Payroll for small business starts when you hire your first employee. One part-time worker counts. So does a seasonal worker. There is no five-person or ten-person grace period.
The hard part is not clicking “run payroll.” It is deciding whether the person is an employee, registering in the right places, and getting every tax deposit and filing out on time.
This guide explains when you need payroll, when a 1099 is allowed, what setup requires, and which type of payroll tool fits a small team.
When does a small business need payroll?
You need payroll when you pay wages to a worker who is your employee under federal and state rules. That can start with your first hire.
• A part-time helper
• A seasonal worker
• A remote employee in another state
• An S corporation owner who works in the business and must receive reasonable compensation
Set up payroll before the first paycheck. An EIN may be available online within minutes, but state withholding, unemployment, workers’ compensation, and bank verification can take longer.
Apply for an EIN directly through the IRS. It is free. Avoid websites that charge you to get one.
Employee or contractor comes first
An LLC can pay a real independent contractor. It cannot turn an employee into a contractor by changing the form, paying through the worker’s LLC, or signing a contractor agreement.
The IRS worker-classification test looks at the full relationship. The main questions involve behavioral control, financial control, and the type of relationship. No single fact decides the answer.
Signs the worker may be an employee
• You control when, where, or how the person works.
• You train the person to follow your process.
• The worker uses your tools or equipment.
• The relationship is expected to continue.
• The work is a key part of your business.
These facts do not create an automatic score. They point toward control and dependence, which are central to employee status.
Signs the worker may be a contractor
• The worker controls how the job gets done.
• The worker runs a separate business and serves other clients.
• The worker uses their own tools and pays their own business costs.
• The worker quotes a project, sends invoices, and can earn a profit or take a loss.
• The relationship ends when a defined project or result is complete.
A freelance designer hired for one website may fit. A “contractor” who works your regular shifts, follows your manager’s instructions, and performs the same job as your employees may not.
What changed for 1099s in 2026
For payments made after December 31, 2025, federal law raised the general information-reporting threshold from $600 to $2,000. The law also calls for inflation adjustments after 2026. See Section 70433 of Public Law 119-21.
That does not mean every $2,000 payment requires Form 1099-NEC. The payment must be reportable nonemployee compensation, and exceptions can apply based on the payee and payment method. State rules may also differ. Collect Form W-9 before the first payment so you have the contractor’s legal name, address, and tax ID.
The new threshold changes reporting. It does not change worker classification. A person who is really an employee still belongs on payroll even if you paid less than $2,000.
Can an owner be paid on a 1099?
Usually not from the owner’s own business.
• Single-member LLC taxed by default: The owner normally takes draws. The business profit flows to the owner’s tax return and is generally subject to self-employment tax.
• Multi-member LLC taxed as a partnership: Working members are partners, not employees. They may receive guaranteed payments and K-1 income.
• LLC taxed as an S corporation: An owner who performs services generally must receive reasonable compensation through payroll before taking non-wage distributions.
For a broader breakdown, see DailyDime’s guide to owner’s draws, salary, and guaranteed payments. The IRS also explains S corporation compensation rules.
What payroll for small business includes
The IRS says employers must deposit and report federal employment taxes. Payroll normally includes all of the following:
• Withhold federal income tax based on each employee’s Form W-4.
• Withhold the employee share of Social Security and Medicare tax.
• Pay the employer share of Social Security and Medicare tax, generally 7.65% before special limits or adjustments.
• Pay federal and state unemployment taxes when required.
• Deposit taxes on the schedule assigned to your business.
• File Form 941 each quarter unless the IRS tells you to file a different return.
• File Form 940 for federal unemployment tax when required.
• Prepare W-2s and a W-3 after year-end.
• Handle state and local withholding, unemployment, paid-leave, and other payroll rules that apply.
A remote employee can create payroll duties in the state where that person works. Check registration, withholding, unemployment, workers’ compensation, and local tax rules before the first workday.
Small business payroll setup checklist
1. Get an EIN from the IRS. Do not pay a third party for the number.
2. Register for state and local withholding and unemployment accounts where required.
3. Confirm whether each worker is an employee or contractor. Document the facts behind close calls.
4. Collect Form W-4 from each employee and Form W-9 from each contractor.
5. Complete Form I-9 for each employee and follow the document-review rules.
6. Choose a pay schedule that follows the law in each employee’s work state.
7. Arrange workers’ compensation and any required state programs.
8. Choose payroll software or a service. Add the company bank account and tax IDs.
9. Run a test payroll before the first live payday.
10. Report each new hire to the proper state directory by the applicable deadline.
11. Save payroll records and tax confirmations. The IRS says employment-tax records should be kept for at least four years.
