar year.

The IRS says the deposit follows the date you pay the wages. It does not follow the day you accrue the wage in your books.

Federal deposits must be electronic. The IRS deposit page lists three free paths. They are your business tax account and Direct Pay for businesses and the Electronic Federal Tax Payment System. A bank ACH credit or a same-day wire or a payroll service can move the money. The IRS says those paths may charge a fee. SCORE’s article tells owners to register for EFTPS. Use the IRS list when you choose the path.

Publication 15’s checklist puts Form 941 on April 30 and July 31 and October 31 and January 31. Those printed dates are not shifted for weekends. Publication 509 is the calendar that shifts them. Most employers file Form 941. The IRS says an employer whose annual employment-tax liability is one thousand dollars or less may file Form 944 if the IRS approves it. SCORE says the IRS notifies the employers who qualify.

If you have not filed a final Form 940 and a final Form 941, Publication 15 says you keep filing those returns for a period when you paid no wages. A seasonal employer has a Form 941 exception. This article does not cover that exception.

FUTA has its own deposit test. Publication 15 says you add any FUTA tax carried forward from an earlier quarter. If the quarter’s total is over five hundred dollars, you deposit it by electronic transfer. If the quarter’s total is five hundred dollars or less, you carry it into the next quarter. The due date is the last day of the month after the quarter ends. A fourth-quarter balance over five hundred dollars is due on the Form 940 date. Publication 15 sets that date at January 31. A fourth-quarter balance of five hundred dollars or less can be paid with Form 940 by that same date.

SCORE groups the annual forms that cluster at January 31. The list is Form 940 and Forms W-2 and W-3. Publication 15 puts Form 940 on January 31 and lists Form W-2 and Form W-3 on the annual checklist. SCORE says a deadline that falls on a weekend or a legal holiday moves to the next business day.

SCORE says a failure-to-deposit penalty can reach 10 percent or 15 percent of the unpaid amount. The percent depends on how late the deposit is. Read the current penalty rules in Publication 15 before you treat those two rates as the whole schedule.

Payroll recordkeeping

Payroll recordkeeping has a tax file and a wage-hour file. They overlap. They do not share one deadline.

The IRS says you keep employment-tax records for at least four years after you file the fourth quarter for the year. The records have to be ready for IRS review. The IRS list includes these items.

• Your EIN.
• Amounts and dates of wage payments.
• The fair market value of in-kind wages.
• Names and addresses and Social Security numbers and occupations.
• Employment dates.
• Copies of Forms W-4.
• Deposit dates and amounts, and acknowledgment numbers for EFTPS deposits.
• Copies of returns and confirmation numbers.
• Fringe benefits and expense reimbursements, with the support for them.
• Undeliverable Form W-2 copies that came back to you.

The same IRS page sets a six-year clock for certain paid-leave wages and for employee-retention-credit wages. Read that page if you claimed either credit.

SHRM’s recordkeeping article quotes attorneys on the Fair Labor Standards Act. Payroll records stay at least three years. Time cards stay two years. The file includes the worker’s full name and Social Security number and the hours worked each week and the basis of pay and the regular hourly rate and the straight-time earnings and the overtime earnings. SHRM says the law cares about the information. It does not require a time clock. Record the time as the work is done. Keep the records in a safe place at the worksite or at a central office. A Department of Labor representative must be able to see them within 72 hours of a request.

SHRM says federal law does not require a pay stub. Many states do. SHRM says the stricter employee-friendly rule is the one you follow when federal and state record rules differ. State clocks can run longer than two or three years. Ask counsel when you have people in more than one state. SHRM makes that point through the attorneys it quotes.

A first payroll pass

Use this pass the month you hire and every month after.

1. Write the control facts before you pay. Employee wages go through withholding. Contractor payments follow the IRS contractor rule and SCORE’s 1099 line.
2. Put the signed W-4 and the completed I-9 and the Social Security number in the file before the first wage payment.
3. Register the state withholding account and the unemployment account. Send the new-hire report inside the state’s window.
4. Withhold federal income tax from the W-4. Withhold 6.2 percent Social Security and 1.45 percent Medicare. Add your matching shares. Add 0.9 percent Additional Medicare Tax only after that worker’s wages from you pass two hundred thousand dollars.
5. Deposit on the monthly schedule unless Topic 757 has moved you to semiweekly or to the next-day rule. Deposit FUTA when the quarter’s total passes five hundred dollars. Include tax carried forward from an earlier quarter.
6. Compare the gross wage and the pre-tax deduction and the taxable wage before you approve the payment. Use SCORE’s one-thousand-dollar illustration as a pattern. Use your own numbers.
7. File Form 941 on the quarterly date unless the IRS has put you on Form 944. File Form 940 for the year. Furnish Form W-2 and file it with Form W-3 on SCORE’s January 31 cluster.
8. Keep the IRS four-year file and the FLSA three-year file. Keep time cards for the two years SHRM describes, or longer if your state says so.

QuickBooks Online is one place to keep the gross wage and the tax you withheld and the deposit you sent next to the bank account. The facts of the relationship decide employee or contractor. The software does not.

After the deposit clears, match the date and the amount and the confirmation number to that payroll entry in QuickBooks Online. The IRS asks you to keep those deposit records. The match is how you see a missed payment while you can fix it.

Classify the worker. Collect the forms. Register before the first check. Deposit on the IRS schedule. Keep both files. That is the payroll system a growing team can run without guessing.