Payroll for New Employers: A First-Hire Checklist

Hiring the first employee changes the business. It brings not only a new expense but a set of federal, state, and sometimes local obligations. Most new-employer penalties come from timing and registration errors, not from complex rules. A checklist approach works well.

Step 1: confirm the worker is an employee

Before payroll, decide whether the person is an employee or an independent contractor. The distinction is not a matter of choice or a signed agreement. It depends on the actual relationship, including behavioral control, financial control, and the nature of the relationship. Misclassifying employees as contractors can result in back taxes, penalties, and interest, and state agencies apply their own tests, which can be stricter. See contractor vs employee.

Step 2: get your registrations in order

EIN. See getting an EIN. The entity that will be the employer needs its own number.
State withholding account. Register with your state's tax agency if the state has an income tax.
State unemployment insurance account. Register with the state workforce or labor agency. New employer rates are typically assigned at first and change with experience.
Local taxes. Some cities, counties, or school districts levy payroll or occupational taxes.
New hire reporting. States require employers to report new hires within a set number of days, to support child support enforcement.
Workers' compensation. Most states require coverage once you have employees, with thresholds and exemptions that vary. Contact an insurance professional.
Paid leave and other state programs. Some states have paid family leave or sick leave programs that require registration and contributions.

Step 3: gather employee documents

Form W-4 for federal withholding elections. Employees complete it, and you use it to compute withholding. Some states have their own withholding form.
Form I-9 to verify identity and work authorization. Complete it within the required timeframe after the hire date, and keep it on file. You do not send it to the government, but you must retain it and produce it on request.
Direct deposit authorization if used.
Offer letter or employment agreement stating pay, duties, and at-will status where applicable.
Handbook or policies as appropriate.

Step 4: choose a payroll system

Options: full-service payroll platforms that calculate, deposit, and file; accountant-run payroll; or do-it-yourself software where you handle deposits. For most new employers, a full-service provider that files federal and state returns is the safest choice. Ask:

Does it make tax deposits and file quarterly and annual returns for you?
Does it handle state registration and new hire reporting?
What happens if it makes an error?
Does it sync with your accounting software?
What are the fees for extra employees, off-cycle runs, and year-end forms?

See payroll tax deposits and filings for what those filings look like.

Step 5: set pay rules

Pay schedule: weekly, biweekly, semimonthly, or monthly. State law may set minimums for frequency.
Classification: exempt versus non-exempt from overtime. The salary level and duties tests determine exemption under federal law, and many states have higher thresholds. Hourly workers are generally non-exempt.
Minimum wage: federal and state (and sometimes local) minimums apply. The highest applicable rate governs.
Overtime: typically 1.5 times the regular rate for hours over 40 in a week for non-exempt employees, and some states have daily overtime rules.
Timekeeping: for non-exempt employees, keep accurate records of hours worked.
Final pay and vacation payout rules vary by state.

Step 6: understand what you pay

For each pay period, the employer generally must:

Withhold federal income tax, based on the W-4.
Withhold the employee share of Social Security and Medicare taxes.
Pay the employer share of Social Security and Medicare.
Pay federal unemployment tax (FUTA) on the wage base annually.
Withhold and pay state income tax where applicable.
Pay state unemployment tax and other state charges.
Withhold pre-tax or post-tax deductions as authorized, such as benefits or garnishments.

In addition, employer costs include workers' compensation premiums, any benefits, and the time to administer payroll. A rough sense of the true cost of an employee is the wage plus employer taxes plus benefits and insurance, not just the wage.

Step 7: calendar the filings

The main federal items are quarterly Form 941, annual Form 940, and year-end Forms W-2 and W-3, with deposits made monthly or semiweekly depending on your liability. State filings include quarterly withholding and unemployment returns. Set reminders, and check that your provider's confirmations match. See small business tax calendar.

Step 8: post required notices and keep records

Federal and state law require posting certain notices (minimum wage, safety, anti-discrimination, and others). Some can be posted electronically for remote workers. Keep payroll records, time records, I-9 forms, and employment tax records for the periods required, which is typically at least four years for employment tax records.

Step 9: benefits and compliance considerations

Health coverage: small employers generally are not required to offer group health insurance, but consider the market and recruiting needs. The Affordable Care Act's employer mandate applies to larger employers.
Retirement plans: may be offered voluntarily. See SIMPLE IRA guide.
Paid leave: state and local requirements vary.
Anti-discrimination and harassment laws: apply based on employee count thresholds.
Wage and hour laws: apply from the first employee.

Step 10: bookkeeping

Set up payroll expense accounts, payroll liability accounts, and a process to reconcile payroll reports to the general ledger every month. See month-end close checklist.

Owners on payroll

If you are an S-corp owner, you are on payroll too. See S-corp payroll for owner-employees. If you are considering hiring family members, special rules can apply. See hiring family members and hiring your children.

Common new-employer mistakes

Paying "under the table" or as a contractor when the person is an employee.
Missing state registrations, especially unemployment insurance.
Late tax deposits, which carry penalties.
Not withholding correctly because there is no W-4 on file.
Skipping the I-9.
No workers' compensation coverage where required.
Treating salaried employees as exempt without checking duties and salary levels.
Using personal funds for payroll without recording it.

If you are hiring for the first time and want a setup review, AE Tax Advisors can help you build the process, and a discovery call is a simple way to begin. Employment law questions belong with an employment attorney.