How to Set Up Payroll for a Small Business: Step-by-Step Guide

A food truck owner in the East End had been paying her two employees cash for three months. The arrangement felt simple. No paperwork, no software, just envelopes every Friday.

When a friend told her the IRS was ramping up enforcement on cash payroll in the restaurant and food service industry, she came in panicked. She owed back payroll taxes, back FICA, and was potentially looking at penalties for not having withheld correctly. What had seemed like a simple workaround cost her around $4,200 to fix.

Setting up payroll properly before you run your first pay cycle is significantly less expensive than fixing it after the fact. The process has clear steps and, once it is running, most of it is automated.

Step 1: Get Your EIN

An Employer Identification Number (EIN) is the federal tax ID number for your business. You need one before you can hire employees and run payroll. Think of it as the business equivalent of a Social Security number.

If you do not already have an EIN, apply at IRS.gov. The online application takes about 10 minutes and the EIN is issued immediately. There is no fee.

You need an EIN to:

• Open a business bank account
• Set up payroll accounts
• File payroll tax returns
• Issue W-2s to employees
• Apply for most business licenses and permits

If you have been operating as a sole proprietor without employees and used your Social Security number for tax purposes, you still need an EIN once you hire your first employee.

Step 2: Classify Your Workers Correctly

Before you set up payroll, confirm that the people you are paying are employees, not independent contractors. This classification has significant tax consequences.

Employees require withholding, employer FICA matching, unemployment insurance, and W-2 filing. Independent contractors receive 1099-NECs and handle their own tax obligations.

The IRS and the Texas Workforce Commission have specific tests for worker classification. The central question is whether you control not just what work is done but how it is done. An employee works under your direction and control. An independent contractor operates with independence, typically works for multiple clients, provides their own tools, and determines their own schedule.

Misclassifying employees as contractors to avoid payroll obligations is one of the most aggressively enforced IRS violations. The penalties include back taxes, interest, and penalties that can reach 100% of the unpaid employment taxes. We wrote a full breakdown of this issue in our post on employee vs. independent contractor classification.

Step 3: Register with the Texas Workforce Commission

Texas employers must register with the Texas Workforce Commission (TWC) to report wages and pay state unemployment insurance tax. Registration is done through the TWC Employer Benefits Service portal at ui.texasworkforce.org.

You will need your EIN and basic business information. Once registered, you are assigned an unemployment insurance tax account and a starting tax rate. New employers in most industries start at 2.7% on the first $9,000 of each employee’s annual wages.

Register before you run your first payroll. TWC registration is a requirement, not an option, and quarterly unemployment reports are due the month after each quarter ends.

Step 4: Collect Required Forms from Employees

Before running your first payroll, collect two required forms from each employee.

Form W-4 (Employee’s Withholding Certificate). This form tells you how much federal income tax to withhold from each paycheck. Employees indicate their filing status and any adjustments. Provide the form on day one of employment. Retain it in your records.

Form I-9 (Employment Eligibility Verification). Required by federal law for all employees. Verifies that the employee is legally authorized to work in the United States. You review and record specific identity and work authorization documents. You do not send the I-9 to any government agency. You keep it on file for three years after the date of hire or one year after employment ends, whichever is later.

Also collect direct deposit information if you are paying by direct deposit, which most payroll systems support automatically.

Step 5: Enroll in EFTPS

The Electronic Federal Tax Payment System (EFTPS) is the IRS system for making payroll tax deposits. All federal payroll tax deposits must be made electronically through EFTPS. You cannot mail a check for payroll taxes.

Enroll at eftps.gov. Enrollment takes 5 to 7 business days because the IRS mails a PIN to your address of record. Set up EFTPS enrollment before you run your first payroll, so the account is active and ready when your first deposit is due.

Monthly depositors (businesses whose total payroll tax liability was under $50,000 during the prior lookback period) must deposit by the 15th of the month following each payroll month. Semi-weekly depositors have tighter schedules based on pay dates.

Step 6: Choose Your Payroll System

For Houston small businesses, three options cover the range of needs.

Manual payroll. Calculating withholding from IRS tables, writing checks, making EFTPS deposits, and filing your own quarterly 941s. This is viable only for a solo S-corp owner with no other employees and strong accounting knowledge. For any business with more than one employee, the calculation complexity and the deposit deadline pressure make manual payroll a liability.

Payroll software. Services like Gusto, QuickBooks Payroll, ADP Run, and Paychex Flex handle the calculations, generate pay stubs, make EFTPS deposits, and file quarterly 941s and annual W-2s. The software prompts you to approve each payroll run and handles the compliance automatically.

