Hiring the first employee is a milestone, and it brings legal obligations that start with the first paycheck. The IRS outlines employer responsibilities in Publication 15 and on its understanding employment taxes page. Here is the order we follow when setting up payroll for a new employer.

Before the first hire

  1. Get an EIN if the business does not have one; see how to get an EIN
  2. Enroll in EFTPS or confirm another electronic payment method for federal deposits
  3. Register with your state for income tax withholding, where the state has an income tax, and for unemployment insurance
  4. Obtain workers' compensation coverage as required by your state
  5. Decide the pay schedule: weekly, biweekly, semimonthly or monthly, subject to state rules

When the employee starts

  • Have the employee complete Form W-4 for federal withholding and any state withholding form
  • Complete Form I-9 to verify employment eligibility, within the required timeframes
  • Report the new hire to your state's new hire registry
  • Confirm whether the role is exempt or non-exempt from overtime; see overtime rules

Each payroll

  1. Calculate gross pay from hours or salary
  2. Withhold federal income tax using the W-4 and the tables in Publication 15-T
  3. Withhold the employee share of Social Security and Medicare taxes
  4. Withhold state and local taxes and any deductions
  5. Calculate the employer share of Social Security and Medicare, federal and state unemployment taxes
  6. Pay employees and record the payroll in the books

Deposits and returns

Records

Keep employment tax records for at least four years after the tax is due or paid, whichever is later, including W-4s, pay records and copies of returns. Wage-and-hour rules from the Department of Labor require additional records such as hours worked for non-exempt employees.

Software or a provider

Very few small businesses run payroll by hand. Payroll software or a provider calculates withholding and files returns, but the setup decisions above remain yours. Our payroll services handle the setup and reconcile every filing to the books.

After the first payroll

  • Save the payroll register and confirm net pay reached employees correctly
  • Record the payroll in your books with gross wages, employer taxes and liabilities
  • Calendar the next tax deposit and the quarterly return
  • Confirm state withholding and unemployment account numbers are active

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
  • Gross Pay and Net Pay: Gross pay is an employee's total earnings before deductions; net pay is the amount actually paid after taxes and deductions.
  • Exempt and Non-Exempt Employees: Non-exempt employees must receive overtime under federal law; exempt employees meet specific tests that remove that requirement.
  • Payroll Register: A payroll register is a report listing each employee's earnings, deductions and net pay for a payroll period.
  • EFTPS: EFTPS, the Electronic Federal Tax Payment System, is a free Treasury service for making federal tax payments electronically.