How to Set Up Payroll for Your First Employee
To set up payroll for your first employee, you need an Employer Identification Number (EIN), state and federal tax registrations, a completed Form W-4 and I-9 from the employee, a chosen pay schedule, and either a payroll provider like Gusto or a manual system to calculate and file withholdings. Most small businesses can be ready to run their first payroll within one to two weeks.
What is payroll setup? Payroll setup is the one-time process of registering your business as an employer and putting the systems in place to legally pay an employee, withhold the correct taxes, and file the required reports on schedule.
Why First-Time Payroll Setup Trips People Up
Hiring your first employee changes your business from a sole proprietor or contractor-only operation into an employer, with its own set of tax registrations and deadlines. Missing a registration or misclassifying a worker doesn't just create paperwork — it can mean penalties, back taxes, or corrected filings months later. This is not tax advice; consult your CPA on the specifics of your situation.
How to Set Up Payroll for Your First Employee
- Get an EIN from the IRS if you don't already have one — this identifies your business for tax purposes.
- Register with your state's tax and labor agencies for state income tax withholding and unemployment insurance.
- Confirm the worker is actually an employee, not a contractor. Someone you direct on how, when, and where to work is generally an employee (W-2), not a 1099 contractor.
- Collect a completed Form W-4 (federal withholding) and Form I-9 (employment eligibility) before the first day of work.
- Choose a pay schedule — weekly, biweekly, semi-monthly, or monthly — and stick to it consistently.
- Set up a payroll system, whether that's a provider like Gusto or a manual process, to calculate gross pay, withholdings, and net pay correctly.
- Run and file on schedule — payroll tax deposits and quarterly filings have fixed deadlines that don't move for a new employer.
How Long Does Payroll Setup Take?
For a first-time employer, payroll setup typically takes one to two weeks — most of that is waiting on an EIN and state registration confirmations rather than active work. Choosing a payroll provider before you need it avoids scrambling once someone has already agreed to start.
Who This Is For
Billy D. Eldridge, founder of BDE Bookkeeping Solutions LLC, is Gusto Payroll Certified and QuickBooks Online Certified ProAdvisor with 10+ years of bookkeeping and payroll experience, supporting small business owners across Shelbyville, Bedford County, and Middle Tennessee who are hiring their first employee and want it set up correctly from day one. See how payroll support works, or call 615-438-2700 to talk through your specific hire.
FAQ
Do I need an EIN to hire my first employee? Yes — an EIN is required before you can legally pay an employee or file the associated payroll taxes.
What's the difference between a 1099 contractor and a W-2 employee? It comes down to control: if you direct how, when, and where the work is done and provide the tools, that's typically an employee. Misclassifying a worker can create real tax exposure, so confirm the distinction before the first paycheck.
Can I run payroll myself without a provider? Yes, but you're responsible for calculating withholdings correctly and filing on every deadline yourself. A payroll provider like Gusto automates the calculations and filings, which is why most first-time employers use one.
Once your first employee is on the books, the next decision is how often you pay them. Read next: How Often Should You Run Payroll?.
Clean books, stronger business. If yours need attention, get in touch with BDE Bookkeeping Solutions and we will take a look.
Frequently Asked Questions
Do I need an EIN to run payroll?
Yes. An Employer Identification Number from the IRS is required before you can withhold and deposit payroll taxes, and it is free to apply for. You will also need to register with your state for withholding and unemployment insurance.
What payroll taxes do I have to withhold and pay?
From the employee: federal income tax, Social Security, and Medicare, plus state income tax where it applies. From the business: a matching share of Social Security and Medicare, federal unemployment, and state unemployment. The deposit schedule depends on your total liability.
What happens if I pay someone as a contractor instead?
Only if they genuinely are one. Worker classification is decided by how much control you have over how and when the work is done, not by what you call it or what the worker agrees to. Misclassifying an employee creates back taxes and penalties, and it is one of the more common expensive mistakes first-time employers make.
Can payroll be set up without a payroll service?
Technically yes, but almost nobody should. A payroll service calculates withholding, makes the deposits on schedule, and files the quarterly and annual returns. The cost is small relative to a single late-deposit penalty.