Hiring your first employee is a major milestone, but it also comes with a new layer of responsibility, especially when it comes to payroll. Between the tax forms, reporting requirements, and legal obligations, it’s easy to feel like you’re missing something important.
You’re not alone. Many business owners feel overwhelmed the first time they run payroll. In this article, we’ll walk through what it takes to set up payroll correctly, keep your business compliant, and avoid the most common pitfalls.
Why do I need an EIN before I run payroll?
An Employer Identification Number (EIN) is like a Social Security number for your business. You’ll need it for nearly every payroll and tax-related task, from reporting wages to filing returns with the IRS.
The good news is it’s free, fast, and easy to get. You can apply directly through the IRS website, and most businesses receive theirs immediately.
Here’s what you’ll need:
- Your name and Social Security Number or ITIN
- Your business’s legal name and address
- Your business structure (LLC, sole proprietorship, corporation, etc.)
Even if you’re only hiring one part-time employee, you still need an EIN. It’s a small step, but an essential one.
What state and local accounts do I need before running payroll?
Once your federal paperwork is in order, your next step is registering with your state. This part of the process is easy to overlook, but it is just as important. Almost every state requires you to open a few key accounts before you can legally pay employees.
At a minimum, most states require:
- A payroll tax withholding account, so you can collect and send in state income taxes
- A state unemployment insurance account, which helps fund benefits for former employees
- Workers’ compensation insurance, which protects your team and your business in case of injury on the job
Some cities and counties also have their own business requirements. You might need a local license, a separate tax ID, or a local payroll registration. These vary widely by location.
The best way to avoid missing a step is to start with your state’s Department of Revenue or Department of Labor website. They typically lay out what you need based on your business size, structure, and location. If your business is brand new, it is worth bookmarking those pages and checking them again when your team grows.
Handling this upfront means fewer headaches later. Delays in registration can hold up your payroll timeline or trigger penalties if you start paying people before your accounts are active.
Does my business structure affect how I handle payroll?
Yes, it does, but not in the way many business owners think.
Your structure affects how payroll works behind the scenes. It changes who gets paid, how taxes are handled, and what forms you need to file. But no matter your setup, if you’re hiring someone, even just one person, you’re still responsible for following payroll rules.
Here’s how it breaks down:
- Sole proprietors and single-member LLCs: If you hire employees, you must withhold taxes and run payroll like any other employer. You don’t run payroll for yourself, but anyone else on your team needs to be paid through a formal process.
- Multi-member LLCs and partnerships: Similar rules apply. You don’t run payroll for yourself or other owners, but employees must go through payroll.
- S corporations and C corporations: If you’re an owner who also works in the business, you must pay yourself a reasonable salary through payroll and file the appropriate forms
The structure shapes what payroll looks like, but it doesn’t remove the responsibility. If you’re unsure how your specific setup works, it’s worth talking to an accountant. A quick check now can keep you compliant and save you from backtracking later.
Choosing a Pay Schedule
Your pay schedule sets the rhythm for your entire payroll process. Most businesses choose from four main options:
- Weekly
- Biweekly (every two weeks)
- Semimonthly (twice a month)
- Monthly
It may seem like a personal preference, but your state laws might limit your choices. Many states require you to pay employees at least twice a month or every other week, so it is important to check your state’s requirements before deciding.
Beyond compliance, think about what you can realistically manage. More frequent payroll means more time spent calculating hours, submitting payments, and updating records. It also means needing more cash on hand more often. On the other hand, paying your team more frequently can improve morale and help with retention, especially in industries where weekly or biweekly pay is the norm.
Choose a schedule that fits your cash flow, complies with local law, and makes sense for the kind of work your employees do. Getting this right from the start can save a lot of administrative hassle later.
How should I handle payroll?
There are three main ways to run payroll, and each comes with its own tradeoffs.
- Manual payroll gives you full control and costs the least upfront. But it is time-consuming and leaves more room for mistakes. You are responsible for all calculations, deadlines, and tax filings.
- Payroll software automates most of the process. It calculates taxes, generates pay stubs, and files forms for you. This is often the best choice for small businesses that want to save time without hiring an expert.
