Before the first employee starts, review the IRS guidance on getting an employer identification number and use the U.S. Department of Labor as a starting point for federal wage, hour, and workplace requirements. Tax rules, registration steps, filing deadlines, and employment requirements can vary by state and locality, so confirm current details with the IRS, your state tax agency, your state workforce agency, and qualified local professionals.
Hiring your first employee changes how your business handles taxes, records, payments, and workplace compliance. You may need an employer identification number, payroll tax accounts, new-hire reporting, wage records, workers’ compensation coverage, and a reliable process for withholding and depositing taxes.
The safest approach is to set up payroll before the employee’s first payday. Do not wait until the first paycheck is due to determine whether you need an EIN or how state withholding works. A missed registration or incorrect withholding can create avoidable notices, penalties, corrections, and employee frustration.
Do you need an EIN before hiring an employee?
Most employers need an EIN when they hire employees. An EIN identifies the business for federal tax purposes and is generally used on employment tax returns, payroll records, and other business documents.
The IRS provides instructions for applying. Review the eligibility requirements and application process directly on the IRS EIN page linked above. Applying through the IRS is generally the appropriate first step, and the IRS does not charge a fee for an EIN application submitted through its official process.
Your EIN is separate from your state payroll accounts. Receiving an EIN does not automatically register the business for state income tax withholding, unemployment insurance, paid leave programs, or other state obligations. Those registrations usually require separate applications.
When should you apply for the EIN?
Apply before you file an employment tax return, open a payroll account, or pay your first employee. Starting early gives you time to correct an application issue and provide the number to your payroll provider, accountant, bank, or tax preparer.
Gather accurate business information before applying, including the legal name, mailing address, responsible party, business structure, and reason for applying. If the business changes ownership or structure, review whether a new EIN may be required. The IRS rules can depend on the type and extent of the change.
Keep the EIN confirmation with permanent business records. You may need it when communicating with tax agencies, completing payroll forms, or responding to an agency notice.
What information should you collect from a new employee?
Before payroll is processed, collect the information required for federal and state onboarding. This commonly includes the employee’s legal name, address, taxpayer identification information, withholding forms, pay rate, job classification, hire date, and payment method.
Federal employment eligibility paperwork may also apply. Use the current official instructions for the required forms and retention rules. Do not request or store more personal information than necessary, and restrict access to payroll records.
Ask the employee to complete the current federal withholding certificate and any state withholding form that applies. The employee’s filing status, additional withholding, and other information can affect the amount withheld. Payroll staff should enter the information exactly as provided and maintain a process for updates.
How do you confirm federal income tax withholding?
Federal income tax withholding is based on the employee’s completed withholding certificate and the IRS withholding method in effect for the pay period. Payroll software or a payroll professional can calculate the amount, but the employer remains responsible for providing accurate employee information and reviewing payroll results.
Do not use an old form or an outdated calculation without checking whether the IRS has issued a revised version or updated instructions. Federal withholding tables and forms can change. Confirm the current requirements through IRS resources before the first payroll and whenever the employee submits an updated form.
Withholding is not the same as the employee’s final tax liability. The amount withheld during the year is generally credited toward the employee’s income tax obligation. The employee may later owe more or receive a refund depending on the complete tax return.
What federal payroll taxes must an employer handle?
For an employee, payroll administration may involve federal income tax withholding, Social Security and Medicare taxes, and the employer’s federal unemployment tax obligations. The exact calculation, deposit schedule, reporting form, and payment deadline depend on current IRS rules and the employer’s circumstances.
Some payroll taxes are withheld from the employee’s wages, while others are paid by the employer. Do not treat every payroll tax as an employee deduction. A payroll system should clearly separate employee withholding from employer liabilities.
Federal payroll tax deposits are generally made electronically through an IRS-approved method. Filing a payroll return does not always replace the need to make deposits during the quarter or other applicable period. Confirm the deposit schedule assigned to your business rather than assuming that all employers use the same schedule.
How do you confirm state income tax withholding?
State withholding must be confirmed with the state where the employee performs work and with any other state that may claim taxing authority. The correct answer can depend on the work location, the employee’s residence, remote work arrangements, reciprocity rules, and the business’s registration status.
Contact the applicable state revenue or tax department before the first paycheck. Ask whether the business must register for employer withholding, which registration form applies, how the employee completes the state withholding certificate, how often returns and deposits are due, and whether local withholding applies.
Do not assume that federal withholding settings can simply be copied into state payroll. State forms, tax rates, exemptions, deposit schedules, and filing methods may differ. If an employee works across state lines, obtain state-specific advice before processing wages.
Do state unemployment and other payroll registrations apply?
Many employers must register with a state workforce or unemployment agency after becoming an employer. The test for coverage, wage base, registration deadline, and contribution rate varies by state and may depend on the number of employees, payroll amount, industry, and business history.
