To put an employee on payroll, you need a federal Employer Identification Number, a completed I-9 and W-4 from the new hire, the correct worker classification, state registrations for unemployment insurance and workers’ compensation, a new-hire report to the state, a payroll system that calculates withholdings, and a schedule for depositing taxes and filing returns. The order matters, because some steps are prerequisites for others, and several carry deadlines that start ticking on the employee’s first day. Here is the full sequence.
Get an Employer Identification Number
Before you can withhold or report any taxes, you need a nine-digit Employer Identification Number from the IRS. It functions like a Social Security number for your business, and the IRS uses it to track everything you owe and file. If you already have an EIN from forming your business entity, you do not need a new one just because you are hiring.
The fastest route is the online application at IRS.gov, which issues the number immediately. Form SS-4 can also be filed by fax (about four business days) or mail (four to five weeks).1Internal Revenue Service. Instructions for Form SS-4 (12/2025) Have the EIN in hand before you move to any of the following steps.
Collect the Right Forms From Your New Hire
Two federal forms have to be completed before the employee starts earning wages, and a third is worth collecting at the same time.
Form I-9 for Employment Eligibility
Federal law requires every employer to verify that a new hire is authorized to work in the United States. The employee fills out Section 1 of Form I-9 no later than their first day of work. You examine their identity and work-authorization documents and complete Section 2 within three business days of that start date.2Department of Homeland Security U.S. Citizenship and Immigration Services USCIS. I-9 Employment Eligibility Verification Acceptable documents include a U.S. passport (which satisfies both identity and work authorization) or a combination like a driver’s license paired with an unrestricted Social Security card.
Keep each I-9 on file for three years after the date of hire or one year after the employee leaves, whichever is later.3USCIS. 10.0 Retaining Form I-9 Paperwork violations alone can bring fines of several hundred dollars per form, and penalties for knowingly hiring an unauthorized worker are considerably steeper.
Form W-4 for Federal Withholding
Federal law requires you to withhold income tax from every wage payment based on the information the employee provides on Form W-4.4Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source The employee declares filing status, dependents, and any extra withholding. You do not approve or reject those choices; you plug the numbers into your payroll calculations. If your state has an income tax, expect a separate state withholding form.
Direct Deposit Authorization
Direct deposit is not legally required, but if you plan to pay electronically, collect a signed authorization along with the employee’s bank routing and account numbers now rather than later.
Classify the Worker Correctly
Classification is where small employers most often expose themselves to real liability, and there are two separate calls to make.
Employee or Independent Contractor
The IRS looks at whether you control what work gets done, how it gets done, and the financial terms of the relationship. If you set the hours, provide the tools, and direct the day-to-day process, the person is almost certainly your employee, regardless of what a contract says.
If the IRS finds you misclassified an employee as a contractor, you will owe back employment taxes at reduced rates under a special penalty provision: 1.5% of the wages paid for federal income tax withholding, plus 20% of the employee’s share of Social Security and Medicare taxes that should have been withheld.5Office of the Law Revision Counsel. 26 USC 3509 – Determination of Employers Liability for Certain Employment Taxes Those are the discounted rates you get if you filed 1099s for the workers. If you filed no information returns at all, the liability doubles.
Exempt or Non-Exempt
Once someone is confirmed as an employee, the Fair Labor Standards Act requires you to determine whether the position qualifies for an overtime exemption. Non-exempt employees must be paid at least 1.5 times their regular rate for every hour worked beyond 40 in a workweek.6U.S. Department of Labor. Handy Reference Guide to the Fair Labor Standards Act The workweek is a fixed 168-hour period you define; it does not have to start on Monday or track the calendar week.
For the executive, administrative, and professional exemptions, the employee must be paid on a salary basis at or above a minimum threshold. After a court vacated the Department of Labor’s 2024 update, the enforceable minimum salary is $684 per week, or $35,568 annually.7U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption Meeting the salary floor is not enough by itself; the employee’s actual duties also have to fit within one of the exempt categories. When in doubt, classify as non-exempt.
Register With State Agencies
Your federal EIN handles IRS obligations. Two separate state registrations still have to happen before you run payroll.
State Unemployment Insurance
Every state runs its own unemployment insurance system, funded through employer payroll taxes. When you register with your state’s workforce or labor agency, you receive a state employer account number and an assigned tax rate. New employers usually start at a default rate until they build enough history for a customized calculation. Rates vary by state, industry, and layoff history.
Workers’ Compensation Insurance
Nearly every state requires employers to carry workers’ compensation coverage. The trigger for the requirement varies; many states mandate coverage from the first hire. Premiums track your industry’s risk level and your payroll size. Failing to carry required coverage can bring fines, and in some states criminal charges. Bind a policy before the employee’s start date, not after.
Report the New Hire to Your State
Federal law requires you to report every new hire and rehire to your state’s Directory of New Hires within 20 days of the start date. The report covers basic information: the employee’s name, Social Security number, address, and your EIN. States use the data primarily to locate parents who owe child support, and also to detect unemployment insurance fraud. The penalty for failing to report is modest, up to $25 per employee, but rises to $500 per employee if the IRS determines you and the worker conspired to avoid reporting.
Set Up Your Payroll System
You have three practical options: run payroll yourself using spreadsheets, use payroll software, or hire a full-service payroll provider. Spreadsheets work in theory but invite math errors and missed deadlines, especially past a handful of employees. Most small businesses land on cloud-based software that automates tax calculations, generates pay stubs, and files electronically.
