Know your requirements

You'll need to determine which of your workers are considered employees subject to withholding. You also need to know exactly what taxes you should collect for federal, state and local governments in your area.

I recommend: The U.S. Small Business Administration (SBA) has a super-helpful Payroll Taxes page with and overview or each type of payroll tax and useful links to federal and state taxing agencies. The IRS has a complete rundown of your tax obligations as a small business employer. Also see Your Payroll Tax Obligations at Business Owner's Toolkit.

Determine what amounts are subject to withholding

Not all compensation is subject to withholding. FICA, for example, only applies up to a certain amount of wages. Business expense reimbursements are not taxable. If you have a restaurant with waiters, be aware of the rules for reporting and withholding on tips

I recommend: For an overview, see What Compensation is Taxable.

Calculate employee payroll taxes

For each employee who gets wages, you'll need to calculate and withhold taxes for each pay period. You can do this manually if you're willing to spend the time and effort. But there are software programs and payroll services available to do it for you.

I recommend: For an estimate of what you will have to withhold, plug your numbers into the Paycheck Calculator. Some software and payroll service options: Paychex, QuickBooks, NetSuite and Peachtree.

Properly handle payroll tax collections

You not only have to collect payroll taxes, you also have to report your collections both to your employees and to the agencies, and you have to forward the amounts collected. You must register with each agency and hand off taxes according to the rules.

I recommend: For a full discussion of your obligations and how to handle them, read Payroll Tax Returns and Payments. Banks will often handle much of the payroll tax process for you. For an example, check out the Bank of America.

Retain records

Your obligations aren't done yet. You have to keep records of your payroll taxes (for as long as eight years in the case of Minnesota) and be ready to share them with the IRS or other agencies.

I recommend: For a list of the types of records you need to keep and how long you need to keep them, see Payroll & Tax Records.