Setting up payroll is one of the first major operational steps a business owner takes when they hire their first employee — and one of the most error-prone. We see it regularly with our clients here in the South Puget Sound region: a business owner brings on their first hire, tries to figure out payroll setup on their own, and ends up behind on deposits, missing a state registration, or misclassifying someone who should have been on payroll from day one.
The good news is that small business payroll is very manageable when you approach it in the right order. This guide walks you through each step — including the Washington State requirements that catch many new employers off guard.
Why Getting Payroll Right Matters From Day One
The IRS and the Washington State Department of Revenue do not give much grace to employers who miss payroll tax deadlines or file incorrectly. Penalties for late federal tax deposits start at 2% and can climb to 15% of the amount owed. State-level violations carry their own penalties on top of that.
Beyond the penalties, a payroll mistake that affects an employee — a missed payment, an incorrect withholding — damages trust immediately. Getting the foundation right protects your business and your people.
How to Set Up Payroll for a Small Business: 8 Steps
Step 1: Get Your Employer Identification Number (EIN)
Before you can run payroll, you need an Employer Identification Number from the IRS. Think of it as a Social Security number for your business — it identifies you for federal tax purposes. You can apply for an EIN for free at IRS.gov. The process takes about 15 minutes and your number is issued immediately.
If you already have an EIN for your business, confirm it is active and associated with your correct legal entity before proceeding.
Step 2: Register with Washington State for Payroll Taxes
This is where many new employers in Washington State get tripped up — and where we spend a lot of time helping our clients clean things up after the fact. Washington has no state income tax, which is a common point of confusion. Many business owners assume that means there is nothing to register for at the state level. That is not the case. Washington employers are required to register with and contribute to:
- Employment Security Department (ESD): Covers unemployment insurance taxes. Register at esd.wa.gov.
- Department of Labor and Industries (L&I): Covers workers' compensation insurance. Most Washington employers are required to carry it. Register at lni.wa.gov.
- Washington Paid Family and Medical Leave (PFML): A state insurance program covering family and medical leave. Both employers and employees contribute premiums. Administered by ESD.
If you are operating a business in Puyallup or anywhere else in Western Washington, these registrations are not optional. Missing them creates liability that only grows over time.
Step 3: Collect Required Paperwork from Each Employee
Before your employee's first day of work, you need two completed forms:
- Form W-4 (Employee's Withholding Certificate): The employee fills this out so you know how much federal income tax to withhold from their paycheck. The current version no longer uses allowances — it uses dollar amounts and step-by-step income information.
- Form I-9 (Employment Eligibility Verification): Required by federal law to verify that the employee is authorized to work in the United States. You must physically inspect the employee's supporting documents, not just receive copies.
Keep completed I-9 forms separate from your general HR files. Federal law requires you to retain them for a specific period based on the employee's length of service.
Step 4: Choose a Pay Schedule
Washington State law requires that employees be paid at least once a month, but most small businesses pay more frequently. Your options:
- Weekly: 52 pay periods per year. Common in construction and trades.
- Bi-weekly: 26 pay periods per year. The most common schedule for small businesses.
- Semi-monthly: 24 pay periods per year (typically the 1st and 15th). Common for salaried employees.
- Monthly: 12 pay periods per year. Less common, but permitted.
Once you establish a pay schedule, stick to it consistently. Changing pay dates without proper notice can create legal exposure in Washington.
Step 5: Decide How You Will Run Payroll
You have three main options for how to actually process payroll:
- DIY payroll software (Gusto, QuickBooks Payroll, ADP Run): Handles calculations, tax withholding, and direct deposit. Works well if your payroll is straightforward and you are comfortable managing it yourself.
- Outsourced payroll service: You send employee hours and salary data; they handle the rest, including tax filings. Removes the administrative burden but can be costly and does not give you a strategic partner.
- Full-service accounting firm: Handles payroll as part of a broader financial relationship. When payroll is managed alongside bookkeeping, tax planning, and HR, nothing falls through the cracks.
