Hiring Your First Employee: The Payroll Tax Checklist

Hiring your first employee payroll tax checklist by Robert Allen Bautista, Kansas City accountant

Hiring your first employee is a milestone, and it also turns you into a payroll tax collector for the federal government and your state. Most first-time employers get into trouble not because the rules are hard, but because nobody gave them the list. Here it is.

Step 0: Employee or contractor?

Before anything else, make sure the person really is an employee. The IRS looks at control: if you decide how, when and where the work is done, provide the tools, and the relationship is ongoing, that person is usually an employee, no matter what the paperwork calls them. Misclassifying an employee as a 1099 contractor can lead to back payroll taxes and penalties.

Before the first day

  1. Get an EIN from the IRS if you do not already have one (free, online).
  2. Register with your state for income tax withholding and for state unemployment insurance.
  3. Check workers' compensation rules in your state. Requirements depend on the number of employees, payroll size and industry.
  4. Choose a payroll method. A payroll service handles calculations, deposits and filings for a modest monthly fee and is usually worth it for small employers.

On the first day

  • Form W-4 (federal withholding) and the state withholding form, if your state has one
  • Form I-9 (employment eligibility): the employee completes Section 1 by day one; you verify documents within three business days
  • New hire report to your state, generally within 20 days of hire

Every payday

Withhold federal income tax, Social Security (6.2%) and Medicare (1.45%) from wages, plus state income tax where applicable. You also owe the employer match of 6.2% and 1.45%. Deposit these taxes electronically on the schedule the IRS assigns you (usually monthly for new small employers).

Every quarter and year

  • Form 941 each quarter: wages paid and taxes withheld and deposited
  • State withholding and unemployment returns, on your state's schedule
  • Form 940 each year: federal unemployment tax (FUTA)
  • W-2s to employees and W-3 to the Social Security Administration by January 31

Budget for the real cost

A rough rule: an employee costs about 8 to 12 percent more than gross wages once you add the employer share of Social Security and Medicare, unemployment taxes and workers' compensation, and more if you offer benefits.

The one mistake to avoid

Never use withheld payroll taxes to cover cash flow. Those funds belong to the government, and the IRS can hold owners personally responsible for unpaid trust fund taxes.

Official IRS sources

This article is general information, not tax advice for your specific situation.

Related guides

About the author

Robert Allen Bautista is a tax preparer and accountant in Kansas City. He spent four years at PwC in IT audit and tax, served as Chief Accountant at a CPA firm, holds an M.S. in Accounting, and is a CPA candidate. He has worked with 350-plus individual and small business clients and writes plain-English tax guides in English and Spanish. More about Robert · Website · LinkedIn 

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