Costs for payroll software:

• Gusto: $46/month base + $6/employee/month. 5 employees = $76/month
• QuickBooks Payroll (Core): $50/month base + $6/employee/month. 5 employees = $80/month
• ADP Run (Essentials): $59/month + $4 to $6 per employee. 5 employees = $79 to $89/month

For a 10-person business, payroll software runs $90 to $140/month. That is a fraction of the cost of a single penalty for a missed deposit.

Full-service payroll provider. For businesses with 30 or more employees, complex pay structures, or multi-state payroll, a full-service provider like Paychex or ADP handles everything including payroll tax liability. Higher cost, but the provider takes on responsibility for processing errors.

We partner with Gusto for most of our Houston clients. It integrates cleanly with QuickBooks Online, handles Texas TWC quarterly reports, and the interface is straightforward for business owners who want visibility without complexity.

Step 7: Set Up Your Pay Schedule

Texas law requires employers to pay employees at least twice per month (semi-monthly) for hourly employees. Common pay schedules:

• Weekly (52 pay periods per year): Common in construction, food service, and hourly-heavy businesses.
• Biweekly (26 pay periods per year): The most common for mixed hourly/salaried workforces.
• Semi-monthly (24 pay periods per year): Often used for salaried employees. Paydays might be the 15th and last day of each month.

Choose a schedule that works for your cash flow and your employees’ expectations. Changing pay schedules later requires notice to employees under Texas law.

Step 8: Understand What You Owe with Each Pay Run

For every payroll run, you are managing several obligations simultaneously.

What you withhold from employees:

• Federal income tax (per W-4)
• Social Security: 6.2% of wages up to $176,100 (2026 wage base)
• Medicare: 1.45% of all wages (plus 0.9% additional for wages over $200,000)

What you pay as the employer:

• Social Security match: 6.2%
• Medicare match: 1.45%
• FUTA: 0.6% on first $7,000 of each employee’s wages (effective rate after credit)
• Texas UI: 2.7% or your experience-rated amount on first $9,000 of each employee’s wages

For a Houston restaurant with 8 employees earning an average of $2,800/month:

Monthly gross payroll: $22,400 Employee FICA withholding: $22,400 x 7.65% = $1,714 Employer FICA match: $22,400 x 7.65% = $1,714 Total monthly FICA: $3,428

Plus federal income tax withholding, which varies by individual W-4 elections. Plus quarterly FUTA and TWC obligations.

Payroll software calculates all of this automatically. Understanding what is being calculated helps you catch errors and understand your true labor cost.

Step 9: Run Your First Payroll

With your EIN, TWC registration, W-4s, I-9s, and payroll software set up, your first payroll run involves:

1. Enter employee information (name, address, SSN, pay rate, W-4 elections, direct deposit)
2. Enter hours worked for the pay period (or confirm salary)
3. Review the calculated withholding and net pay for each employee
4. Approve the payroll run
5. Confirm the payroll tax deposit is scheduled through EFTPS
6. Distribute pay stubs to employees

Payroll software walks you through each step with prompts. The first run typically takes 30 to 45 minutes. Subsequent runs, once everything is set up, take 10 to 15 minutes per period.

Step 10: Stay Current on Quarterly and Annual Filings

Setting up payroll is not a one-time event. It comes with ongoing compliance obligations.

Form 941: Filed quarterly (April 30, July 31, October 31, January 31). Reports total wages, withholding, and FICA for the quarter. Payroll software prepares this automatically.

TWC quarterly report: Due the month after each quarter ends. Reports wages and calculates state unemployment insurance. Most payroll software handles Texas TWC filing.

Form 940: Filed annually by January 31. Reports your FUTA tax for the year.

W-2s: Due to employees by January 31. Filed with the Social Security Administration by January 31 (electronic filing).

If you are using payroll software that handles automated filing, these deadlines are managed for you. If you are managing payroll manually or have a bookkeeper processing it, make sure someone owns each deadline.

The Most Expensive Payroll Mistake to Avoid

Failing to deposit payroll taxes on time. The penalties scale from 2% for deposits one to five days late to 10% for deposits more than 15 days late, and up to 15% for amounts still unpaid after an IRS notice.

A Houston landscaping company that missed three consecutive monthly deposits on a $12,000 monthly payroll tax liability accumulated $3,600 in penalties before the issue was caught. That is three months of payroll software subscriptions lost in one compliance lapse.

Set up automatic deposits in EFTPS or use payroll software that makes deposits on your behalf. Do not manage this manually.

What EZQ Group Does for Payroll Setup

Our in-house accounting team is supported by licensed CPAs when your situation calls for CPA-level expertise. We set up payroll for Houston small businesses through Gusto and QuickBooks Payroll, handling EIN verification, TWC registration, employee onboarding, first payroll run, and ongoing quarterly filings.

If you are hiring your first employee and want the setup done correctly, or if you have been running payroll manually and want to transition to a clean system, reach out to our team.

You can also call us at (346) 389-5215.