Step 6: Calculate and Withhold the Correct Taxes
Every payroll run requires calculating and withholding multiple taxes. Federal withholdings from each employee's paycheck:
- Federal income tax (based on the employee's W-4 and tax tables)
- Social Security tax: 6.2% employee share (you match 6.2% as the employer)
- Medicare tax: 1.45% employee share (you match 1.45% as the employer)
- Additional Medicare tax of 0.9% applies to wages above $200,000
Washington State withholdings — no state income tax, but these are real obligations:
- Paid Family and Medical Leave (PFML) premiums — employee and employer shares
- Workers' compensation (L&I) premiums — employee contribution is deducted from wages; employer contribution is a separate expense
Step 7: Make Payroll Tax Deposits on Time
Federal payroll tax deposits must be made to the IRS on a schedule that depends on your total tax liability. Most small businesses start on a monthly deposit schedule, but if your liability grows, you may be required to deposit semi-weekly. Missing a federal deposit deadline triggers the failure-to-deposit penalty, which starts at 2% for deposits 1 to 5 days late and escalates from there.
For state-level obligations, ESD and L&I have their own quarterly reporting and payment schedules.
Step 8: File Quarterly and Annual Payroll Tax Returns
Quarterly filings required:
- IRS Form 941: Reports federal income tax withheld and FICA taxes. Due by the last day of the month following each quarter.
- Washington ESD quarterly report: Unemployment insurance wages and premiums.
- L&I quarterly report: Workers' compensation premiums.
Annual filings required:
- W-2s: Must be provided to employees and filed with the Social Security Administration by January 31.
- W-3: The transmittal form that accompanies W-2s when filing with the SSA.
- IRS Form 940: Annual federal unemployment tax (FUTA) return.
A Critical Issue: Contractor vs. Employee Classification
One of the most common and costly payroll mistakes we see is misclassifying an employee as an independent contractor. The IRS and Washington State both scrutinize worker classification, and the consequences of getting it wrong — back taxes, penalties, interest, and potential legal claims — can be severe.
The general rule is that if you control when, where, and how someone works, they are likely an employee, not a contractor. If you are paying someone regularly and they work exclusively or primarily for your business, it is worth getting a formal classification review before a problem develops.
How Green Consulting Handles Payroll for Our Clients
We work with small business owners across the South Puget Sound region — from Puyallup to Tacoma and beyond — who want payroll handled correctly and completely, without it consuming their time every two weeks.
When you work with us on payroll, we manage your federal and state registrations, handle all calculations and filings, keep you on the right deposit schedule, and make sure your year-end W-2s go out accurately and on time. Because we also handle bookkeeping, accounting, and HR consulting, payroll does not exist in a silo — it is integrated with your full financial picture.
If you are hiring your first employee, trying to clean up a payroll mess, or simply want to stop managing this yourself, we would be glad to help.
Frequently Asked Questions About Payroll Setup
How do I set up payroll for a small business in Washington State?
Start by obtaining an EIN from the IRS, then register with the Washington State Employment Security Department for unemployment insurance and with the Department of Labor and Industries for workers' compensation. You will also need to register for Washington's Paid Family and Medical Leave program. Once those accounts are open, collect W-4 and I-9 forms from each employee, choose a pay schedule, and select how you will process payroll.
Does Washington State have state income tax withholding for payroll?
No. Washington State does not have a personal income tax, so there is no state income tax to withhold from employee paychecks. However, Washington employers are still required to withhold and remit Paid Family and Medical Leave premiums and workers' compensation contributions. These requirements catch many new employers off guard because they assume 'no income tax' means no state payroll obligations.
How often do I need to deposit federal payroll taxes?
It depends on your total federal tax liability. The IRS assigns new employers to a monthly deposit schedule by default, meaning deposits are due by the 15th of the following month. Once your accumulated liability reaches certain thresholds over a lookback period, you will be required to deposit on a semi-weekly schedule.
What happens if I misclassify an employee as a contractor?
Misclassification exposes you to significant liability. The IRS can assess back taxes for the employee's and employer's share of Social Security and Medicare taxes, plus interest and penalties. Washington State's Department of Labor and Industries may also pursue back premiums for workers' compensation. If there is any doubt about how to classify someone working for your business, get a formal review before it becomes a problem.
How much does it cost to outsource payroll for a small business?
The cost varies depending on the provider and the scope of services. DIY payroll software typically runs between $40 and $150 per month for a small team, plus a per-employee fee. Full-service payroll processing through an accounting firm costs more but includes tax filings, compliance monitoring, and integration with your broader financial reporting. For many small businesses in the South Puget Sound area, the time savings and reduced risk of errors make full-service payroll a sound investment.
