How to run payroll: a step-by-step guide

“How do I run payroll?” sounds like it should have a one-line answer, but payroll is really a sequence — a set of steps that must happen in order, every period. Do them in the right order and payroll is routine; skip or reorder one and the numbers or the compliance go wrong. Here’s the whole thing, start to finish. (General guidance, not tax advice; specifics and rates change.)

Before your first run: set up

Some things happen once, before any payroll: register for an employer tax ID (federal EIN and state accounts), collect each employee’s W-4 and state withholding form, choose a pay schedule and set up each employee’s record, and arrange direct deposit. Get this foundation right and every run inherits correct settings.

The steps for each pay run

1. Gather the period’s inputs. Hours worked, overtime, bonuses, and any changes (new hires, raises, terminations).
2. Calculate gross pay. Hours × rate plus overtime at the correct rate, or salary for the period, plus other earnings.
3. Apply pre-tax deductions. 401(k), cafeteria-plan health and similar, which reduce taxable wages.
4. Calculate taxes. Federal income tax (per the W-4), FICA, and state/local tax on the reduced wages. This is the heart of the gross-to-net calculation.
5. Apply post-tax deductions. Garnishments, Roth contributions, union dues.
6. Arrive at net pay and pay employees. Via direct deposit or cheque, with a pay stub showing the breakdown.
7. Deposit the taxes. Remit withheld income tax, FICA (both shares) and employer taxes on your deposit schedule — the step with the harshest penalties if missed.
8. File and record. File the required returns (quarterly 941, annual 940, year-end W-2s) and keep the payroll register and reports.

Why it can’t be casual at scale

For a handful of employees you can almost do this by hand. At hundreds or thousands, every step multiplies — multi-state tax, garnishments, benefit deductions, prior-wage carry-in for FICA limits — and a wrong step becomes a mass correction. That’s where payroll built for volume, with an approval step before a run commits, earns its place.