How to Set Up a W-2 Employee: EIN, I-9, W-4, and Payroll

Setting up a W-2 employee means lining up a chain of federal and state registrations, onboarding forms, insurance, and payroll mechanics before the first paycheck goes out. Here is how to set up a W-2 employee in the order the deadlines actually fall: get a federal Employer Identification Number, register with your state for withholding and unemployment, verify work authorization and collect a W-4, report the hire to the state, buy workers’ compensation coverage, and stand up a payroll system that can withhold, deposit, and file on schedule.

Get a Federal Employer Identification Number

You cannot withhold taxes, file employment returns, or issue a W-2 without an Employer Identification Number. The IRS uses this nine-digit number to track everything you owe and everything you report.¹

The fastest route is the IRS online application, which issues the number immediately at no cost. Fax or mail submissions of Form SS-4 take several business days to several weeks.²

Register for State Withholding and Unemployment

Alongside the EIN, register with your state’s taxing authority for a state tax ID. That number tracks the state income tax you withhold from paychecks, which is a separate obligation from federal withholding. Most states run the registration through their department of revenue, often with an online portal.

You also need a state unemployment insurance (SUTA) account. Each state runs its own program, and the SUTA account is where you report wages and pay the tax that funds benefits for workers who lose their jobs. Taxable wage bases vary by state, commonly falling between $7,000 and $13,000 per employee per year. Complete both registrations before the start date so you are not behind on withholding and reporting from day one.

Verify Work Authorization With Form I-9

Federal law requires every employer to confirm each new hire is authorized to work in the United States by completing Form I-9.³ The employee fills out Section 1 no later than their first day of work for pay. They can complete it earlier, any time after accepting the offer.⁴

You then have three business days from the hire date to examine the employee’s original identity and work-authorization documents and complete Section 2.³ Acceptable documents fall into three lists on the form’s instructions. A single List A document, such as a U.S. passport or permanent resident card, proves both identity and work authorization. Alternatively, the employee presents one List B document (like a driver’s license) plus one from List C (like a Social Security card). Record each document’s title, issuing authority, number, and expiration date on the form.

Federal contractors with qualifying contracts above $150,000 lasting at least 120 days must also verify employees through E-Verify.⁵ Some states mandate E-Verify for all or certain private employers, so check your state’s rule.

Collect Form W-4 for Income Tax Withholding

Every new employee should complete IRS Form W-4 so you can calculate federal income tax withholding from each paycheck.⁶ They provide their Social Security number and filing status and can account for a working spouse, multiple jobs, dependents, and other adjustments.

Make sure the employee’s legal name on the W-4 exactly matches their Social Security card. Keep the W-4 in your files rather than sending it to the IRS. If an employee doesn’t submit a W-4, withhold at the default rate of single with no other adjustments, which produces the highest withholding for a given wage.

Report the New Hire to Your State

After completing the I-9 and W-4, report the new employee to your state’s Directory of New Hires. Federal law requires the report within 20 calendar days of the hire date, and some states set shorter deadlines.⁷ Employers transmitting electronically may instead use two monthly transmissions spaced 12 to 16 days apart.

The report typically includes your EIN, business name and address, and the employee’s name, address, Social Security number, and start date. State penalties for failing to report cannot exceed $25 per missed report, or $500 where the employer and employee conspired to avoid reporting or submitted false information.⁷

Secure Workers’ Compensation Insurance Before Day One

Nearly every state requires workers’ compensation insurance in place before an employee begins work. The policy pays for medical treatment and a portion of lost wages if an employee is injured or becomes ill because of the job. Cost is based on industry classification, total payroll, and claims history, and the employer pays the full premium.

Going without required coverage can trigger stop-work orders, daily fines, and personal liability for workplace injuries. A handful of states permit self-insurance, and Texas does not mandate coverage for most private employers, but skipping it forfeits the legal protections the system provides. Buy the policy through your state’s workers’ compensation marketplace or a licensed private insurer before the first shift.

Set Up Payroll: FICA, Income Tax Withholding, and Unemployment

The biggest cost difference between a W-2 employee and a contractor is FICA, the combined Social Security and Medicare tax that employer and employee share. For 2026, the rates are:

Social Security: 6.2% withheld from wages plus a matching 6.2% employer share, on wages up to $184,500.⁸
Medicare: 1.45% withheld plus a matching 1.45% employer share, with no wage cap.⁹
Additional Medicare Tax: an extra 0.9% withheld from the employee once wages exceed $200,000 in a calendar year. The employer does not match this portion but is responsible for withholding it.¹⁰

The combined employer-employee FICA burden is 15.3% on wages up to the Social Security wage base and 2.9% (Medicare only) above it. Your 7.65% share sits on top of the wage itself.

You also withhold federal income tax from each paycheck using the employee’s W-4 and IRS withholding tables. Federal Unemployment Tax (FUTA) comes entirely out of the employer’s pocket. The FUTA rate is 6.0% on the first $7,000 of each employee’s annual wages, but paying state unemployment taxes in full and on time earns a credit of up to 5.4%, bringing the effective FUTA rate down to 0.6% — a maximum of $42 per employee per year.¹¹ Late SUTA payments can cost you that credit and roughly quintuple the federal bill. New employers typically receive a default SUTA rate from the state, which adjusts over time based on claims history.

