Setting Up Payroll for Your First Employee: EIN, Withholding, and the Employer Taxes You Cannot Miss

Payroll is not "cutting a check" — it is becoming a tax agent

The moment you hire a W-2 employee, the government makes you an unpaid tax collector. You must withhold the employee's income and payroll taxes from every check, add your own employer taxes on top, deposit both to the right agencies on a fixed schedule, and file a stack of returns proving you did. Miss a deposit and the penalties are immediate; misclassify the worker to avoid all of it and the bill is worse. This is the least glamorous part of hiring and the one that quietly sinks small companies, so it is worth doing in the right order from the first hire.

A note before anything else: this only applies to genuine employees. Do not reach for a 1099 to skip payroll — worker classification is decided by the actual relationship, not the paperwork you prefer, and getting it wrong converts a payroll chore into back taxes, penalties, and interest across every misclassified worker and year.

Step 1: Get the registrations before the first paycheck

You cannot run payroll without accounts to remit to. Set these up first, because some take days to activate:

• Federal EIN. Apply for an Employer Identification Number (Form SS-4) from the IRS — it is free and usually issued instantly online. It is your account number for federal payroll deposits and filings.
• State income-tax withholding account. Every state with an income tax requires you to register as a withholding agent before you can remit. (No-income-tax states skip this.)
• State unemployment insurance (SUI/SUTA) account. Separate from withholding. This funds unemployment benefits and is experience-rated — the more former employees draw benefits charged to your account, the higher your future rate climbs, which is the real reason to handle unemployment claims deliberately.
• Workers' compensation coverage. Required in almost every state as soon as you have employees, obtained through a carrier or state fund, not a tax registration — but a genuine new-hire injury without coverage is a catastrophic exposure, so line it up before day one.
• Local tax accounts where they exist (some cities and counties levy their own wage taxes).

If your employee works in a different state than your office, their work state's rules generally govern, and you may owe registrations there instead of — or in addition to — your home state. That is one of the most-missed items when you hire across state lines.

Step 2: Collect the forms that set up withholding

Before the first run you need the documents that tell you how much to withhold and where to send net pay. These live inside the broader new-hire paperwork packet, but the payroll-critical ones are:

• Form W-4 — the federal withholding certificate. Without it you must withhold at the highest default rate, which over-withholds and irritates the new hire.
• The state withholding certificate — most income-tax states have their own; a federal W-4 does not cover them.
• Form I-9 — employment eligibility. Not a tax form, but a hard federal requirement with its own I-9 and E-Verify rules.
• Direct deposit authorization and any benefit or retirement deferral elections.
• State new-hire report. You must report every new hire to your state's directory, generally within 20 days — a genuinely easy federal deadline to forget.

Step 3: Understand what you withhold vs. what you owe on top

This is the concept that catches first-time employers: payroll costs you more than the wage, because some taxes are the employer's own.

Withheld from the employee's pay (their money, you just remit it):

• Federal income tax, per their W-4.
• The employee share of FICA — Social Security at 6.2% (up to the annual wage base) and Medicare at 1.45% (no cap), plus an Additional Medicare Tax of 0.9% you withhold on wages above a threshold.
• State (and any local) income tax.

Paid by you, the employer, on top of wages:

• The employer match of FICA — another 6.2% Social Security and 1.45% Medicare. (You do not match the 0.9% Additional Medicare Tax; that one is employee-only.)
• FUTA — federal unemployment tax, 6.0% on the first $7,000 of each employee's wages, but you get a credit for state unemployment taxes paid that usually drops the effective rate to 0.6%.
• SUTA — state unemployment tax, at your experience-rated rate on the state wage base.

Budget for the employer side as a real cost of the hire — it is meaningful money, and it belongs in your compensation planning and your true cost-per-employee math, not as a surprise at deposit time.

Step 4: Deposit on the right schedule

Withheld taxes are not yours to hold. You deposit federal income tax and both halves of FICA to the IRS — electronically, through EFTPS — on either a monthly or semi-weekly schedule, and which schedule you are on is determined by a lookback period the IRS assigns, not by your preference. FUTA is deposited quarterly once it exceeds a small threshold. States have their own deposit calendars.

Treat deposit dates as sacred. Unremitted withheld taxes are trust-fund taxes — money you held on the government's behalf — and failure to deposit them can trigger the Trust Fund Recovery Penalty, which pierces the corporate veil and holds owners and responsible individuals personally liable. Of every payroll deadline, this is the one never to miss.

Step 5: File the periodic and year-end returns

Depositing is not filing. You still reconcile and report:

• Form 941, quarterly, reports wages, withheld income tax, and FICA. (Very small employers may be assigned Form 944 to file annually instead — file whichever the IRS tells you to.)
• Form 940, annually, reconciles FUTA.
• State withholding and unemployment returns, on each state's cadence.
• Forms W-2 to every employee and W-3 transmittal to the Social Security Administration by January 31 — the same deadline as the state equivalents. Missed or incorrect W-2s carry per-form penalties.

Note the e-file threshold: the IRS now requires electronic filing when you have 10 or more information returns of all types combined, which pulls most employers into mandatory e-filing.

The GovCon layer: payroll is where labor accounting starts

If you are a government contractor, payroll is not a standalone function — it is the front end of your cost accounting. The hours that drive each paycheck are the same hours that must satisfy total time accounting and flow to the right cost objectives under DCAA-compliant timekeeping. If you hold a Service Contract Act or Davis-Bacon contract, payroll also has to deliver the prevailing wage and the hourly fringe obligation, with cash-in-lieu when benefits fall short. Wiring timekeeping and payroll together from the first hire — so daily hours per employee feed both the paycheck and the labor distribution — saves you from rebuilding it under audit pressure later.

The bottom line

Setting up payroll for your first employee is a sequence, not a single act: register federally and in every work state, collect the withholding forms, understand that you owe employer taxes on top of wages, deposit withheld amounts on the schedule the IRS assigns you, and file the quarterly and year-end returns on time. None of the individual steps is hard. The failure mode is not knowing a step was triggered — a missed registration, a blown deposit, a forgotten new-hire report — until a penalty notice shows up. Build the checklist once, run every hire through it, and payroll becomes routine instead of a recurring near-miss.

This is general guidance on setting up payroll for small employers, not tax or legal advice. Rates, wage bases, deposit schedules, and filing thresholds change year to year and vary by state — confirm the current numbers and your specific obligations with a payroll provider or a CPA before your first run.