How to run payroll in the United States: a step-by-step guide
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll in the United States means collecting employee tax information, calculating gross pay, withholding the correct federal and state taxes, remitting those taxes on schedule, and filing the required reports. Get those steps right and you stay compliant; miss one and you face penalties that compound quickly.
Step 1: Set up your employer accounts before the first paycheck
Before you can run payroll, you need two things: a Federal Employer Identification Number (EIN) from the IRS and, in most states, a state employer tax account. Apply for an EIN through the IRS website — it takes minutes online. State registrations vary; some states require a separate unemployment insurance account, a withholding account, or both. Sort these out before your first hire, not after.
Step 2: Collect the right forms from every employee
Each new hire must complete two documents:
- Form W-4 — tells you how much federal income tax to withhold. Federal income tax is progressive, running from 10% to 37% depending on the employee's income and filing status. The W-4 captures allowances and any additional withholding the employee wants. If an employee does not submit one, the IRS requires you to withhold at the default rate.
- Form I-9 — verifies the employee's eligibility to work in the US. You do not send this to the government, but you must keep it on file and make it available for inspection.
For contractors, collect a Form W-9 instead. Contractors are not employees; you do not withhold taxes for them, but you must issue a Form 1099-NEC if you pay them $600 or more in a calendar year.
Step 3: Calculate gross pay and mandatory withholdings
For each pay period, start with gross pay — hourly wages multiplied by hours worked, or the agreed salary amount. Then apply withholdings in this order:
Federal income tax — use the IRS withholding tables (Publication 15-T) together with the employee's W-4 to determine the correct amount.
FICA taxes — these cover Social Security and Medicare:
- Social Security: 6.2% from the employee, matched by 6.2% from you as the employer, applied up to the annual wage base.
- Medicare: 1.45% from the employee, matched by 1.45% from you, with no earnings cap.
- Additional Medicare Tax: an extra 0.9% withheld from the employee (not matched by the employer) once earnings cross the applicable threshold for high earners.
State income tax — this depends entirely on where the employee works. Several states, including Texas, Florida, and Washington, have no state income tax. Others have their own withholding tables, brackets, and filing requirements. Some cities and counties add a local income tax on top.
Other deductions — pre-tax benefits such as health insurance premiums or 401(k) contributions reduce taxable gross pay before you apply withholding. Post-tax deductions come out after.
Step 4: Remit taxes on the IRS deposit schedule
Withholding the money is only half the job. You must deposit federal payroll taxes — the employee withholdings plus your employer share of FICA — to the IRS on a schedule that depends on your total tax liability. Most new employers start on a monthly deposit schedule; larger payrolls move to semi-weekly. Missing a deposit date triggers a percentage-based penalty, and the IRS does not waive it easily.
State deposit schedules run separately. Check your state's revenue or labor department for the exact due dates and payment methods.
Step 5: File the required payroll reports
Payroll compliance is not just about deposits. The IRS and your employees expect formal reports on a fixed calendar:
- Form 941 — filed quarterly, reporting total wages paid, federal income tax withheld, and FICA taxes for the quarter. Due at the end of the month following each quarter.
- Form W-2 — sent to each employee and to the Social Security Administration by January 31 of the following year. It summarizes annual wages and all taxes withheld.
- Form 940 — filed annually for Federal Unemployment Tax (FUTA). You pay this; employees do not.
- State equivalents — most states require their own quarterly wage reports and annual reconciliation filings.
Keep copies of all payroll records — W-4s, pay stubs, tax filings — for at least four years. The IRS can audit payroll records going back that far, and some states require longer retention.
A note on contractor vs. employee classification
Misclassifying an employee as a contractor is one of the most common and costly payroll mistakes. If the IRS or a state agency reclassifies a worker, you become liable for all the payroll taxes you should have withheld, plus penalties and interest. The IRS uses a multi-factor test focused on behavioral control, financial control, and the nature of the relationship. When in doubt, err toward employment — or get a formal determination using Form SS-8.
State rules add another layer. California, for example, applies the strict ABC test for worker classification, which is harder to satisfy than the federal standard. Know the rules in every state where you have workers, not just where your company is headquartered.
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