Deposit Taxes on the IRS Schedule

Withheld income tax and combined FICA taxes must be deposited with the IRS on a set schedule; you cannot hold the money until the end of the quarter. All federal tax deposits go through the Electronic Federal Tax Payment System (EFTPS), which is free.¹² Enroll in EFTPS as soon as you have your EIN, since enrollment can take up to two weeks.

Deposit frequency depends on the taxes you reported during a four-quarter lookback period:

Monthly depositors: $50,000 or less in employment taxes during the lookback period; deposit each month’s taxes by the 15th of the following month.
Semiweekly depositors: more than $50,000 during the lookback period; deposit by Wednesday for wages paid Wednesday through Friday, or by Friday for wages paid Saturday through Tuesday.
New employers with no lookback history are treated as monthly depositors for the first year.

If accumulated tax liability reaches $100,000 on any single day, you become a semiweekly depositor immediately and must deposit by the next business day.¹³

Pick a Pay Schedule and Follow Wage and Hour Rules

State law dictates pay frequency. Common schedules are weekly, biweekly, and semimonthly. Pick one that complies with your state and stick to it.

Under the Fair Labor Standards Act, covered nonexempt employees must receive at least the federal minimum wage of $7.25 per hour and overtime pay of at least 1.5 times their regular rate for hours worked beyond 40 in a workweek.¹⁴ Many states set higher minimums; pay whichever is greater.

Certain salaried employees in executive, administrative, or professional roles may be exempt from overtime if they meet both a duties test and a minimum salary threshold. Following a 2024 federal court decision that blocked a planned increase, the Department of Labor is currently enforcing the 2019 threshold of $684 per week ($35,568 per year).¹⁵ A salary alone does not make someone exempt; the actual duties must also qualify.

File the Quarterly and Annual Returns

Each quarter, file IRS Form 941 to report income taxes, Social Security taxes, and Medicare taxes withheld along with your employer FICA share. The deadlines are April 30, July 31, October 31, and January 31 (for the fourth quarter of the prior year). If you deposited all taxes on time, you get an extra 10 calendar days to file.¹⁶

File Form 940 annually to reconcile FUTA obligations. Form 940 is due by January 31 of the following year.

At year-end, issue a Form W-2 to each employee and file copies with the Social Security Administration. For tax year 2026, the deadline to furnish W-2s to employees and file with the SSA is February 1, 2027.¹⁷ Late or incorrect W-2 filings can trigger per-form penalties that increase with the length of the delay.

Health Coverage Rules That Apply Above 50 Employees

If your business had an average of 50 or more full-time employees (including full-time equivalents) during the prior year, the Affordable Care Act classifies you as an Applicable Large Employer. That designation requires you to offer affordable minimum-value health coverage to full-time employees or face potential penalty assessments.¹⁸ Employers below the 50-employee threshold are not required to provide health insurance, though many choose to.

Several states also require employers to withhold payroll taxes for state disability insurance or paid family leave programs. These apply regardless of company size in the states that mandate them and run through your state payroll tax registration.

Post the Required Workplace Notices

Federal law requires certain notices to be posted where employees can easily see them. The most commonly required posters include:¹⁹

The Fair Labor Standards Act (minimum wage) poster, required for virtually all employers with at least one covered employee.
The OSHA “Job Safety and Health” poster, required for private employers in businesses affecting commerce.
The Family and Medical Leave Act poster, required for employers with 50 or more employees.
The Employee Polygraph Protection Act poster, required for most private employers.
The USERRA poster, required for all employers, covering reemployment rights for service members.

The Department of Labor provides free versions on its website. Most states have additional posting requirements, and federal contractors may need further notices related to prevailing wages, nondiscrimination, and labor relations.

Keep the Records Long Enough

Federal agencies impose overlapping retention rules. Keep everything related to the employee for at least the longest applicable period:

Form I-9: retain for three years after the hire date or one year after the employee leaves, whichever is later.³
Payroll records (hours, pay rates, deductions): at least three years under the FLSA and ADEA.²⁰
General personnel records: at least one year from the date of creation, or one year after termination if the employee was involuntarily let go.²⁰
Tax records (Forms 941, W-4, deposit receipts): at least four years after the tax becomes due or is paid, whichever is later, per IRS guidelines.

Store Social Security numbers and other sensitive data securely, whether in a locked cabinet or an encrypted system. These records are what protect you during an audit by the IRS, Department of Labor, or immigration authorities.

1
eCFR. 26 CFR 301.6109-1 – Identifying Numbers
2
Internal Revenue Service. Employer Identification Number
3
Office of the Law Revision Counsel. 8 USC 1324a – Unlawful Employment of Aliens
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U.S. Citizenship and Immigration Services. Completing Section 1, Employee Information and Attestation
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E-Verify. Who Is Affected by the E-Verify Federal Contractor Rule
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Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate
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Office of the Law Revision Counsel. 42 USC 653a – State Directory of New Hires
8
Social Security Administration. Contribution and Benefit Base
9
Office of the Law Revision Counsel. 26 USC 3101 – Rate of Tax
10
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
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Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return
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Internal Revenue Service. Depositing and Reporting Employment Taxes
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Internal Revenue Service. Instructions for Form 941
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U.S. Department of Labor. Handy Reference Guide to the Fair Labor Standards Act
15
U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption
16
Internal Revenue Service. Employment Tax Due Dates
17
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
18
Internal Revenue Service. ACA Information Center for Applicable Large Employers (ALEs)
19
U-S. Department of Labor. Workplace Posters
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U.S. Equal Employment Opportunity Commission. Recordkeeping Requirements