Before the Payroll Setup menu item appears in the Employees menu, you need to tell QuickBooks how you'll process your payroll.
Go to the Employees menu, click Payroll, and then click Learn About Payroll Options.
Click OK to launch a Web browser.
You can choose a QuickBooks Payroll Service or run your payroll manually.
Go back to the Employees menu and you should see Payroll Setup as a selection.