So, you’re ready to hire your first employee — congratulations! It is an exciting and important step. It also means dealing with payroll, which can feel like stepping into a maze of tax forms and deadlines.
The process is less complicated than it appears. Once your system runs properly, most tasks happen automatically. Good payroll software handles calculations, withholdings, and filings without much input from you.
I have guided many business owners through payroll setup over the past decade. Here is what you actually need to do, along with the pitfalls that catch people off guard.
Step 1 – Start with Your EIN
Before you can run payroll, you need an Employer Identification Number (EIN) from the IRS. Think of it like a Social Security number for your business. Banks need it. Tax agencies need it. Payroll systems need it. If you do not have one yet, you can apply for free on the IRS website. It takes about ten minutes.
Resource: IRS EIN
Apply on the IRS website. The process is free and takes roughly ten minutes. Most applicants receive their number immediately. Store it somewhere accessible because you will reference it often.
You will also need to register with your state for things like unemployment insurance and state income tax withholding. Requirements vary by state, so check your state’s Department of Revenue or Labor website to see what you need.
Tip: Do not skip this step. Running payroll without the proper registrations can lead to penalties, and trust me, you do not want that headache.
Step 2 – Classify Your Workers Correctly
This one is huge. Are your workers employees or independent contractors? The IRS has specific rules about this, and getting it wrong can cost you in back taxes and penalties.
Here is the general rule: If you control when, where, and how someone works, they are probably an employee. If they set their own hours, use their own tools, and work for multiple clients, they are likely a contractor.
When in doubt, err on the side of employee classification or consult with an accountant. It is better to be safe than sorry.
Step 3 – Gather Employee Documents
Time to gather some intel from your crew. Several forms are mandatory before issuing their first paycheck.
W-4 Forms: Employees complete this to indicate how much federal income tax should be withheld based on their personal situation.
I-9 Forms: Verifies work authorization in the United States. Keep it on file for three years minimum. It is not submitted to any agency but can be audited, so keep it in its own folder.
State Tax Withholding Forms: Many states have their own version for state tax purposes.
You also need Social Security numbers, current addresses, and banking details for anyone choosing direct deposit.
Resources: Payroll Forms
Step 4 – Choose a Software
You have options, and the right one depends on your budget, how many employees you have, and how involved you want to be.
Selecting payroll software eliminates most of the manual work. These systems calculate withholdings, process payments, and submit tax filings.
DIY (Do It Yourself): You can calculate payroll manually and file taxes yourself. I will be honest, this is time consuming and risky if you are not familiar with payroll tax rules. I do not recommend it unless you have just one employee and a lot of patience.
Payroll software: Tools like Patriot, Gusto, or QuickBooks Online Payroll handle calculations, tax filings, and direct deposits for you. This is what most of my clients use, and it is worth it for the time and stress it saves.
Full service payroll provider: Companies like ADP or Paychex do everything for you — payroll processing, tax filings, year end forms, the works. It costs more, but if you want to be completely hands off, this can be the way to go.
Simple needs and tight budget? Patriot Software works well. Want comprehensive support? Gusto delivers. Already using QuickBooks? Stay in that ecosystem.
Whichever system you choose, make sure you review the quarterly reports and fix any tax or wage reporting issues immediately.
Questions about which fits your situation? Let me know and we can discuss it.
Step 5 – Establish a Pay Schedule
Choose how frequently employees receive paychecks and maintain consistency:
- Weekly: 52 pay periods per year
- Biweekly: 26 pay periods, every two weeks
- Semimonthly: 24 pay periods, typically the fifteenth and last day of the month
- Monthly: 12 pay periods per year
Verify that your state allows your chosen schedule, as some states have minimum pay frequency requirements.
Whatever you choose, be consistent. Employees need to know when to expect their paychecks, and changing schedules midyear can create payroll tax headaches.
Step 6 – Monitor Tax Deadlines
Here is where it gets a little technical, but stick with me. When you run payroll, you are responsible for withholding and paying several types of taxes.
- Federal income tax: Withheld from employee paychecks based on their W-4.
- Social Security and Medicare (FICA): You withhold half from the employee and pay the other half yourself.
- Federal unemployment tax (FUTA): You pay this; it is not withheld from employees.
- State income tax: If your state has it, you will withhold this too.
- State unemployment tax (SUTA): You pay this as well.
Step 7 – Keep Good Records
The IRS requires you to keep payroll records for at least three years (some states require longer). That includes:
- Employee W-4s and I-9s (I-9s must be kept for 3 years after hire or 1 year after employment ends, whichever is later).
- Timesheets or time tracking records.
- Payroll registers (who got paid what and when).
- Tax filings and payment confirmations.
Store everything securely — digital is fine, just make sure it is backed up.
Common Problems
Certain mistakes appear repeatedly after years of fixing payroll issues:
Worker misclassification. Labeling employees as contractors to sidestep payroll taxes creates serious problems. IRS reclassification means owing back taxes plus penalties and interest. Uncertainty means treating someone as an employee.
Inadequate records. Federal law mandates keeping payroll records three years minimum. Download reports regularly and store them securely. Software companies can disappear or experience data loss.
Deadline failures. Automated systems still require monitoring. Confirm deposits and filings happen punctually. Late penalties accumulate rapidly.
Missing workers’ compensation. Most states mandate this coverage for businesses with employees. Noncompliance brings substantial fines.
Cash payments. Some believe this simplifies matters. It does not. It violates the law, and discovery brings severe consequences for everyone involved.
Construction Adds Complexity
Construction and trades face additional layers:
Prevailing wage requirements affect many public projects. These mandate specific pay rates and weekly certified payroll reports.
Certified payroll documentation lists employee names, hours, wages, and benefits in a specific format. Public contracts require these reports.
Multi state operations create complications when crews work across state lines. Each work location may require separate withholding and reporting.
Final Thoughts
Setting up payroll is not as scary as it sounds, but it does require attention to detail. Decent software and a clear process get you operational in an afternoon. Once running, the system operates with minimal intervention.
If this all feels like too much, that is okay. Payroll is one of those areas where getting help is worth it. Whether that is payroll software, a bookkeeper (hi!), or a full service provider, investing in the right support will save you time, money, and stress.
Need help with payroll setup? Schedule a consultation or explore my payroll services.