Hiring Your First Employee? The Payroll and Tax Checklist You Need Before Day One

Hiring your first employee is an exciting milestone. It can also feel like a big administrative leap. Until now, you may have managed your business finances yourself. Adding a W-2 employee means taking on payroll, employment taxes, insurance, wage-and-hour rules, and additional recordkeeping.

The good news is that you do not have to figure everything out at once. With the right checklist, you can complete the major setup steps before your employee’s first day and avoid many common payroll mistakes.

This guide covers the key items to handle before hiring your first employee.

Important: Payroll requirements vary by state and sometimes by city or county. Use this guide as an educational starting point, then confirm the specific requirements where your business and employee are located.

Step 1: Confirm Whether the Worker Is an Employee or Contractor

Before you set up payroll, determine whether the person should be treated as a W-2 employee or an independent contractor.

An employee generally works under your direction and control. You may determine their schedule, provide tools or equipment, train them, and control how their work is performed. Employees are paid through payroll, receive a Form W-2, and are generally covered by wage-and-hour protections.

An independent contractor is typically operating their own business. They may serve multiple clients, control how the work is completed, provide their own tools, and have an opportunity for profit or loss.

A contract that calls someone an “independent contractor” does not automatically make that classification correct. The IRS considers factors such as behavioral control, financial control, and the relationship between the parties. The Department of Labor also considers the overall economic reality of the relationship.

Misclassification can be expensive. If a worker who should have been an employee is treated as a contractor, your business may owe:

• Unpaid payroll taxes and withholding

• Employer and employee portions of Social Security and Medicare taxes

• Unemployment taxes

• Unpaid minimum wage or overtime

• Penalties and interest

• Workers’ compensation or other employment-related costs

If you are uncertain, discuss the situation with a qualified accountant or employment professional before making the first payment. The IRS also provides information about worker classification and Form SS-8.

Step 2: Get an EIN Before Running Payroll

If you do not already have one, apply for an Employer Identification Number, or EIN.

An EIN is the federal tax identification number your business uses when filing employment tax returns, reporting wages, and communicating with the IRS. You should not use your Social Security number in place of an EIN for payroll filings.

You can apply through the IRS using the online EIN application. Add the EIN to your payroll system and keep the IRS confirmation with your business records.

You may also need to confirm that your business entity is using the correct EIN. For example, an LLC taxed as a corporation may have different payroll reporting requirements than a sole proprietorship.

Step 3: Register for State Payroll Accounts

Federal payroll setup is only part of the process. Most states require separate employer registrations.

Before your first payroll, check whether you need to register for:

• State income tax withholding

• State unemployment insurance

• Local or municipal payroll taxes

• Paid sick leave programs

• Paid family and medical leave programs

• New hire reporting

If your employee works in a different state than your business, you may need to register in the employee’s work state. Remote employees can create additional state payroll obligations, so do not assume your current registration covers every location.

Save your state account numbers, filing frequencies, payment instructions, and online portal login information. Payroll software may help calculate taxes, but it does not always complete every state registration for you.

Step 4: Obtain Workers’ Compensation Insurance

Most states require employers to carry workers’ compensation insurance once they have employees, although the rules and employee-count thresholds vary.

Workers’ compensation generally helps cover medical care and lost wages when an employee is injured or becomes ill because of work. You may need coverage before the employee starts working.

When applying for a policy, provide accurate information about:

• Your business activities

• The employee’s job duties

• The employee’s work location

• Estimated annual payroll

• Whether the employee works remotely, in the field, or at a physical location

Ask your insurance provider when coverage begins and what notices or workplace postings are required in your state.

Step 5: Collect the Required New-Hire Forms

Your employee should complete certain forms as part of onboarding.

Form I-9

Form I-9 verifies the employee’s identity and authorization to work in the United States. It applies to employees, including U.S. citizens and noncitizens.

Generally:

• The employee completes Section 1 no later than the first day of work.

• The employer completes Section 2 within three business days of the employee’s first day.

• You keep Form I-9 in your records; you do not send it to the IRS.

The employee must provide the required documents from the acceptable document lists. You should not demand specific documents if the employee provides valid documents from the permitted lists.

Review the current Form I-9 instructions from USCIS before onboarding your employee.

Form W-4

Form W-4 tells you how to calculate federal income tax withholding from the employee’s wages. Ask the employee to complete and sign it before the first payroll.

You keep Form W-4 in your records. You generally do not send it to the IRS unless the IRS specifically requests it.

If the employee does not provide a completed W-4, federal withholding rules generally require you to withhold as though the employee is single or married filing separately with no additional adjustments. State withholding forms may also be required.

You should also collect the employee’s legal name, Social Security number, address, pay rate, employment start date, and any information needed for benefits or deductions.

Step 6: Choose a Payroll System or Service

You generally have three choices:

1. Run payroll yourself using payroll software

2. Hire a payroll service provider

3. Work with an accountant or bookkeeping professional who handles payroll

Payroll software can calculate wages, deductions, and taxes, and may help with direct deposit and payroll filings. However, you still need to enter accurate information, approve payroll on time, and monitor tax payments.

