Going from zero employees to one is a bigger administrative step than going from one to ten. The first hire is the moment your business becomes an employer in the eyes of the IRS and your state, with registrations, forms, and deposit deadlines that did not exist the week before.
None of it is difficult, but the order matters and a few of the deadlines are short. This checklist covers what to set up before the first day, what to collect on it, and what has to happen every payday and every quarter afterward. State rules vary, so treat the state items as prompts to check with your own state agencies.
Before the first day: registrations and insurance
Confirm the worker is an employee. If you set the schedule, supply the tools, and direct how the work is done, you are almost certainly hiring an employee and not an independent contractor, and everything below applies.
Get an Employer Identification Number. A sole proprietor who has been filing under a Social Security number needs an EIN before running payroll. It is free on IRS.gov and issued immediately when you apply online.
Register with your state. Most states require two accounts: one for state income tax withholding, if your state taxes wages, and one for state unemployment insurance. Some cities and counties add their own. Processing can take days or weeks, so start before the offer letter goes out.
Buy workers' compensation coverage. Most states require it as soon as you have an employee, and the penalties for going without are steep. Your state's rules decide who must be covered and where the policy can be purchased.
Choose a payroll provider and a pay schedule. The schedule has to meet your state's minimum pay frequency. Decide at the same time whether the position is hourly and eligible for overtime or genuinely meets the tests for an exempt salary, because that determines what has to be tracked from the first week.
On the first day: the paperwork
Form W-4. The employee fills it out so you know how much federal income tax to withhold. You keep it on file. It does not go to the IRS. States with an income tax usually have their own version.
Form I-9. This verifies identity and eligibility to work in the United States. The employee completes Section 1 no later than the first day of work, and you examine their documents and complete Section 2 within three business days of the start date. The form stays in your files, where it must be kept for three years after the hire date or one year after employment ends, whichever is later.
New hire report. Federal law requires employers to report each new employee to the state's new hire registry within 20 days, and some states set a shorter window. Most payroll providers file it for you, but confirm that yours does.
Finish with the small items: direct deposit details, a signed acknowledgment of the pay rate and schedule, and the required federal and state labor law posters displayed where employees can see them.
Every payday and every quarter
From each paycheck you withhold federal income tax, Social Security at 6.2 percent, and Medicare at 1.45 percent, plus state income tax where it applies. The business then pays its own matching 6.2 and 1.45 percent on top of the wage. You also owe federal unemployment tax, which is 6 percent of the first $7,000 paid to each employee and usually drops to 0.6 percent once you receive credit for paying state unemployment tax on time, plus state unemployment tax at the rate your state assigns to new employers.
The withheld amounts are not your money. They are held in trust for the government and deposited electronically on a schedule the IRS assigns, which is monthly for most new employers, due by the 15th of the following month. Late deposits draw penalties quickly, and owners can be held personally responsible for withheld taxes that were never paid, even when the business is an LLC or a corporation.
Each quarter you file Form 941 to reconcile wages and deposits, due the last day of the month after the quarter ends, along with your state's wage and unemployment reports. The smallest employers are sometimes told by the IRS to file once a year on Form 944 instead. Form 940 for federal unemployment tax is filed annually by January 31, the same day W-2s are due to your employees and to the Social Security Administration.
Set up the books before the first paycheck
Payroll changes your chart of accounts. Add an expense account for gross wages, a separate expense account for the employer's share of payroll taxes, an expense account for workers' compensation, and a liability account for taxes withheld but not yet remitted. The amount that leaves the bank on payday is the net paycheck, which is smaller than the wage expense. The difference sits in the liability account until the tax deposit clears it. Recording only the bank withdrawals as wages is the most common first-year mistake, and it understates your labor cost every month.
Budget for the real cost as well. Between the employer's payroll taxes, unemployment taxes, and workers' compensation, an employee costs more than the wage you agreed on, and you can only see by how much if the books keep each piece separate.
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