Congratulations — Now Let's Get the Paperwork Right

Bringing on your first employee is exciting, but it comes with a set of legal and administrative responsibilities that many new business owners aren't fully prepared for. Setting up payroll correctly from day one protects you from penalties, builds employee trust, and creates clean records as your business grows.

Step 1: Get Your Federal Employer Identification Number (EIN)

If you don't already have one, you need an Employer Identification Number (EIN) from the IRS before you can run payroll. Think of it as a Social Security Number for your business. You can apply online at IRS.gov for free and receive your EIN immediately. Most banks and state tax agencies also require an EIN for business accounts and registrations.

Step 2: Register with Your State Tax Agency

In addition to the IRS, most states require employers to register for a state employer tax account for withholding income tax and paying state unemployment insurance (SUTA). Some states have separate registrations for each. Do this before the first paycheck — not after.

Step 3: Collect Required Paperwork from Your New Hire

On or before the first day of work, collect the following:

  • Form I-9: Verifies the employee's identity and authorization to work in the United States. You must complete Section 2 within three business days of their start date.
  • Form W-4: Tells you how much federal income tax to withhold based on the employee's filing status and adjustments.
  • State Withholding Form: Most states have their own equivalent of the W-4.
  • Direct Deposit Authorization: Bank account and routing number for electronic payment.
  • Benefits Enrollment Forms: If you offer health insurance, 401(k), or other benefits.

Step 4: Report the New Hire to Your State

Federal law requires employers to report all new hires to the state within 20 days of the hire date. States use this information for child support enforcement programs. Most states make this easy through an online portal.

Step 5: Set Your Pay Schedule and Determine Classification

Decide on a pay frequency — weekly, biweekly, semi-monthly, or monthly. Confirm with your state whether any minimum frequency requirements apply (many states have rules protecting employees from infrequent pay).

Also confirm whether your worker is an employee or independent contractor. Misclassifying an employee as a contractor is one of the most common and costly payroll mistakes. Employees require tax withholding; contractors do not, but they receive a 1099 instead of a W-2.

Step 6: Choose How You'll Run Payroll

You have three main options:

  1. Payroll software: Most efficient for recurring payroll. Automates tax calculations, direct deposit, and filings.
  2. Accountant or bookkeeper: Hands-off but adds cost. Good if your finances are complex from the start.
  3. Manual calculation: Feasible for a single salaried employee but highly error-prone. Not recommended long-term.

Step 7: Understand Your Ongoing Obligations

Once payroll is running, your ongoing responsibilities include:

  • Depositing withheld federal taxes + employer FICA on the IRS schedule (monthly or semi-weekly)
  • Filing Form 941 quarterly
  • Paying FUTA quarterly (if above the annual threshold)
  • Providing employees with a pay stub each pay period
  • Issuing W-2 forms by January 31 each year

Starting strong with payroll compliance sets the foundation for a healthy employer-employee relationship and keeps you off the IRS's radar. If you're unsure about any step, consulting a payroll professional for the initial setup is money well spent.