Sarah Johnson
Hiring your first employee is one of the most exciting things you’ll do as a business owner. It’s also the moment a lot of people quietly panic and open seventeen browser tabs at once.
I get it. Payroll sounds like it should be simple, and then you find out there are employer taxes, withholding tables, quarterly filings, and a form called a 940 that nobody warned you about. Here’s what I tell people who sit down with me at this stage: the system itself is not that complicated once you understand what’s actually happening. What makes it feel hard is that no one explains it in order.
So let’s do that.
Use this checklist to track every required step from hire date through your first quarterly filing cycle.
| Step | What It Is | Deadline or Timing | Where to File/Store |
|---|---|---|---|
| 1. Obtain EIN | Federal employer identification number | Before first payroll runs | IRS.gov (online, immediate) |
| 2. State employer registration | Withholding tax account + unemployment insurance account | Before first payroll; some states require within 20 days of first wages | State revenue dept + workforce agency |
| 3. Collect Form W-4 | Employee's federal withholding elections | On or before first day of work | Keep in payroll file (do not send to IRS) |
| 4. Complete Form I-9 | Employment eligibility verification | Section 1: Day 1; Section 2: within 3 business days of start | Separate I-9 binder (retain 3 years after hire or 1 year after termination, whichever is later) |
| 5. Report new hire | State new-hire reporting (child support enforcement) | Typically within 20 days of hire (varies by state) | State new-hire directory |
| 6. Run first payroll | Calculate gross pay, withhold FICA (6.2% SS + 1.45% Medicare), federal/state income tax | On your established pay date | Payroll system or manual ledger |
| 7. Deposit withheld taxes | Federal income tax + employee/employer FICA | Monthly or semi-weekly based on total liability (most new employers: by 15th of following month) | EFTPS.gov (electronic deposit required) |
| 8. File Form 941 | Quarterly federal payroll tax return | Last day of month following quarter end (Apr 30, Jul 31, Oct 31, Jan 31) | IRS (e-file or mail) |
| 9. File Form 940 | Annual federal unemployment (FUTA) tax return | January 31 following the tax year | IRS |
| 10. Provide Form W-2 | Annual wage and tax statement to employee | By January 31 for prior year | Employee + SSA (Copy A) |
Illustrative general information, confirm current figures for your situation.
Before You Pay Anyone, Get Your Paperwork in Place
The first thing to do has nothing to do with money. It’s registration.
If you don’t already have an Employer Identification Number (EIN), that’s your starting point. You get one free from the IRS at irs.gov, and the online application takes about ten minutes. This is the number that identifies your business to the federal government for tax purposes. You need it before you can do anything else payroll-related.
Next, register with your state’s department of revenue (or whatever they call it) for state income tax withholding, and with your state’s workforce agency for unemployment insurance. Every state does this differently. Some have a combined registration portal; others make you file separately. Just search “[your state] employer registration payroll” and follow whatever the state actually tells you to do. This part trips people up because they assume it’s one-size-fits-all. It isn’t.
Your new employee needs to fill out two forms on day one:
- Form W-4 (your federal withholding choices)
- Form I-9 (proof you’re allowed to work in the U.S.)
The I-9 requires you to look at identity documents in person. Not over email. Federal law is strict about that. If you’re hiring someone remote, an authorized representative can verify for you, but it’s not a virtual handshake situation. Keep the I-9 in a separate binder from everything else in their personnel file. I know that sounds obsessive, but audits happen, and mixing these documents together creates unnecessary headaches.
Some states also require their own withholding form. California’s DE 4 is one example. Check what your state actually requires before payday hits.
Understanding What You Actually Owe as an Employer
This is where first-timers get blindsided. Paying someone $50,000 a year doesn’t cost you $50,000. It costs more.
What comes out of the employee’s paycheck (you take it out and send it to the government):
- Federal income tax (whatever they chose on their W-4)
- Social Security: 6.2% of gross wages, capped at $168,600 for 2024
- Medicare: 1.45% of everything they make
What you pay out of your own pocket as the employer, on top of their salary:
- Matching 6.2% for Social Security
- Matching 1.45% for Medicare
- Federal unemployment tax (FUTA): 6% on the first $7,000 per employee per year, though credits usually bring that down to about 0.6%
- State unemployment tax (SUTA): differs by state and your claims history
Pay someone $50,000 annually and your actual business cost is closer to $54,000 to $56,000 once employer taxes land. That’s before benefits, workers’ comp, or anything else. You need to know that number before you make any job offers.
On the state side: if your state taxes income, you withhold based on their form and send it to the state on whatever schedule they assign you.
Actually Running Payroll: The Real Choice You Need to Make
How to File Business Taxes for the FIRST TIME! · Karlton Dennis on YouTube
Two realistic paths exist. Software, or outsource it.
