How to Run Payroll in 2027: A Step-by-Step Guide for US SMBs

To process payroll, you must register with your state and the IRS, categorize your employees, gather new hire paperwork, and select a pay plan. Next, compute gross pay, deduct taxes, pay employees, deposit taxes, and submit the necessary paperwork for each pay period.

The documents and dates that US SMBs must be aware of are included in this step-by-step guide to payroll processing in 2027.

How to Run Payroll in 8 Steps

Here’s the full process in order. Steps 1 to 4 happen once you set up payroll; steps 5 to 8 repeat every pay period.

Step 1: Obtain Your State and Federal Employer IDs First

Visit the IRS website to apply for an Employer Identification Number (EIN). It is typically issued the same day and is free. Next, register for a state unemployment insurance (SUI) account and, if your state has income tax, a withholding tax account. Additionally, several counties and localities have their own registration requirements.

Step 2: Classify Every Worker Correctly

Determine if each individual is a 1099 independent contractor or a W-2 employee. That person is probably an employee if you provide the tools, make the schedule, and oversee the work. Treat them like an employee when you’re unsure.

Determine if each worker is exempt from overtime under the Fair Labor Standards Act (FLSA) or not. Duties and pay scale are more important than job titles alone.

Step 3: Collect New Hire Paperwork

Before the first paycheck, every new employee needs:

• Form W-4 for federal income tax withholding
• A state withholding form, if your state uses its own
• Form I-9, completed within three business days of their start date
• Direct deposit details, with written authorization

Every new hiring must also be reported to the new hire registration in your state, usually within 20 days. An onboarding workflow that collects these documents digitally keeps anything from slipping through on day one.

Step 4: Choose A Pay Schedule

Weekly, bimonthly, semimonthly, or monthly are the typical options. Before selecting monthly, examine your state’s regulations since many have minimum pay frequency requirements for some or all employees. The most popular option for SMBs is biweekly.

Step 5: Calculate Gross Pay

Divide the yearly compensation of salaried workers by the number of pay periods. Multiply the number of hours worked by the hourly rate for hourly workers.

When nonexempt workers put in more than 40 hours in a workweek, they get paid 1.5 times their regular rate. Daily overtime is also mandated in several states, such as California. Include any commissions, bonuses, or gratuities.

Step 6: Withhold Taxes and Deductions

From gross pay, you subtract:

• Federal income tax, based on the employee’s W-4
• Social Security (6.2%) and Medicare (1.45%), together known as FICA
• State and local income tax, where they apply
• Benefits and other deductions, such as health insurance premiums, 401(k) contributions, and wage garnishments

You also owe employer taxes on top of wages: your matching 6.2% Social Security and 1.45% Medicare, federal unemployment tax (FUTA), and state unemployment tax. To see how withholding plays out in your state, try a paycheck calculator for California, New York, Texas, Florida, or Washington.

Step 7: Pay Employees and Deposit Taxes

Pay employees by direct deposit or check on the scheduled payday, along with a pay stub showing gross pay, each deduction, and net pay. Expect a few questions about that first pay stub; an HR helpdesk that answers routine pay questions saves time every payday.

Next, deposit the employer and withheld taxes. Depending on the amount of your tax burden, federal contributions are processed either monthly or semiweekly via the IRS Electronic Federal Tax Payment System (EFTPS). State deposits adhere to the timetable set by your state.

Step 8: File Reports and Keep Records

Payroll doesn’t end on payday. You’ll need to file:

• Form 941 every quarter to report federal income tax and FICA
• Form 940 once a year for federal unemployment tax
• State unemployment and withholding returns, usually quarterly

Form W-2 for each employee and Form 1099-NEC for each contractor paid $2,000 or more in 2026 (up from $600 under the One Big Beautiful Bill Act). Both are normally due January 31; in 2027 the deadline is Monday, February 1, because January 31 falls on a Sunday. Starting with payments made in 2027, the 1099 threshold is adjusted for inflation each year

The IRS asks employers to keep employment tax records for at least four years.