Whichever route you pick, you will need to enter your EIN, your state employer ID numbers, each employee’s W-4 data, their pay rate, and your pay frequency. Link your business bank account for direct deposit and tax payments. Set the workweek start day so overtime calculations align with the 168-hour period you have defined.
Calculate and Distribute Each Paycheck
Every pay period follows the same sequence: calculate gross pay, subtract mandatory withholdings, deduct any voluntary items, and distribute what remains.
Gross pay for hourly employees is hours worked multiplied by the hourly rate, plus overtime at 1.5 times that rate. For salaried employees, divide the annual salary by the number of pay periods. From that gross amount, you withhold:
- Federal income tax, calculated using the employee’s W-4 and the IRS withholding tables.
- Social Security tax at 6.2% of wages up to $184,500 in 2026. Once earnings hit that cap, withholding stops for the rest of the year.8SSA.gov. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
- Medicare tax at 1.45% of all wages, with no cap. For employees earning over $200,000 in a calendar year, withhold an additional 0.9% on wages above that threshold. You do not match this extra 0.9%; it is entirely the employee’s obligation.9Social Security Administration. Social Security and Medicare Tax Rates10Internal Revenue Service. Publication 926 (2026), Household Employers Tax Guide
- State and local taxes, at rates and under rules that depend on your jurisdiction.
You also match the employee’s Social Security and Medicare contributions from your own funds: 6.2% plus 1.45%, a combined employer cost of 7.65% on top of wages. After withholdings and any voluntary deductions like health premiums or retirement contributions, net pay goes to the employee by direct deposit or check.
Pick a consistent pay schedule and stick to it. Biweekly and semimonthly are the most common. Most states have laws dictating pay frequency, and some also specify how quickly a final paycheck must be issued after termination.
Deposit Payroll Taxes on Time
Withholding is only half the job. You have to deposit the withheld amounts, along with your employer share, with the IRS on a set schedule. All federal tax deposits must be made electronically, through the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay, or your business tax account.11Internal Revenue Service. Depositing and Reporting Employment Taxes
Your deposit frequency depends on payroll size. If you reported $50,000 or less in employment taxes during the IRS lookback period, roughly the prior year, you deposit monthly, by the 15th of the following month. Above $50,000, you are on a semiweekly schedule with tighter deadlines tied to your paydays. Any employer accumulating $100,000 or more in tax liability on a single day must deposit by the next business day.12Internal Revenue Service. Topic No. 757, Forms 941 and 944 – Deposit Requirements
Late deposits trigger penalties that scale with the delay: 2% if you are one to five days late, 5% for six to fifteen days, 10% beyond fifteen days, and 15% if you still have not paid within ten days of receiving an IRS notice.13Internal Revenue Service. Failure to Deposit Penalty These percentages do not stack; the IRS charges the single rate that fits your level of lateness.
File Quarterly and Annual Tax Returns
Beyond depositing taxes each pay period, you have recurring returns to file.
Form 941, Quarterly
Each quarter, you file Form 941 to report total wages paid and the federal income, Social Security, and Medicare taxes you withheld and matched.14Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return For 2026, the deadlines are April 30, July 31, November 2 (shifted from October 31, which falls on a Saturday), and February 1, 2027.15Internal Revenue Service. Publication 509 (2026), Tax Calendars If you deposited every dollar owed on time throughout the quarter, you get an automatic ten-day filing extension.
Form 940, Annual FUTA
The Federal Unemployment Tax Act imposes a 6.0% tax on the first $7,000 of each employee’s annual wages.16Internal Revenue Service. Instructions for Form 940 (2025) In practice, nearly every employer pays far less. Paying state unemployment taxes on time earns a credit of up to 5.4%, dropping the effective federal rate to 0.6%, a maximum of $42 per employee per year.17U.S. Department of Labor. Unemployment Insurance Tax Topic You reconcile the tax annually on Form 940, but if your FUTA liability exceeds $500 in any quarter, you must make a quarterly deposit.
Form W-2, Annual Wage Statements
After each calendar year, you must provide every employee with a Form W-2 showing total wages and taxes withheld. For tax year 2026, the deadline to furnish W-2s to employees and file copies with the Social Security Administration is February 1, 2027.18Internal Revenue Service (IRS). General Instructions for Forms W-2 and W-3 If you file 10 or more information returns in a calendar year, W-2s must be filed electronically.19Internal Revenue Service. Topic No. 801, Who Must File Information Returns Electronically
Late or incorrect W-2 filings carry per-form penalties that grow with the delay: $60 per form if corrected within 30 days, $130 if corrected by August 1, and $340 per form after that.20Internal Revenue Service. Information Return Penalties Across multiple employees, those figures add up quickly.
Keep Records and Post Required Notices
Keep all employment tax records (W-4s, payroll registers, deposit receipts, and filed returns) for at least four years after the tax becomes due or is paid, whichever is later.21Internal Revenue Service. Employment Tax Recordkeeping I-9 forms follow a different retention rule: three years from the date of hire or one year after the employee leaves, whichever is later.3USCIS. 10.0 Retaining Form I-9
Federal law also requires certain workplace posters where employees can see them. The specific posters depend on which federal statutes apply to your business, but most employers need notices covering minimum wage and overtime rights, family and medical leave, workplace safety, equal employment opportunity, and polygraph protections.22U.S. Department of Labor – DOL.gov. Workplace Posters Your state will have its own required posters. The Department of Labor’s online Poster Advisor tool identifies the federal ones your business needs.