DIY payroll software like QuickBooks Payroll, Gusto, or OnPay calculates taxes automatically, spits out pay stubs, and handles deposits and filings for you. Gusto is what I see most small business owners start with, and for one to five employees it’s genuinely hard to beat. Their Simple plan costs about $40 per month plus $6 per employee per month as of 2024. It files your quarterly 941s, your annual 940, and your year-end W-2s. For most people in this position, that $46 a month is money well spent.
Full-service payroll companies like ADP or Paychex might appeal if you’re scaling fast or want a dedicated rep, but pricing isn’t always transparent, and I’ve watched business owners get stuck on plans costing $150 to $200 a month for a single employee without fully understanding why. Unless you have a specific reason to go that direction, skip it for now.
Doing it completely yourself is legal, but only if you’ve got an accountant handling all the filings and you actually understand payroll tax mechanics. Miss one deposit deadline and you’re looking at a 2% to 15% penalty depending on how late you are. The IRS isn’t flexible about this.
If you’re uncertain which approach fits your setup, SCORE’s free mentorship resources pair you with advisors who’ve walked first-time employers through exactly this. I’ve referred people there and heard good things back.
The Filing Calendar Nobody Tells You About
Payroll isn’t something you set and forget. There’s a calendar.
Federal tax deposits (Social Security, Medicare, and withheld federal income tax) get due either semi-weekly or monthly depending on your total liability. New employers are usually monthly: taxes from any month are due by the 15th of the next month. Deposit through EFTPS (Electronic Federal Tax Payment System), which is free. Open your account the same week you get your EIN.
Form 941 goes out quarterly: April 30, July 31, October 31, January 31. It’s a summary of what you withheld and what you owe that quarter.
Form 940 is annual, due January 31, and covers federal unemployment tax.
W-2s go to your employee and the Social Security Administration by January 31 of the year after.
State schedules vary. Some states want monthly deposits, some quarterly, some just annually depending on what you owe. Your state workforce agency will tell you what applies to you after registration.
If you’re using Gusto or something similar, most of this happens automatically. But you should still understand what’s moving where and why. The Consumer Financial Protection Bureau’s small business resources explain employer obligations in plain language. Read it once just to confirm you’re not missing anything.
Workers’ Comp and a Few Things That Slip Through the Cracks
Workers’ compensation insurance is legally required in almost every state the moment you hire your first employee. Not after a certain headcount. Not after waiting a year. Day one.
The cost swings wildly by industry and state. A clerical employee might cost $0.20 per $100 of payroll. A roofing worker might cost $20 per $100. Get quotes before hire day, not after.
A few other things get forgotten:
New hire reporting. Federal law says you report new hires to your state’s directory within 20 days of their start. This is separate from payroll registration. Simple forms, but miss it and you pay penalties.
Pay frequency. Decide whether you’re paying weekly, bi-weekly, semi-monthly, or monthly before the first paycheck goes out. Some states limit your options. Check your state’s labor law. Once you tell someone when they get paid, changing it is legally messy in most states.
Record retention. Keep payroll records for at least four years. W-4s, pay records, tax deposit confirmations, time records, all of it. Four years is federal standard; some states want longer.
J.K. Lasser’s Small Business Taxes (updated annually and available on Amazon) goes deep on employer obligations without requiring you to speak accountant fluently.
One more: talk to a CPA before you hire, especially if you’re unsure about your business structure or state specifics. One hour of consultation to confirm you’re set up right is almost always cheaper than fixing a mistake later.
You don’t need to get this perfect on day one. You do need to get the foundation right: EIN, state registrations, correct worker classification, and a deposit schedule you actually follow. Lock those four things in and the rest becomes manageable. Most people who’ve been through this tell me the same thing: it’s not as bad as they expected. The first time is just harder because everything is new.
Sources & References
- IRS, Employer ID Numbers, EIN requirements and online application process
- IRS, Employment Taxes for Small Businesses, Supports Form 940, withholding, quarterly filing obligations
- USCIS, I-9 Central, Form I-9 completion requirements and timing rules
- SBA, Hire and Manage Employees, Overview of state registration and payroll setup steps
Photo: Vitaly Gariev via Pexels
This article is for general informational purposes only and does not constitute financial, tax, or legal advice. Business finance and tax rules vary by entity type, state, and individual circumstances. Consult a qualified CPA, enrolled agent, or business attorney for advice specific to your situation.
Recommended Resources
Disclosure: As an Amazon Associate, we earn a small commission from qualifying purchases at no extra cost to you. We only recommend products that genuinely support the topics covered in this article.
- Mastering QuickBooks 2025 (~$32), The most comprehensive QuickBooks 2025 guide, covers bookkeeping, payroll, invoicing, tax prep, and cash flow.
- Accounting for Small Business Owners (~$14), Beginner-friendly accounting guide covering basic bookkeeping, financial statements, and managing business taxes.
