Federal Payroll Requirements for Small Business Owners

Starting a new business takes a lot of work. You need to choose the best business entity for your company, prepare a market plan, secure financing, obtain business licenses, and check off all the other items on your to-do list. The options seem endless, but there are specific federal requirements that are either necessary or highly recommended. We've compiled this step-by-step guide to help you get started, from obtaining your Employer Identification Number (EIN) to filing year-end forms.

Payroll Basics Every New Employer Should Know

Before diving into specific federal requirements, let's start with the payroll basics. At its core, payroll involves three parties: you (the employer), your employees, and the federal government. You act as a payer and a tax collector. You compensate your employees for their work while withholding their share of federal taxes. You also pay your own employer taxes on those wages. The Internal Revenue Service (IRS) expects you to deposit these taxes regularly and report them quarterly or annually.

Even if you don't have any employees yet, you should have a business structure and system in place to pay yourself as a business owner. The timeline matters, too. Federal payroll requirements for small businesses start before your first hire and continue year-round. Missing early steps, such as EIN registration, can create problems later.

Establish Your Federal Payroll Tax Setup in Four Steps

When learning how to set up payroll for a new business, it's a good idea to focus on the federal requirements first. They form the foundation of your compliance, and they apply regardless of your location or industry. Here are four steps that will set you on the right path:

Step 1: Obtain an EIN

One of the most important steps is to get your Employer Identification Number (EIN)(opens in a new tab) through the IRS website. You simply answer some questions and click on submit. If it's approved, you'll receive your EIN immediately, free of charge. Apply before hiring anyone, as you cannot use your Social Security number for business payroll.

Step 2: Gather Documentation From New Employees

After obtaining your EIN, you can turn your attention to the required employee documentation for a proper federal payroll tax setup. Two forms in particular lay the foundation for your federal compliance. Store them securely and be ready for potential audits:

1. Form W-4 (Employee's Withholding Certificate): This form determines how much federal income tax you withhold from each paycheck. Every employee must complete this form before their first payroll. If an employee doesn't provide a W-4, you should withhold as if they were single with no adjustments(opens in a new tab), usually at the highest rate

2. Form I-9 (Employment Eligibility Verification): This form confirms each employee's legal right to work in the United States. Unlike the W-4, which goes in your payroll files, the I-9 belongs in your personnel records. You're required to complete Section 2 of the I-9 within three business days of the employee's first day

Step 3: Set Up Federal Tax Withholding and Deposits

With employee documentation complete, you need systems to handle the federal payroll requirements. As an employer, you're required to withhold the following federal taxes from each employee's pay:

• Social Security Tax: You pay 6.2% of each employee's wages(opens in a new tab) up to the annual wage base ($184,500 for 2026). Employees pay a matching 6.2%

• Medicare Tax: You pay 1.45% on all wages, with no limit, and your employees match it. You need to withhold an additional Medicare tax of 0.9%(opens in a new tab) for any high earners (more than $200,000 per year)

• Federal Unemployment (FUTA) Tax: You pay 6% on the first $7,000 of each employee's annual wages. Most employers receive a 5.4% credit for state unemployment taxes, reducing the effective rate to 0.6%(opens in a new tab)

These employer taxes represent your real costs beyond employee wages. You should budget accordingly when you're planning compensation and calculating the true cost of payroll. The IRS requires most employers to deposit taxes electronically. Enroll your business in the Electronic Federal Tax Payment System (EFTPS) and allow several business days for activation.

Your deposit schedule(opens in a new tab) depends on your tax liability. New employers often start as monthly depositors, meaning taxes are due by the 15th of the following month. As your payroll grows, you might shift to semiweekly deposits or even next-day deposits for large amounts.

Step 4: File Required Federal Payroll Forms and Reports

Federal reporting keeps the IRS informed about your withholding and deposits. You need to submit them on time and fill them out accurately. Key forms include:

• Form 941 (Employer's Quarterly Federal Tax Return): This form reports wages paid and taxes withheld each quarter. File it by the last day of the month following the end of each quarter. That means submitting this form four times per year! (Some small businesses may qualify to file Form 944 once a year instead)

• Form 940 (Employer's Annual Federal Unemployment Tax Return): This form covers FUTA taxes. You file it once per year by January 31 to report unemployment taxes on employee wages

• Forms W-2 and W-3: These forms close out your reporting year and show each employee’s wages and withheld taxes for the calendar year. Provide a copy of the W-2s to employees and file Copy A with the Social Security Administration (SSA) by January 31. Electronic filing is required if you issue 10 or more W-2s. Form W-3 reconciles the total amounts reported on individual Forms W-2. You also send this form to the SSA, and the totals reported on it should reflect the totals reported on Forms 941 and 940 for the calendar year

Note: This article outlines federal payroll requirements for small business owners, but you're also responsible for state and local payroll tax requirements. These may include state income taxes, state unemployment taxes, state disability insurance, family leave deductions, and new hire reporting requirements. Make a list of all payroll tax forms you need and set up reminders to stay compliant.

How Justworks Helps You Run Payroll

Learning how to set up payroll for a new business might seem daunting, but breaking it into steps makes it more manageable. Best practices include the steps above, as well as creating a payroll calendar to mark all federal deadlines and maintaining consistency in payroll frequency and withholdings. Setting up a separate bank account for payroll taxes prevents accidental spending of funds that should go to the IRS. You should also document your payroll processes from day one.

The right tools can help you stay consistent and compliant. Justworks Payroll is a streamlined solution that simplifies your payroll and HR operations. Our user-friendly navigation and reliable support help you stay on track and manage your teams. Get started with Justworks today.