Payroll is where small-business tax administration gets serious. Income tax mistakes cost penalties; payroll tax mistakes can cost the owner personally, because taxes withheld from employees are trust funds the government treats as its money in your custody. The system is entirely manageable, but it rewards setting it up correctly before the first paycheck rather than reverse-engineering it after.
This guide covers the one-time setup, the true cost of an employee, the recurring calendar, and the first-hire checklist. It assumes an entity and EIN already exist; if not, start with the formation guide.
The One-Time Setup, in Order
Then, for every hire: a Form W-4 (their withholding elections), a Form I-9 with identity documents within three days of the start date (kept on file, not filed), state new-hire reporting within about 20 days (varies by state), and a wage notice where the state requires one. Classification matters before any of this: if the worker is actually an independent contractor, none of the payroll machinery applies, and the tests are covered in contractor vs employee.
What an Employee Actually Costs
The wage is the floor, not the price. On top of gross pay, the employer pays: the 7.65% FICA match (6.2% Social Security up to the wage base + 1.45% Medicare), federal unemployment (FUTA: 6% of the first $7,000, reduced to an effective 0.6% in states with full credit), and state unemployment at your assigned rate, typically 1% to 4% for new employers on a state-specific wage base. Add workers' comp (industry-rated: cents per $100 of payroll for office work, dollars for construction), and software. The practical planning number: wages plus 10% to 15%. Run scenarios in the payroll tax calculator.
From the employee's check you also withhold (but do not pay): federal income tax per the W-4, their 7.65% FICA share, and state income tax where applicable. Withholding is the trust-fund money: it was never yours, and the LLC's liability shield explicitly does not cover it.
The Recurring Calendar
Deposits. Federal withholding and FICA deposit on an IRS-assigned schedule: monthly (by the 15th of the following month) for smaller liabilities, semiweekly for larger ones, determined by a lookback period. States run parallel schedules for their withholding.
Quarterly. Form 941 reconciles the quarter (due April 30, July 31, October 31, January 31); state unemployment reports file quarterly with the SUI payment.
Annually. Form 940 (FUTA) by January 31; W-2s to employees and the SSA by January 31; 1099-NEC to contractors by the same date. State reconciliations vary.
Software exists because this calendar is relentless rather than difficult. Every mainstream payroll platform calculates, deposits, and files all of the above automatically; the owner's job reduces to approving payroll runs and keeping the bank account funded on deposit dates.
The Payroll Mistakes That Actually Hurt
Why it happensWithheld taxes sit in the account looking like cash flow.
ConsequenceEscalating penalties, and personal liability for the trust fund portion, shield or no shield.
PreventionLet software deposit automatically; treat the money as gone the moment payroll runs.
Why it happens1099s skip the taxes, insurance, and paperwork.
ConsequenceBack payroll taxes, penalties, benefits claims, state audits.
PreventionApply the tests honestly: the classification guide.
Why it happensTwo obscure registrations nobody mentions at hiring time.
ConsequencePenalty notices and interest from an agency you did not know existed.
PreventionThe five-step setup above, completed before the first payday.
Why it happensPremiums feel optional at small scale.
ConsequenceState fines plus uncapped personal exposure for a workplace injury.
PreventionCoverage effective on or before the start date, nearly everywhere, from employee one.
A First Hire, End to End
The owner registers for state withholding and SUI (two online applications, one afternoon), binds a workers' comp policy, connects payroll software, and collects the W-4 and I-9 on day one. The software files the new-hire report, schedules monthly deposits, and queues the quarterly 941.
Outcome: Every filing lands automatically; the owner's only recurring duties are approving payroll and keeping the account funded on deposit dates.
Register first, automate immediately, never touch the withholding
Payroll is five registrations, two hiring forms, and a calendar that software runs better than humans do. The single non-negotiable: withheld taxes are not your money, and they are the one liability that follows an owner personally.
Frequently asked questions
How do I set up payroll for my small business?
Six registrations and documents: an EIN from the IRS, a state income tax withholding account, a state unemployment insurance (SUI) account, workers' compensation coverage, then a W-4 and I-9 from each employee at hire, plus new-hire reporting to your state. After that, payroll runs on a deposit-and-filing calendar, which software automates.
How much does payroll cost a small business?
Beyond wages: employer payroll taxes add roughly 8% to 11% (7.65% FICA match, 0.6% effective FUTA after credits, plus state unemployment, commonly 1% to 4% for new employers), workers' comp premiums vary by industry, and payroll software runs $40 to $150+ per month. Budget wages plus about 10% to 15%.
What payroll taxes does an employer pay?
The employer match of FICA (6.2% Social Security + 1.45% Medicare = 7.65%), federal unemployment (FUTA: 6% on the first $7,000 per employee, usually 0.6% after state credits), and state unemployment insurance at your assigned rate. You also withhold, but do not pay, the employee's income tax and FICA share.
What is Form 941 and when is it due?
The quarterly federal return reconciling wages paid, income tax withheld, and both halves of FICA. Due the last day of the month after each quarter: April 30, July 31, October 31, January 31. The actual tax deposits happen earlier, on a monthly or semiweekly schedule the IRS assigns. Small employers with tiny liabilities may qualify for annual Form 944.
Can I pay myself through payroll in my LLC?
Only if the LLC elected S-corp or C-corp taxation: then owner wages run through payroll like any employee's, and a reasonable salary is required for S-corps. Default LLC members are not employees and take owner draws instead, paying self-employment tax through quarterly estimates. See reasonable salary rules.
What happens if I miss a payroll tax deposit?
Penalties scale fast: 2% for deposits 1-5 days late, 5% for 6-15 days, 10% beyond that, plus interest. Worse, withheld employee taxes are trust fund taxes: the responsible person is personally liable for them, and the LLC's liability shield does not apply. Payroll deposits are the one bill never to float.
Do I need workers' comp for my first employee?
In almost every state, yes: most require coverage from the first employee (a few exempt very small headcounts, and rules differ for owners themselves). It is state-regulated insurance purchased privately or through state funds. Skipping it brings fines and personal exposure for workplace injuries.
Hiring? Get the entity side ready first.
EIN, entity formation, and the compliance calendar that keeps state filings current while payroll software handles the paychecks. The registrations below assume an entity that exists and is in good standing.
