Contents:
- Before You Run Your First Payroll: Preparation
- Step 1: Collect the Right Paperwork
- Step 2: Choose a Pay Schedule
- Step 3: Set Up Tax Withholding and Deposits
- Step 4: Register for State Payroll Taxes
- Regional Differences Worth Knowing
- Step 5: Pick a Payroll Method
- Common Mistakes to Avoid
- Frequently Asked Questions
- Do I need payroll software for just one employee?
- How long does EIN approval take?
- What happens if I miss a payroll tax deposit?
- Can I pay my first employee in cash?
The stack of new-hire forms sits on your desk under a coffee ring, your phone buzzes with a question about start dates, and somewhere in a filing cabinet is a W-4 you haven’t looked at yet. Setting up payroll for your first employee feels chaotic the first time through, but it breaks down into a manageable checklist once you know the order of operations.
Before You Run Your First Payroll: Preparation
You need an Employer Identification Number (EIN) from the IRS before you can legally pay anyone. Apply free online at irs.gov; approval is usually instant. You’ll also need state and, in some cities, local tax accounts, plus workers’ compensation insurance in nearly every state.
Step 1: Collect the Right Paperwork
Every new employee needs to complete Form W-4 for federal withholding and Form I-9 to verify work eligibility, along with any state-specific withholding form. Keep the I-9 and its supporting documents on file for at least three years — the IRS and Department of Labor can request them during an audit.
Step 2: Choose a Pay Schedule
Most small businesses pay biweekly or semimonthly. Check your state’s rules first: California requires at least semimonthly pay for most workers, while some states allow monthly. Pick a schedule you can sustain consistently, since changing it later creates confusion and possible compliance headaches.
Step 3: Set Up Tax Withholding and Deposits
You’ll withhold federal income tax, Social Security, and Medicare from each paycheck, and you’re on the hook for matching Social Security and Medicare contributions plus federal unemployment tax (FUTA). Deposits are typically due monthly or semiweekly depending on your total tax liability, reported through the Electronic Federal Tax Payment System (EFTPS).
Step 4: Register for State Payroll Taxes
State income tax withholding and state unemployment insurance (SUI) registration are required almost everywhere. A handful of states, including Texas and Florida, skip income tax withholding entirely, which simplifies this step considerably if you operate there.
Regional Differences Worth Knowing
Payroll rules vary more by region than most first-time employers expect. In the Northeast, states like New York and New Jersey add extra disability and paid family leave withholdings. In the South, states such as Texas and Florida have no state income tax, cutting your paperwork in half. On the West Coast, California’s overtime and meal-break rules are among the strictest in the country, so budget extra time for compliance review if you’re hiring there.
Step 5: Pick a Payroll Method
You can run payroll manually with spreadsheets, use payroll software like Gusto or QuickBooks Payroll (typically $40–$80 per month plus a per-employee fee), or hire a payroll service. For a single employee, software is usually the sweet spot between cost and accuracy.
Common Mistakes to Avoid
- Misclassifying an employee as an independent contractor to skip payroll taxes — this triggers steep IRS penalties if discovered.
- Missing tax deposit deadlines, which accrue penalties starting at 2% and climbing fast.
- Forgetting workers’ compensation insurance, which is mandatory in most states from day one.
Frequently Asked Questions
Do I need payroll software for just one employee?
It’s not legally required, but it dramatically reduces calculation errors and automates tax filings, which is worth the $40-$60 monthly cost for most owners.
How long does EIN approval take?
Online applications through the IRS are approved instantly during business hours.
What happens if I miss a payroll tax deposit?
The IRS charges penalties starting at 2% of the unpaid amount, increasing the longer it remains unpaid, plus interest.
Can I pay my first employee in cash?
You can, but you still must withhold and report taxes correctly — “cash under the table” without reporting is illegal.
Once the first payroll cycle runs smoothly, every one after it gets easier. The real work is in building the checklist correctly the first time.
