Setting up payroll in a small business
Step 1: Obtain a federal identification number from the Internal Revenue Service and a state identification number from your state revenue department. Federal id numbers can be acquired instantly by applying online (see New employer ID numbers now available instantly online ). Contact your state revenue department  directly for information on applying to be a payroll provider in your state. While you're at it, get a copy of IRS Circular E , Publication 15-A  and a similar payroll tax publication from your state.
Step 2: Have your employees fill out necessary enrollment forms. For federal taxes, the employees must fill out Form W-4. There is a similar form available from your state. Note that employees may revise these forms at any time.
Step 3. Determine a pay period. Employers are entitled to pay based on any schedule they desire, so choose a schedule that fits best with your company and your schedule of receiving revenue. Typically companies pay weekly, bi-weekly, semi-monthly, or monthly. The IRS and your state revenue department provide withholding tables and rates for all of these choices. Some states require employers to pay more frequently than monthly, so check your state regulations before making a decision to pay on a monthly basis.
Step 4: Determine company policy for sick and vacation days.
Step 5: Determine company policy for overtime and bonuses. Check with your state for rules on paying overtime.
Step 6: Decide upon benefits, such as health insurance and a retirement plan, which will be paid for through payroll withholding.
Step 7: Calculate withholding. If preparing payroll by hand, use the tables in IRS Circular E (see Step 1) and the printed tables you obtain from your state. If you are using a software program for processing payroll, the withholding calculation will be automatic.
Step 8: Make tax deposits. The amounts you withhold for taxes and benefits must be paid to the government and the benefits providers. Payments for federal taxes are deposited with your financial institution (however, some employers are required to make their deposits electronically – see the IRS Employment Taxes  page for more information.
Step 9: Prepare and file payroll tax returns. The IRS requires that you file a quarterly Form 941 (you can file less frequently if your payroll is below a certain threshold), reconciling the amount of tax you owe and the amount you have paid. Similar forms must be filed with your state revenue department. File Form 940 annually to reconcile the federal unemployment tax. Check your state rules for unemployment tax, which might be due monthly or quarterly. Prepare annual W-2 forms each January for all of your employees, showing how much they were paid and summarizing their withholding for the previous year. These forms are filed with the Social Security Administration and copies are sent to your employees.