- Outsourced payroll puts everything in someone else’s hands. Whether it is an accountant or HR professional, this option costs more but brings peace of mind, especially if you do not want to spend your time on paperwork or risk missing a deadline.
Payroll errors can lead to penalties and strained relationships with employees. Even with just one team member, it is worth investing in a system that makes sense for your workload and confidence level. Start with what works for your business today but choose a solution that can grow with you as your team expands.
Payroll Taxes and Withholdings
Once you hire an employee, you are responsible for withholding and paying several types of payroll taxes. Here is a quick breakdown:
- Federal income tax: You withhold this from each employee’s paycheck
- Social Security and Medicare (FICA): You split the cost with your employee
- Federal unemployment tax (FUTA): This comes entirely from your business
- State taxes: Most states require you to withhold income taxes and pay into a state unemployment fund. Check with your state agency for exact requirements.
You will need to deposit these taxes regularly, either monthly or semiweekly, depending on how much you owe. On top of that, you must file quarterly and annual reports with the IRS and your state tax agencies.
It is also important to keep payroll records on hand for at least four years. That includes payment details, tax filings, and employee information. These records are not just a backup in case of audit; they also make year-end reporting much easier.
Do I need insurance for my first employee?
Bringing on an employee means taking on legal responsibilities, and insurance is at the top of the list. Here are the main types you may need:
- Workers’ compensation insurance: Required in nearly every state, even if you only have one employee
- Unemployment insurance: You will pay into both federal and state unemployment programs
- Disability insurance: Only required in a few places, including New York, New Jersey, California, Rhode Island, Hawaii, and Puerto Rico
These policies are not just legal requirements. They protect both you and your employee in case of injury, illness, or job loss. Having the right coverage in place keeps your business compliant and gives you peace of mind from day one.
Staying Compliant with Labor Laws
Hiring even one employee puts you on the hook for key labor laws at both the federal and state levels. These rules exist to protect workers, and they are not optional just because your business is small. Understanding what applies now helps you avoid costly penalties and build a workplace that runs smoothly.
Here’s what counts (even if you only have one employee):
- Minimum wage, overtime, and breaks: Yes, these all apply
- Required labor law posters: That break room poster? You need it, even if your “office” is your dining room
- Recordkeeping: Hold onto key forms (like W-4, I-9, state tax forms, and emergency contacts)
Want to be really prepared? Draft a simple employee handbook with basics like your expectations and workplace policies. It keeps things clear and protects you, too.
What employee paperwork do I need from day one?
The moment someone joins your team, you take on new legal responsibilities as an employer. That starts with collecting the right documents and storing them properly. Getting this right up front sets the tone for a professional, organized onboarding process and protects you in case of an audit or dispute.
Before your new hire’s first day, make sure you’ve got:
- IRS W-4 form (tax withholding info)
- State withholding form (if your state uses one)
- Form I-9 (proof they can legally work in the U.S.)
- Optional: Direct deposit authorization
- Signed handbook acknowledgment (if you have an employee handbook)
Keep everything private and secure; you’ll need to save these for at least four years.
Going the Extra Mile
Once the required setup is in place, it’s worth thinking about what else you can do to protect your business and stand out as an employer. These aren’t mandatory for your first hire, but they’re smart steps if you’re planning to grow.
Not required when hiring your first employee, but worth considering:
- Health insurance: Not mandatory for fewer than 50 employees, but a good perk if you can manage it
- Retirement plan: Options like a SIMPLE IRA or 401(k) are tax smart for everyone involved
- Professional advice: Hiring an accountant or HR professional could pay for itself by preventing costly mistakes
A little extra effort at the start often pays off in fewer surprises and sends a professional message to potential hires down the road.
The Bottom Line
Getting payroll right from the start doesn’t have to be overwhelming. Break it into manageable steps. Register for the right accounts. Pick a pay schedule that fits. Set up a system that tracks and files everything. Keep your documents organized.
If something feels unclear or risky, bring in help. A good accountant or payroll provider can save you time, money, and stress. Not sure where to begin? Schedule a call with our team. We’ll help you figure out what steps you’ve already covered, what’s missing, and how to get everything in place, so you can hire with confidence.
