Hiring your first employee is a big milestone. It means the business is growing and you’re ready to share the work. It also means you become an employer in the eyes of the IRS, your state, and several other agencies, each with its own forms and deadlines. Laid out in order, it’s very manageable. Here are eight payroll steps to take before your new hire’s first day.

1. Get an Employer Identification Number (EIN)

Your EIN is your business’s federal tax ID. If you already have one for your LLC or corporation, use the same number. If you’re a sole proprietor who has been using your Social Security number, you’ll need an EIN before you can run payroll. The IRS lets you apply for an EIN online for free, and approved applications get the number right away. Avoid look-alike sites that charge a fee.

2. Register with your state for withholding and unemployment

Most states require two separate registrations. One is with the state tax agency for income tax withholding, if your state has an income tax. The other is with the state workforce or labor agency for unemployment insurance. Each one gives you an account number and a filing schedule, and your state will also assign you an unemployment tax rate. Some places add local taxes or state disability insurance. The rules depend on where your employee actually works, so check your state’s employer registration page early. Approval can take a few days to a few weeks.

3. Collect a Form W-4

Form W-4 tells you how much federal income tax to withhold from each paycheck. Ask your new hire to fill it out on or before day one. If an employee doesn’t give you a W-4, the IRS has default withholding rules, but it’s far better to have the form on file. Many states have their own withholding certificate too, so ask for that at the same time. Keep them on file; you don’t send them to the IRS unless it asks.

4. Complete Form I-9 on time

Form I-9 confirms that a new hire is eligible to work in the United States. It has two timing rules. The employee completes Section 1 no later than the first day of work. You, the employer, review their identity and work-authorization documents and complete Section 2. According to the USCIS Handbook for Employers, Section 2 is due within three business days of the date employment begins. If someone starts on a Monday, you have until Thursday. If the job lasts fewer than three business days, finish Section 2 by the first day. Keep the I-9 on file; don’t send it to any agency.

5. Report the new hire to your state

Every employer must report new employees to the state’s new hire registry. The federal Office of Child Support Services says federal law requires new hires to be reported within 20 days of the hire date, but states can set a shorter deadline, and you must follow your state’s rule. The report is short: your business name, address, and EIN, plus the employee’s name, address, Social Security number, and hire date. Many payroll services file it for you.

6. Set up workers’ compensation coverage

Workers’ compensation insurance covers medical costs and lost wages when an employee is hurt on the job. It’s governed by state law, not federal law. Some states require coverage from the first employee, while others start at a higher headcount or treat certain industries differently. In some states you buy a policy from a private insurer, and in others you buy from a state fund. Have coverage in place before day one.

7. Choose a pay schedule and set up your payroll system

Decide how often you’ll pay: weekly, every two weeks, twice a month, or monthly. Many states set a minimum pay frequency, so check yours before you commit. Then set up your payroll system with your company’s tax accounts, the employee’s W-4 details, the pay rate, any deductions, and direct deposit information. Decide, too, whether you’ll run payroll yourself or use a provider.

8. Understand your federal payroll tax deposits

When you run payroll, you withhold federal income tax and the employee’s share of Social Security and Medicare, then add your matching employer share. You hold that money in trust and deposit it with the IRS on a set schedule. All federal tax deposits must be made electronically, and the Treasury’s EFTPS system is a free way to do it.

There are two main deposit schedules. IRS Notice 931 explains that your schedule depends on the taxes you reported in a “lookback period.” If that total was $50,000 or less, you’re a monthly depositor. If it was more, you’re a semiweekly depositor. A brand-new employer is treated as having zero taxes in the lookback period, so you’ll be a monthly depositor for your first calendar year. Monthly depositors deposit each month’s taxes by the 15th of the following month. One exception applies to everyone: if you ever pile up $100,000 or more in taxes on a single day, the deposit is due the next business day. For the full rules, see IRS Publication 15 (Circular E).

You’ll also file Form 941 each quarter to report wages and taxes, and Form 940 once a year for federal unemployment (FUTA) tax.

A quick pre-hire checklist

EIN in hand
State withholding and unemployment accounts registered
Workers’ compensation policy active
Pay schedule chosen and payroll system set up
W-4 (and state form) signed on or before day one
I-9 Section 1 on day one, Section 2 within three business days
New hire report filed by your state’s deadline
EFTPS enrollment done and deposit dates on the calendar

Your first payroll run, by example

Here’s a simple hypothetical. A small shop hires one employee at $20 an hour, paid every two weeks. The employee works 80 hours in the first pay period, so gross pay is $1,600. Before approving the run, the owner checks the hours, W-4 settings, and direct deposit details. The payroll system works out federal and state withholding plus the employee’s Social Security and Medicare, and it calculates the employer’s matching share and state unemployment tax. Because the shop is a monthly depositor, the owner puts a reminder on the calendar to deposit that month’s federal taxes through EFTPS by the 15th of the next month. Then the owner saves the payroll register to the books.

Keep good records from the start

The IRS says to keep all employment tax records for at least four years. That includes W-4s, pay records, tax deposits, filed returns, and records of any fringe benefits. Keep I-9s under USCIS’s own retention rules. A clean digital folder per employee and pay period makes any agency question easy to answer.

When to get help

Many owners handle a first hire on their own. It’s worth bringing in help if you’re hiring in more than one state, if your first hire is a family member or an S corporation owner-employee, if you’re not sure whether someone should be an employee or a contractor, or if you’ve already missed a deposit or filing.

Let us handle the setup

Mac Neal LLC helps small businesses set up payroll the right way from the first paycheck. Malcolm Alexander-Neal is a QuickBooks ProAdvisor (Levels 1 and 2) and is Intuit Bookkeeping and QuickBooks Workforce certified. Our Payroll Services start at $99 per month for up to 5 employees, plus $8 for each additional employee, with setup from $199. Want to work through it yourself first? Download our free guide, “Hiring Your First Employee: A Payroll Setup Checklist,” here (also en español), or browse all our guides on the Resources page.

This article is general information, not tax or legal advice. Check the official pages each year.

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