Setting up payroll for your first employee

What must I set up before the first paycheck?

Set up the employer's tax identity, payroll accounts, employee records, withholding method and deposit method before paying wages. A paycheck creates tax and reporting duties even if the business has only one worker (IRS: Publication 15).

1. Confirm the business's federal tax classification and the worker's work location. An LLC's name alone does not tell you whether its owner is an employee (IRS: single-member LLCs).
2. Get the employer identification number (EIN) and the payroll accounts required where the employee works (IRS: EIN; California EDD: registration).
3. Collect the hiring forms and verify the worker's name and Social Security number. Set the wage, payday and payroll period (IRS: hiring employees; IRS: Publication 15).
4. Calculate withholding and employer taxes, arrange electronic federal deposits, then calendar federal and state returns and new-hire reporting (IRS: depositing and reporting; California EDD: new hires).

If the worker may be a contractor, settle employee versus contractor status before choosing the payroll path.

Which federal and home-state employer accounts do I need?

An employer needs an EIN to report federal payroll taxes and needs the accounts its state requires for wages paid there. A single-member LLC disregarded for income tax still uses the LLC's own name and EIN for wages it pays to employees (IRS: EIN; IRS: single-member LLCs).

State and local requirements vary. Check the agency for the employee's work location before the first pay run; the California account is an example, not a national account. If the worker is in a second state, see employees in another state.

In California, a business that hires employees must register within 15 days after paying more than $100 in a calendar quarter (California EDD: registration trigger).

Which forms and details do I collect at hiring?

Collect a signed Form W-4 for federal income tax withholding, complete Form I-9 to verify identity and work authorization, and record the employee's correct name and Social Security number for Form W-2. The IRS says an individual taxpayer identification number is not a substitute for an employee Social Security number (IRS: hiring employees).

If an authorized worker is waiting for an SSN, have them apply through Social Security. If it is still pending when Form W-2 is due, use “Applied For” on paper or zeros electronically, then correct the W-2 when the number arrives (IRS: Publication 15).

Keep the payroll period, gross wages, deductions, net pay and tax liabilities in the employer's records so deposits and later returns reconcile (IRS: Publication 15).

For a nonresident alien employee working in the US, follow the IRS's special W-4 instructions and withholding adjustment. Treaty-exempt wages may require Form 8233 instead of Form W-4 (IRS: Publication 15).

What comes out of each paycheck, and what does the employer add?

The employee's withholding reduces take-home pay; the employer's own taxes are an added business cost. For ordinary covered wages, the employer deposits both employee and employer Social Security and Medicare amounts, plus federal income tax withheld (IRS: Publication 15; IRS: depositing and reporting).

For ordinary business employees, federal unemployment tax generally applies if the employer paid at least $1,500 in wages in any quarter of this or the prior year, or had an employee for part of a day in at least 20 different weeks in either year. Farm and household work have different tests (IRS: Publication 15).

The federal rates and wage bases above come from IRS Publication 15. Withhold an additional 0.9% from an employee's wages above $200,000 paid by this employer in a calendar year, starting with the paycheck that crosses the threshold. There is no employer match (IRS: Publication 15). California, for example, lists unemployment and employment training taxes as employer costs and state disability insurance and personal income tax as amounts withheld from wages (California EDD: payroll taxes). State rates, wage bases and local taxes need a separate check.

How do I find my federal deposit schedule and pay?

Use the IRS lookback rules to find the employer's monthly or semiweekly schedule; filing Form 941 quarterly does not mean paying taxes quarterly. A new Form 941 employer generally starts as a monthly depositor in its first calendar year because its prior lookback liability is treated as zero (IRS: Publication 15).

These are deposit rules for federal income tax withheld and both sides of Social Security and Medicare; the pay date controls the deposit period. A Form 941 employer may instead pay with a timely return if current or prior-quarter tax liability is below $2,500 and no next-day deposit obligation arose in the current quarter. If unsure, deposit on schedule. Required federal deposits are electronic (IRS: Publication 15).

A monthly depositor that reaches the next-day trigger becomes a semiweekly depositor on the next day for at least the rest of that year and the following year (IRS: Publication 15).

Federal unemployment tax has a separate quarterly deposit test: deposit after the accumulated liability exceeds $500, by the last day of the month following that quarter; smaller amounts generally carry forward (IRS: Publication 15).

Late deposits can cost 2% for days 1–5, 5% for days 6–15, 10% after day 15, or 15% if still unpaid more than 10 days after the first IRS notice or on immediate demand, whichever is earlier. Reasonable cause can remove the penalty; an inadvertent first-quarter failure may also qualify for waiver after timely filing, subject to IRS size limits (IRS: Publication 15).