5 Common Payroll Mistakes and How to Avoid Them

1. Misclassifying employees: Penalties and back taxes may result from treating an employee as a 1099 contractor. Every time a role changes, review the classifications.
2. Tax deposits that are missing: Depending on how late an employment tax deposit is, the IRS may impose penalties ranging from 2% to 15%. Put each deposit date on a common calendar.
3. Disregarding state regulations: States have different regulations regarding pay frequency, overtime, and final paychecks, and remote workers are typically taxed where they work rather than where your office is. Before you pay anyone in a state, check its regulations.
4. Getting final pay wrong: Some states require final wages on the employee’s last day. Offboarding software can tie final pay to the exit process.
5. Relying on spreadsheets: Every paycheck has a single incorrect formula. Since direct deposits can take one to two business days, start payroll a few days early and test-calculate a pay period and compare it with your system before paying anyone.

If a payroll term is unfamiliar, the HR glossary explains it in plain English.

Payroll Checklist for Every Pay Period

Run through this list before each payroll, and especially when you add a new state or entity:

• EIN, state withholding, and state unemployment accounts set up
• Every worker classified as W-2 or 1099, and exempt or nonexempt
• W-4, state forms, I-9, and direct deposit forms collected
• New hires reported to the state
• Pay schedule chosen and shared with employees in writing
• Hours approved and overtime checked
• Taxes and deductions calculated, and pay stubs ready
• Tax deposit dates added to your calendar
• Records stored in one secure place

For more ready-to-use lists, browse the HR checklists or try the free HR tools.

Should You Do Payroll Manually or Use Software?

You can do payroll by hand with a spreadsheet and IRS Publication 15-T, which explains federal withholding. For one or two salaried employees in a single state, that can work for a while. But each new hire, state, or benefit adds another calculation and another deadline.

Payroll software is worth considering when any of these are true:

• You have hourly employees or overtime
• You have people working in more than one state
• You offer benefits or 401(k) deductions
• Payroll takes you more than an hour each pay period
• You’ve already made a correction or paid a late-deposit penalty

Take Payroll Off Your Plate

The truth, about payroll is that none of the eight steps are truly difficult.

Register, categorize, gather forms choose a time slot, compute, withhold, pay and file.

You can learn how to manage payroll at one go.

Doing things correctly every single time can make people feel exhausted. A new employee who is in a new state, a week filled with work, a tax payment that shows up out of nowhere on a Friday. Even though each of these things is small when they all happen together payday becomes something you worry about of something your team is excited, for.

Growing businesses typically discontinue processing payroll by hand at that point. The appropriate tool frees you from the burden of math, deadlines, and paperwork, allowing you to intervene only when a person is truly required.

If you are in that situation check out our payroll. Our payroll handles deposit automatically calculates federal, state and local taxes in all states spots errors before each run and links with QuickBooks, Xero and NetSuite. Payroll is linked with HR records and onboarding, in Zimyo 3.0 new hire data come in automatically and a built‑in Payroll Agent checks every run before anyone gets paid. Within two weeks most teams are up and running.

Your people work hard for their paychecks. Getting those paychecks right, on time, every time, is one of the simplest ways to show them it matters.

See how to run payroll with us or book a free demo.

Not ready for a demo? No worries, meanwhile compare plans or see how other teams made the switch in our case studies.

Frequently Asked Questions

What do I need before I can run payroll for the first time?

You need an EIN from the IRS, state withholding and unemployment tax accounts, and completed W-4, I-9, and direct deposit forms for each employee. You also need to report each new hire to your state and choose a pay schedule.

How long does it take to set up payroll for an SMB?

Getting an EIN online usually takes a day, but state registrations can take one to four weeks depending on the state. Start the setup at least a few weeks before your first payday so accounts are active in time.

What taxes does an employer pay on payroll?

Employers must pay a 6.2% Social Security match and a 1.45% Medicare match on employee wages and Employers must also pay unemployment tax, known as FUTA and state unemployment tax. Employers in some states and cities must also pay their employer taxes, such, as disability taxes or training fund contributions.

What happens if I make a payroll mistake?

Fix it soon as you catch it. Underpaid employees should receive the difference immediately through an off‑cycle payroll. Tax errors must be corrected by filing amended forms, for example by filing Form 941‑X for federal returns. Late or missed tax deposits can trigger IRS penalties, so correct those immediately.

Can I do payroll myself, or do I need an accountant?

Many SMBs run payroll in-house, especially with payroll software that calculates taxes and generates forms automatically. An accountant is still helpful for reviewing your setup, handling multi-state questions, and checking year-end filings.