A payroll service may handle payroll calculations, deposits, filings, and year-end forms. Before choosing one, ask:

• Which federal and state filings are included?

• Who submits tax deposits?

• Who corrects errors?

• Are workers’ compensation payments or new-hire reports included?

• What happens if the service misses a deadline?

• Can I access proof of tax payments?

The IRS reminds employers that outsourcing payroll does not always eliminate the employer’s responsibility. Even when a third party handles the work, your business may remain liable for missed deposits or incorrect filings.

Step 7: Set the Pay Schedule and Direct Deposit

Decide how often employees will be paid. Common schedules include:

• Weekly

• Every two weeks

• Twice per month

• Monthly

Your state may restrict certain pay frequencies or require specific paydays. Confirm the rules before making a decision.

If you use direct deposit, collect the employee’s authorization and banking information through a secure system. Avoid sending sensitive banking information by ordinary email.

Also establish:

• The workweek

• Timekeeping procedures

• Payroll cutoff dates

• Who approves hours

• How paid time off is recorded

• How bonuses, commissions, reimbursements, and benefits will be handled

Your payroll calendar should include both the payday and the internal deadline for submitting hours and approving payroll.

Step 8: Understand Minimum Wage and Overtime

Covered, nonexempt employees must generally receive at least the applicable minimum wage. The federal minimum wage is $7.25 per hour, but many states and cities require a higher rate. When federal, state, and local rules differ, the employee is generally entitled to the higher applicable rate.

Nonexempt employees are generally entitled to overtime pay of at least one and one-half times their regular rate for hours worked over 40 in a workweek under the Fair Labor Standards Act. State overtime rules may provide additional protections.

Do not assume that paying someone a salary automatically makes them exempt from overtime. Exempt status depends on the employee’s duties, salary, and applicable legal requirements.

For current federal information, review the Department of Labor’s minimum wage and overtime guidance.

Step 9: Know Which Employer Taxes You Pay

Payroll taxes include amounts withheld from the employee and amounts paid by the business.

From the employee’s wages, you may need to withhold:

• Federal income tax

• State and local income tax, where applicable

• Employee Social Security tax

• Employee Medicare tax

• Voluntary benefit deductions or other authorized deductions

Your business is generally responsible for paying:

• The employer share of Social Security tax

• The employer share of Medicare tax

• Federal unemployment tax, or FUTA

• State unemployment tax

• Workers’ compensation premiums

• Any applicable state or local employer taxes

For 2026, the IRS lists the Social Security tax rate as 6.2% for both the employee and employer, and the Medicare tax rate as 1.45% for both. Additional Medicare Tax may apply to certain higher-paid employees, but there is no employer match for that additional tax.

FUTA is paid by the employer, not withheld from employee wages. The federal FUTA rate is generally 6% on the first $7,000 of wages per employee before applicable state unemployment tax credits. State unemployment rules and wage bases vary.

Review IRS Publication 15 and the IRS overview of employment taxes for current federal requirements.

What to Expect After the First Payroll

After running your first payroll, do not put the paperwork away and forget about it. You will need to maintain a regular payroll compliance routine.

Depending on your situation, you may need to:

• Deposit federal payroll taxes electronically

• File Form 941 quarterly

• File Form 940 annually for FUTA

• File state withholding returns

• File state unemployment returns

• Submit new-hire reports

• Maintain payroll and tax records

• Prepare Forms W-2 and W-3 at year-end

Form 941 is generally due by April 30, July 31, October 31, and January 31 for the preceding quarter, subject to IRS rules and adjustments for weekends or holidays. Your tax deposit schedule may be different from your payroll schedule.

At year-end, you will need to reconcile payroll reports, tax deposits, quarterly filings, and Forms W-2. Keeping your books updated throughout the year makes this process much easier.

Keep Payroll Connected to Your Bookkeeping

Payroll affects more than employee paychecks. It also affects your profit and loss statement, balance sheet, cash flow, payroll tax liability accounts, and business tax return.

Accurate bookkeeping helps you confirm that:

• Payroll expenses are recorded correctly

• Payroll taxes payable are reconciled

• Tax deposits match payroll reports

• Employee reimbursements are categorized properly

• Your financial reports reflect the true cost of hiring

Monthly bookkeeping services from Your Business Accountant include transaction categorization, bank and credit card reconciliations, clear financial reports, and ongoing support.

If you want to understand your payroll and bookkeeping instead of simply handing over the numbers, our QuickBooks Online training can help you learn how to navigate QuickBooks, categorize transactions, reconcile accounts, and interpret financial reports.

Hiring your first employee does not have to be intimidating. Start early, use a payroll calendar, confirm your state requirements, and ask for help with any step you do not understand.

Your Business Accountant can help you set up organized bookkeeping, understand payroll-related transactions, plan for tax obligations, and keep your business finances moving in the right direction. Schedule a free consultation to get started.