A sole proprietor directly owes employment taxes without a willfulness test. General partners usually also owe partnership payroll debts under state law; an LLP can differ. A person responsible for a corporation's, partnership's or LLC's withholding who willfully fails to pay it may owe the trust fund amount under IRC 6672; employer taxes and FUTA are excluded from that penalty. For timely filed returns, the IRS generally has three years from the following April 15 to assess and ten years after assessment to collect; a proposed assessment can be appealed within 60 days, or 75 if addressed abroad (IRS: liability guidance; IRS: penalty and appeal).

Hiring a payroll provider generally leaves the employer responsible for correct deposits and returns (IRS: Publication 15).

In California, a person controlling an LLC who willfully fails to pay state payroll taxes can also owe the tax, penalties and interest under UI Code 1735 (California EDD: LLC payroll).

Which returns and wage statements will I file?

Most employers file Form 941 each quarter, Form 940 annually if subject to federal unemployment tax, and Form W-2 for each employee. A federal tax deposit pays a liability; it does not replace the return that reports it (IRS: depositing and reporting).

An employer expecting annual employment tax of $1,000 or less could request Form 944 for 2026 by March 16 (mail) or April 1 (phone). That request window has closed; use Form 944 only if the IRS approved it in writing. Agricultural employers may use Form 943 (IRS: Form 941 instructions).

Do I report a new hire to the state, and when?

Report a new hire under the work state's new-hire rules, separately from tax returns. California requires Form DE 34 for employees who work there within 20 calendar days after the first day of work for wages; it also covers rehires after a separation of at least 60 consecutive days. For electronic filing, EDD calls for two monthly reports 12 to 16 days apart; skip an empty report (California EDD: new hires).

California's report includes the employer's EDD account number and EIN plus the employee's name, Social Security number, home address and start date. Other states can use different deadlines and methods, so check the relevant state agency before the worker starts (California EDD: new hires).

California may charge $24 per unreported worker, or $490 for an intentional agreement to omit or falsify the report (California EDD: new hires).

I am my S corporation's only worker. What is the same?

An S corporation officer who performs services and is paid or entitled to pay generally has employee wages, even if the officer owns all the stock. The IRS exception is for an officer who performs no or only minor services and is not entitled to pay. Set up the same employer EIN, applicable state account, withholding, deposits, returns and W-2 process used for another employee (IRS: S corporation officers).

Distributions do not replace wages for services. Deciding how much salary to pay an S corporation owner is a separate question; the amount depends on the work and the facts (IRS: S corporation officers).

I own a sole proprietorship or an LLC. Can I put myself on payroll?

A sole proprietor and the individual owner of a disregarded single-member LLC generally pay self-employment tax on business earnings rather than treating their own draws as employee wages. A partner, including a member of an LLC taxed as a partnership, is self-employed for services to that partnership, not its employee (IRS: single-member LLCs; IRS: partners).

That is the federal rule. For California payroll taxes, EDD generally treats service pay to a limited partner as wages, but excludes bona fide general partner draws (California EDD: LLC and partnership payroll).

An LLC taxed as a corporation follows corporate payroll rules for an owner who works as an employee. Classification therefore comes first; an LLC can be disregarded, taxed as a partnership or taxed as a corporation. A disregarded LLC can still run payroll for its other employees under its own name and EIN (IRS: single-member LLCs).

Example

Illustrative US dollars; assume ordinary covered wages, a monthly federal deposit schedule and no state or benefit deductions. A business pays one employee $5,000 gross in a month. Its federal income tax calculation from Form W-4 produces $500 of withholding. Employee Social Security is $310 and Medicare is $72.50, leaving $4,117.50 to the employee.

The business also owes $310 of its own Social Security and $72.50 of its own Medicare. Its cash cost is $5,382.50 before unemployment tax and any other employer costs. Its federal deposit for that month's wages is $1,265: $500 of income tax withheld plus $382.50 from the employee and $382.50 from the employer. It deposits on the monthly schedule, then separately reports the wages and taxes on its quarterly Form 941. The employee's $382.50 withholding is part of gross pay, not another employer cost.

Different for you?

• The worker may be a contractor: check worker classification before paying them.
• Your S corporation owner wage is undecided: review S corporation owner salary.
• The employee works in another state: see employees in another state.
• The employee works across the US–Canada border: see cross-border hiring.
• Your first employee is your child or spouse: federal Social Security, Medicare or FUTA exemptions can apply to family wages in a sole proprietorship or certain parent-owned partnerships; corporate wages remain covered (IRS: Publication 15, family employees).
• Your business has qualifying research expenses: a qualified small business elects the research payroll tax credit on Form 6765 by its original income tax return due date, including extensions. It uses Form 8974 with its employment tax return to reduce the employer's Social Security and Medicare tax starting the quarter after it files that income tax return (IRS: Publication 15).
• A deposit or return is already late: see behind on payroll taxes. Withheld taxes remain due even when the business has cash pressure (IRS: Publication 15).
• You are still forming the business: see what to set up after formation.
• The entity's classification, state accounts or first deposits are uncertain: gather the EIN, LLC tax election or corporate status, work location, pay schedule, W-4 and state account notices, then get bookkeeping help.