Setting up payroll for your small business involves several steps, and getting it right from the start saves headaches later. California has specific requirements that make this more involved than in some other states.

Start with your federal Employer Identification Number. If you don’t already have an EIN, apply through the IRS website. It’s free and you’ll get your number immediately online. This is the tax ID you’ll use for all payroll tax filings and deposits.

Next, register with California’s Employment Development Department. This is where California gets complicated. You need an EDD account to handle state income tax withholding, unemployment insurance, state disability insurance, and the employment training tax. Register online through the EDD e-Services portal. You’ll receive an employer account number within a few days that you’ll use for quarterly filings.

Before hiring, decide how you’ll classify workers. California is aggressive about worker misclassification, and the penalties are significant. The ABC test that California uses presumes workers are employees unless you can prove otherwise. If you’re unsure whether someone should be W-2 or 1099, err on the side of employee classification or get professional advice.

Choose your pay schedule. California requires you to pay employees at least twice per month on designated paydays. Most small businesses choose biweekly or semi-monthly. Once you establish your schedule, stick to it. California has strict rules about when wages must be paid after the pay period ends.

Pick a payroll system. You can run payroll manually with spreadsheets and file everything yourself, but most small business owners use software like Gusto, QuickBooks Payroll, or ADP. These systems calculate withholdings, handle direct deposits, file your payroll taxes, and generate year-end forms. The cost is worth it for the time saved and errors avoided.

Collect paperwork from every employee before their first day. You need a completed W-4 for federal withholding elections, a DE-4 for California state withholding if they want different elections than federal, and an I-9 to verify employment eligibility. Keep these in your records.

Set up your tax deposit schedule. New employers typically deposit payroll taxes monthly, though the IRS may require more frequent deposits as your payroll grows. California has its own deposit schedule based on your liability amount. Your payroll software should track this and remind you when deposits are due.

Don’t forget workers’ compensation insurance. California requires it for all employers, even if you have just one employee. Get a policy in place before your first paycheck goes out.

Running payroll correctly matters because the penalties for mistakes are steep. Late deposits, missed filings, and incorrect withholdings all trigger fines from both the IRS and California. If the setup feels overwhelming, an LA County bookkeeper for small business can configure your system correctly from the start. And if you’d rather not manage ongoing payroll yourself, full-service payroll handles everything from wage calculations to tax filings so you can focus on running your business.