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Payroll for Business Owners: 5 Key Questions Answered Simply
Whether you've just hired your first employee or you're wondering about paying yourself, understanding payroll basics doesn't have to be complicated.
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Key Highlights:
When Do I Need a Payroll Account?
How Do I Set Up Payroll?
What Rules & Deadlines are there?
Should I Pay Myself a Salary?
Can I pay my Kids?
When Do I Need a Payroll Account?
You need to set up a payroll account as soon as you hire your first employee. For example, if Jake opens "Jake's Bakery" and hires a cashier, he needs payroll right away – not at the end of the month or tax year.
Small business owner hiring first employee
You need payroll when:
You hire your first W-2 employee (not a contractor)
You plan to pay yourself a regular salary from your corporation or LLC
You want to put family members on the payroll legally
Pro Tip: Don't wait until after you've paid someone to set up payroll. The IRS requires you to have an Employer Identification Number (EIN) and proper tax accounts before making your first payment.
How do I Set Up Payroll?
Setting up payroll doesn't have to be overwhelming. Let's follow Jake from Jake's Bakery as he sets up payroll for the first time:
Get an Employer Identification Number (EIN) - Jake applies for his EIN on the IRS website for free in about 15 minutes.
EFTPS Registration- Jake registers with EFTPS online to manage timely federal deposits.
Register with state agencies - Jake registers with his state's department of revenue and unemployment office online.
Collect employee information - Jake has his new cashier fill out W-4 (tax withholding) and I-9 (work eligibility) forms.
Choose a payroll system - Jake decides between doing payroll himself using software or hiring a payroll service.
DIY strategies reducing your tax burden and maximizing your take-home pay, check out Taxation Intel:
What Rules & Deadlines are there?
Missing payroll deadlines can lead to penalties. Here are the key dates and rules Jake at the bakery needs to remember:
What to File | Deadline | What Is Required |
Form 941 | April 30, July 31, October 31, January 31 | Quarterly report of wages and taxes |
Federal Tax Deposits | Monthly or semi-weekly (depends on size) | Deposit of withheld taxes |
W-2 Forms | January 31 | Annual wage statements to employees |
State Requirements | Varies by state | State income tax and unemployment filings |
Important: The IRS can charge penalties of up to 15% for late payroll tax payments. Set calendar reminders for these key dates!
Should I Pay Myself a Salary?
Whether you should pay yourself through payroll depends on your business structure. Let's look at TWO examples:
Jake's Sole Proprietorship BakeryDoes not need payroll for himself
| Sarah's LLC Bakery (S-Corp Election)Needs payroll for herself
|
"The IRS expects S-Corporation owners to pay themselves a reasonable salary before taking distributions. How much? But what is reasonable? This amount is what someone would pay for similar work in your industry."
Pro Tip: If you have an LLC, talk to a tax professional about whether electing S-Corporation status might save you money through a combination of salary and distributions.
For more information on tax savings when converting to an S-Corp, click below:
Can I pay my Kids?
Putting your children on payroll can be a smart tax move when done correctly. Sarah at "Sarah's Coffee Shop" employs her 16-year-old daughter to manage social media and take product photos.
Benefits of Paying Your Children:
Business gets a tax deduction for wages paid
First $15,750 (2025 standard deduction) your child earns may be tax-free to them
If you're a sole proprietor or family LLC, you might not have to pay FICA taxes on wages to children under 18
Teaches kids about work and money management
Rules You Must Follow:
Real work only - Your child must do actual, necessary work for your business
Reasonable pay - Pay what you'd pay anyone else for the same work
Documentation - Keep timesheets and job descriptions
Proper tax forms - Complete W-4, I-9, and issue W-2s
Age restrictions - Follow child labor laws (generally 14+ for most jobs)
Pro Tip: Have your child save some earnings in a Roth IRA. They can build retirement savings while in a low tax bracket, and the money grows tax-free!
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