Other programs may apply based on the work location. Examples can include state disability insurance, paid family or medical leave, local payroll taxes, or employment training assessments. These programs are not uniform across the country.
Confirm every applicable registration locally. Ask the state tax agency and workforce agency for current employer instructions, account numbers, filing frequencies, and payment methods. Save registration confirmations and agency correspondence with payroll records.
What should you know about wage and hour rules?
Federal wage and hour requirements can affect minimum pay, overtime, timekeeping, youth employment, breaks, deductions, and worker classification. The U.S. Department of Labor provides federal workplace information at dol.gov.
State and local rules may provide additional protections. When multiple rules apply, the employer may need to follow the rule that provides the greater protection to the employee. Confirm the requirements for the employee’s actual work location and job duties.
Set up a timekeeping method before work begins. A basic system should record the date, start time, end time, meal periods where required, total hours, pay rate, and any overtime calculation. Keep records consistently, even if the employee is paid a salary.
How should you classify the worker?
Calling someone an independent contractor does not determine the legal classification. The actual working relationship, degree of control, economic dependence, job duties, and other factors may matter. Misclassification can affect wages, overtime, payroll taxes, benefits, and reporting.
Review federal guidance from the Department of Labor and applicable state standards before deciding. A worker who performs ongoing work under the business’s direction may require employee treatment even if the parties signed a contractor agreement or the worker invoices the business.
If the classification is unclear, obtain advice from an employment attorney or tax professional familiar with the state where the work occurs. Keep a written explanation of the analysis and revisit it if the relationship changes.
What payroll schedule should you use?
Choose a regular payday and communicate it in writing. Common schedules include weekly, every two weeks, twice monthly, or monthly, but state law may restrict the available options or impose timing rules. Confirm the permitted schedule locally before promising a payday.
Build in time for approving hours, reviewing deductions, funding payroll, and delivering payments. If you use direct deposit, verify the employee’s banking information through a secure process. Maintain a backup plan for rejected payments or a payroll system outage.
Keep payroll calendars for federal tax deposits, federal returns, state withholding deposits, state unemployment filings, and any local filings. A calendar should identify both the date payroll is processed and the date taxes must be deposited.
How much should you budget for payroll administration?
Payroll costs vary by employee count, pay frequency, tax jurisdictions, integrations, and whether you handle filings yourself. For planning purposes, small-business payroll software is often priced in a broad range of roughly $30 to $100 per month, with additional per-employee charges commonly around $5 to $15 per worker per month. Full-service payroll, tax filing, human resources features, workers’ compensation administration, and multi-state support can cost more.
These are budgeting ranges, not official fees or quotes. Confirm current pricing with the provider and ask about setup charges, year-end forms, state registration assistance, amended returns, expedited payments, and additional jurisdiction fees.
Also budget for employer payroll taxes, unemployment contributions, workers’ compensation, wage increases, paid leave obligations, and professional advice. Keep payroll tax money separate from operating cash so funds intended for deposits are not accidentally spent.
What records should you keep?
Maintain payroll records that show employee identity, hire date, pay rate, hours worked, gross wages, deductions, net pay, tax deposits, payroll returns, withholding forms, and year-end reporting. Keep records securely because payroll files contain sensitive personal and financial information.
Retention periods can differ by record type and by federal, state, or local rule. Confirm the applicable periods with the IRS, the Department of Labor, and local agencies. Do not destroy records simply because a payroll year has ended.
Use a consistent naming and storage system. Keep copies of agency registrations, filing confirmations, payment receipts, notices, amended filings, and correspondence explaining corrections. These records can help resolve an inquiry and demonstrate how payroll was handled.
What should you do if payroll is wrong?
Act quickly when you discover an incorrect wage, deduction, withholding amount, tax deposit, or employee classification. First identify the affected pay period, employee, jurisdiction, and amount. Then determine whether the employee needs a corrected payment or written explanation.
Contact the payroll provider, accountant, IRS, or applicable state agency before making assumptions about a correction. A late or incorrect payroll tax deposit may require a specific correction process, amended return, interest payment, or penalty response.
Do not alter payroll records to hide an error. Document what happened, when it was discovered, what was corrected, and who approved the correction. Use the issue to improve approval controls and payroll checklists.
What is the final pre-payroll checklist?
Before the first payday, confirm that the business has an EIN, the employee has completed required federal and state forms, and the payroll system reflects the correct legal name, address, pay rate, work location, and pay schedule.
Confirm federal withholding and payroll tax settings with current IRS instructions. Confirm state income tax withholding, unemployment registration, local taxes, paid leave programs, and any other state requirements with the relevant agencies. Review federal wage and hour information through the Department of Labor and check for stricter state or local rules.
Finally, test the payroll calculation before issuing payment. Review gross wages, employee deductions, employer taxes, net pay, deposit dates, and available cash. A careful setup process helps protect the business and gives employees confidence that their wages and tax records are being handled accurately.