Useful official pages: Form I-9, new-hire reporting, EFTPS, and IRS payroll recordkeeping.
Payroll service vs. payroll software
Most small employers should not run payroll from a spreadsheet. A missed deposit or bad filing can cost more than a year of software.
Do it yourself by hand
• Best fit: One employee, one state, and an owner who already understands payroll deposits and forms.
• Main risk: Deadlines, rate changes, and state rules stay with you.
Online payroll software
• Best fit: Small teams that want to approve payroll while the system calculates taxes, files returns, and sends direct deposits.
• Main risk: The lowest plan may exclude multi-state payroll, HR tools, time tracking, or penalty protection.
Full-service payroll company
• Best fit: Multi-state teams, complex benefits, fast growth, or owners who want more human support.
• Main risk: Custom pricing, add-on fees, longer setup, and service levels that vary by package.
Payroll software comparison
Starting prices below were checked on September 21, 2026. Promotions and add-ons can change the total. Confirm the live quote before you buy.
Option | Starting monthly price | Best fit | Watch for |
$49 + $6 per person | First-time employers that want easy setup and benefits options | Single-state payroll on Simple; multi-state requires a higher plan | |
$50 + $6.50 per employee | Businesses already using QuickBooks Online | Confirm the current bundle, promotion, and state filing terms | |
$49 + $6 per worker | Small teams that want transparent full-service pricing | Optional HR and time tools cost extra | |
$37 + $5 per worker | Budget-focused U.S. employers with simple payroll | Extra-state filing fees may apply | |
Custom quote | Multi-state teams or owners who want more service and HR support | Compare setup, add-ons, contract terms, and support level |
Vendor pricing pages: Gusto, QuickBooks Payroll, OnPay, Patriot, ADP, and Paychex.
How to choose in one minute
• One or two employees in one state: Start with a low-cost full-service payroll plan.
• Already deep in QuickBooks: Price QuickBooks Payroll first, then compare the final cost and support.
• Want a clean, modern workflow: Compare Gusto and OnPay.
• Price matters most: Compare Patriot Full Service with the entry plans from Gusto and OnPay.
• Many states, complex benefits, or a larger HR need: Get quotes from ADP and Paychex.
Five questions to ask a payroll vendor
1. Do you file federal, state, and local payroll taxes for me?
2. Do you handle new-hire reporting?
3. If your error causes a penalty, who pays it?
4. Can I pay contractors in the same system without mixing up their status?
5. What will the total monthly price be at my headcount, states, and pay frequency?
Payroll mistakes that get expensive
• Waiting until after the first paycheck to register.
• Calling a regular staff member a contractor.
• Assuming an LLC can pay every worker on a 1099.
• Missing federal or state tax deposit dates.
• Hiring in a new state without registering there.
• Skipping workers’ compensation when the state requires it.
• Letting an S corporation owner take distributions while skipping reasonable compensation.
• Assuming the payroll company is liable for every tax penalty without reading the contract.
Payroll tax money is not another source of working capital. The IRS can assess the Trust Fund Recovery Penalty against responsible people who willfully fail to collect or pay over withheld taxes. An LLC does not automatically erase that personal risk.
Payroll for small business quick answers
Do I need payroll for one employee?
Yes. One W-2 employee can trigger payroll duties.
Can I stay an LLC and pay everyone on a 1099?
You can stay an LLC. You can pay true contractors as contractors. You cannot use the LLC label to hide employees.
Does a part-time employee go on payroll?
Yes. Part-time status does not turn an employee into a contractor.
Is payroll software enough?
Usually, for a small team with simple payroll. A full-service provider or payroll professional may be worth the cost when you add states, benefits, unusual pay, or fast hiring.
How much does small business payroll cost?
Entry-level full-service software commonly starts around $37 to $50 a month, plus about $5 to $7 per worker, based on the vendor prices checked for this article. Multi-state payroll, time tracking, HR tools, benefits, and premium support can raise the bill.
The bottom line
Payroll for small business starts with the first employee. Get the worker type right before you worry about software.
If the worker is truly independent, collect a W-9, keep clean records, and file the required information returns. If the worker is an employee, register before payday, use a full-service payroll system, and confirm who owns each filing and penalty.
Payroll is not a sign that your company has made it. It is the basic cost of hiring someone. Get the first paycheck right, then get back to running the business.