Running Payroll for Your First Employee
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Running Payroll for Your First Employee
Going from solo operator to employer is one of the biggest compliance jumps a small business makes. The moment you put someone on a W-2, you become a tax collector for the federal government and your state: you withhold money from their check, add money on top of it, and remit both on a strict calendar. Miss a deadline and the penalties compound fast.
This guide walks the full sequence — from the paperwork before their first day to the W-2 you file the following January. The good news: once it is set up, payroll is a repeatable monthly rhythm.
Before they start: get your house in order
1. Have an EIN
You need a federal Employer Identification Number to report wages and deposit taxes. If you have been operating as a sole proprietor under your SSN, apply for an EIN (free, online, instant) before you hire. The IRS treats the EIN as the account every payroll deposit posts against.
2. Decide: do it yourself or use a provider
Manual payroll is legal but error-prone — the withholding math, deposit schedules, and quarterly filings are unforgiving. Most first-time employers use a payroll service (Gusto, QuickBooks Payroll, ADP, etc.) that calculates withholding, makes deposits, and files returns automatically. Budget for it as a real line item; for one employee, doing it by hand to save a small monthly fee is usually a false economy once you price your own time and audit risk.
Day one: the new-hire paperwork
Three documents get completed at or near the start date. Do not skip any of them.
3. Form I-9 — Employment Eligibility Verification
Every U.S. employer must complete Form I-9 for every person hired, citizen or not. The employee fills out Section 1 by their first day; you examine their identity/work-authorization documents and complete the employer section within three business days of the start date. This is a USCIS form — you keep it on file, you do not mail it.
4. Form W-4 — Employee's Withholding Certificate
The W-4 tells you how much federal income tax to withhold from each paycheck. Have the employee sign it and make it effective with their first wage payment. Per IRS guidance, if an employee does not give you a valid W-4, you withhold as if they are single with no adjustments. Many states have their own withholding certificate too — check yours.
5. State new-hire reporting
Federal law requires you to report every new and rehired employee to your state's new-hire directory within 20 days of hire — and many states set a shorter window. The report is short (employee name, address, SSN; your name, address, FEIN) and feeds the system that enforces child-support orders. Payroll providers usually file this for you.
6. Workers' compensation insurance
Most states require workers' comp coverage once you have employees — often from the very first one. Rules and exemptions are state-specific, so confirm with your state's labor or industrial-commission site and line up a policy before the first shift, not after.
Each pay run: what you withhold and what you add
A common surprise for new employers: the employee's gross wage is not your total cost. You both pay into FICA, and you alone pay unemployment tax on top.
Withheld from the employee's paycheck
- Federal income tax — per their W-4 and the IRS withholding tables.
- Social Security — 6.2% of wages, up to the annual wage base.
- Medicare — 1.45% of all wages (no cap).
- State/local income tax — where applicable.
Paid by you, the employer, on top of wages
- Social Security match — another 6.2% on wages up to the 184500 USD Social Security wage base for 2026.
- Medicare match — another 1.45%.
- FUTA (federal unemployment) — 6.0% on the first $7,000 of each employee's wages, typically reduced to an effective 0.6% once you take the state-unemployment credit.
- SUTA (state unemployment) — rate and wage base set by your state; new employers usually get an assigned starting rate.
The combined employer-side match of Social Security and Medicare is 7.65%. Add federal FUTA and you are carrying roughly 8.25% on top of gross wages at the federal level alone — and state unemployment plus workers' comp push the real burden higher. Plan your offer and your cash flow around total cost, not the headline wage.
The deposit and filing calendar
This is where DIY employers get burned. Withheld taxes are not yours to hold — you deposit them on a schedule the IRS assigns.
7. Deposit federal employment taxes on schedule
The IRS classifies you as a monthly or semiweekly depositor based on your tax liability during a lookback period. Most brand-new, single-employee businesses fall into monthly: you deposit the prior month's withheld income tax plus both halves of FICA by the 15th of the following month, via EFTPS. Get your schedule wrong, or deposit late, and failure-to-deposit penalties apply.
8. File Form 941 every quarter
Form 941, the Employer's Quarterly Federal Tax Return, reconciles what you withheld and owe. It is due the last day of the month after each quarter — April 30, July 31, October 31, and January 31. Deposit everything on time all quarter and you get up to 10 extra days to file the return.
9. File Form 940 once a year
Form 940 reports your FUTA tax for the year and is due January 31 (with the same on-time-deposit extension to mid-February).
10. Issue W-2s and file W-3 by the January deadline
After year-end, give each employee a Form W-2 and file Copy A with the Social Security Administration. The deadline is January 31 — note that when January 31 falls on a weekend the date rolls to the next business day. When you e-file your W-2s, the SSA generates the summary Form W-3 automatically, so you do not file it separately.
A simple operating rhythm
Once it is wired up, the cadence is predictable:
- Every pay period: run payroll, withhold, pay the net to the employee.
- By the 15th monthly (typical): deposit federal employment taxes via EFTPS; handle state deposits on their schedule.
- Quarterly: file Form 941 and your state returns.
- Annually: file Form 940; issue W-2s and transmit to the SSA by January 31.
Set calendar reminders for every deposit and filing date, or let a payroll provider own the calendar. The penalties for late deposits and missed filings are almost always larger than the cost of automating the whole thing.
Bottom line
Hiring your first employee is mostly a setup problem: get the EIN, nail the I-9 / W-4 / new-hire report on day one, secure workers' comp, and pick how you will run the numbers. After that, payroll is a checklist on a calendar. Treat withheld taxes as money you are holding in trust — because legally, that is exactly what it is — and the rest follows.