Setting up payroll for the first time feels overwhelming—forms, deadlines, tax deposits, penalties. But you only need to complete this process once, and the penalty for skipping a step can cost thousands. This guide walks through every requirement in the correct order, so you can run your first pay cycle with confidence.
Your EIN is the federal tax ID for your business. You need it before you can hire employees, open a business bank account, or file payroll taxes.
Apply online at IRS.gov/EIN—it's free and takes about 15 minutes. You'll receive your EIN immediately after completing the application. If you apply by fax or mail, expect 4 business days or 4 weeks respectively.
Keep your EIN confirmation letter (CP575) in a secure place. You'll reference this number on every payroll tax form you file.
Before your first payday, you must register with your state for:
Each state has its own registration portal—search "[your state] employer registration" to find yours. Some states process applications in 24 hours; others take 2-3 weeks.
Your SUI tax rate starts as a "new employer rate" (typically 2.7-3.4%) and adjusts based on your claims history over time. States send you a tax rate notice annually—file it where you can find it.
Before the first payday, each employee must complete:
This tells you how much federal income tax to withhold from each paycheck. The 2020 revision asks for filing status, multiple jobs, dependents, and other adjustments. Employees can update their W-4 anytime—process the change within 30 days.
You must verify that every employee is legally authorized to work in the U.S. The employee completes Section 1 on their first day; you complete Section 2 within 3 business days. Examine original documents (passport, or driver's license + Social Security card, or other acceptable combinations).
Store I-9s separately from other personnel files—inspectors can request them with 3 days' notice. Keep them for 3 years after hire or 1 year after termination, whichever is later.
Federal law requires employers to report every new hire within 20 days of their start date (some states require 7-14 days). This helps states locate parents who owe child support and detect unemployment fraud.
Report online through your state's new hire directory. You'll need the employee's name, address, SSN, and your EIN. Most states accept electronic uploads if you're hiring multiple people.
State law determines your minimum pay frequency—most allow weekly, biweekly, semimonthly, or monthly. Align your schedule with your cash flow and administrative capacity.
Best practices:
Each paycheck requires withholding for:
You also owe employer-side taxes: your share of Social Security (6.2%), Medicare (1.45%), and FUTA (federal unemployment tax, typically 0.6% after state credit).
Use payroll software or IRS Publication 15 (Circular E) to calculate withholdings correctly. Manual calculations invite errors—most small businesses use software or a payroll service.
Depositing schedules depend on your total tax liability. Most new employers fall into the monthly deposit schedule—taxes are due by the 15th of the following month. Larger employers (accumulating $100,000+ in taxes) must deposit semiweekly.
Make deposits through EFTPS.gov (Electronic Federal Tax Payment System). Enroll in advance—it takes 5-7 days to receive your PIN by mail.
Late deposits trigger penalties starting at 2% of the underpayment and reaching 15% if more than 10 days late. Set calendar reminders for every deposit deadline.
Most employers file Form 941 each quarter to report federal income tax withheld and both employer and employee shares of Social Security and Medicare taxes.
If your annual payroll tax liability is under $1,000, you may qualify to file Form 944 annually instead.
File Form 940 annually by January 31 to report federal unemployment tax. FUTA funds state unemployment programs—most employers pay 0.6% on the first $7,000 of each employee's wages after receiving a credit for timely state unemployment tax payments.
By January 31, provide Form W-2 to each employee and file copies with the Social Security Administration (Form W-3 transmits them). File with your state as required—some states accept the federal W-2; others require separate forms.
Payroll software automates calculations, tax deposits, and filings. It also generates pay stubs and year-end forms. Most services charge per employee per month—compare features and state coverage.
Alternatively, Altera helps you track payroll expenses alongside invoices, bills, and cash flow—so you see the full picture of your labor costs in one view. Start for free at altera.host.
If you're a sole proprietor with no employees, you don't run payroll. But if you're incorporated (LLC taxed as S-Corp or C-Corp) and take a salary, you do. Consult your CPA.
No. Contractors receive Form 1099-NEC at year-end, not W-2. Don't withhold taxes from contractor payments—they handle their own taxes.
Deposit immediately. The penalty is smaller if you correct the mistake quickly—noticing weeks later is expensive.
Keep payroll tax records for at least 4 years after the due date of the return or the date the tax was paid, whichever is later. Keep I-9s for 3 years after hire or 1 year after termination.