Hiring your first employee is an important milestone for a growing small business. It can also introduce a new set of federal, state, and local tax responsibilities that business owners need to understand.
Payroll involves much more than simply paying an employee. Employers may need to collect specific information, withhold taxes, make tax deposits, file payroll returns, issue year-end forms, and maintain detailed records.
If you're preparing to hire employees for the first time, the following checklist can help you organize the major tax and payroll steps.
1. Set Up a System for Employee Records
Good recordkeeping should begin as soon as you hire your first employee.
Employment tax records generally need to include information such as employee names, addresses, Social Security numbers, wage payments, tax withholdings, employment dates, Forms W-4, and records of federal tax deposits.
The IRS generally requires employers to keep employment tax records for at least four years after the due date of the applicable return or the date the tax was paid, whichever is later. These records should be available for IRS review when required.
Because employee information can contain sensitive personal data, businesses should also use secure systems for storing and transmitting payroll records.
2. Verify Employment Eligibility
Before or shortly after a new employee begins work, employers must complete the required employment eligibility verification process.
Form I-9, Employment Eligibility Verification, is used to verify the identity and employment authorization of individuals hired in the United States. This requirement generally applies to both U.S. citizens and noncitizens.
Employers should use the current Form I-9 and follow the applicable USCIS instructions and deadlines.
It's important to remember that Form I-9 is an employment eligibility requirement, not a payroll tax form.
3. Collect the Employee's Social Security Number
Employers generally need each employee's name and Social Security number for wage reporting, including Form W-2.
The IRS specifically states that an ITIN should not be accepted in place of an SSN for employee identification or Form W-2 reporting. An ITIN is designed for federal tax purposes for individuals who are not eligible for an SSN and does not authorize someone to work in the United States.
If an employee is waiting for an SSN, employers should follow current IRS and Social Security Administration guidance rather than automatically treating the individual as ineligible for employment.
4. Have Employees Complete Form W-4
A new employee generally needs to provide Form W-4, Employee's Withholding Certificate.
The information on Form W-4 helps the employer determine the appropriate amount of federal income tax to withhold from the employee's wages. The form takes into account information such as filing status, multiple jobs, credits, other income, deductions, and any additional withholding requested by the employee.
Employers should use the information provided on the employee's valid W-4 and the applicable IRS withholding procedures to calculate federal income-tax withholding.
If an employee does not provide a valid Form W-4, the employer must generally calculate federal withholding using the IRS default rules.
State withholding requirements are separate and depend on the state in which the employee works.
5. Withhold Social Security and Medicare Taxes
Employers generally must withhold the employee's share of Social Security and Medicare taxes and pay a matching employer share.
For 2026, the Social Security tax rate is 6.2% for both the employee and employer, with a Social Security wage base of $184,500. Medicare tax is 1.45% for both the employee and employer and has no wage base limit.
An additional Medicare tax can also apply to certain higher-paid employees. The additional 0.9% is generally withheld from employee wages above the applicable threshold; the employer does not match this additional Medicare tax.
Payroll calculations can become more complicated when employees receive bonuses, taxable fringe benefits, retirement contributions, or other forms of compensation.
6. Make Federal Payroll Tax Deposits on Time
Withholding payroll taxes creates an obligation to deposit the appropriate amounts with the federal government.
Depending on the employer's circumstances and tax liability, federal employment-tax deposits generally follow either a monthly or semiweekly schedule. New employers must determine the applicable deposit schedule under IRS rules rather than automatically assuming one schedule applies to every business.
Electronic payment methods such as the Electronic Federal Tax Payment System (EFTPS) can be used for federal tax deposits.
Missing a required deposit deadline can result in penalties, so payroll tax money should be treated as funds that must be set aside for the government's tax obligations.
7. File the Required Payroll Tax Returns
Payroll tax deposits are only part of an employer's responsibilities.
Many employers must file Form 941, Employer's Quarterly Federal Tax Return, to report federal income tax withheld from employee wages and Social Security and Medicare taxes.
Some employers may qualify to file Form 944, Employer's Annual Federal Tax Return, instead. This is not something an employer should simply choose on its own; the IRS determines eligibility and provides instructions regarding annual filing.
Employers should also prepare the appropriate year-end information returns, including Forms W-2 and W-3 when required.
8. Understand Federal Unemployment Tax (FUTA)
FUTA is another employer responsibility that needs to be considered when hiring employees.
Unlike federal income tax and the employee share of Social Security and Medicare taxes, FUTA is generally paid by the employer and is not withheld from employee wages.
The federal FUTA tax generally applies to the first $7,000 of wages paid to each employee during the year. Employers that also pay state unemployment tax may be eligible for a credit against their federal FUTA liability, subject to applicable rules.
FUTA is generally reported annually on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. The timing of FUTA deposits depends on the amount of FUTA tax accumulated during the year.
Because state unemployment systems interact with the federal FUTA system, businesses should review both federal and state requirements.
9. Check State and Local Payroll Requirements
Federal requirements are only one part of payroll compliance.
Depending on where your business operates and where your employees work, you may have additional responsibilities involving:
· State income-tax withholding
· State unemployment insurance
· New-hire reporting
· Workers' compensation
· Paid family or medical leave programs
· Local payroll taxes
· State wage-reporting requirements
· State-specific employee notices
The rules can differ significantly from one state to another.
For example, the IRS notes that all 50 states and most U.S. territories have new-hire reporting systems. Employers should determine where and when new employees must be reported based on applicable state requirements.
10. Create a Payroll Compliance Calendar
One of the best ways to avoid missed deadlines is to create a payroll compliance calendar before your first employee receives a paycheck.
Your calendar can include:
· Payroll dates
· Federal tax deposit deadlines
· Form 941 filing deadlines
· Form 940 requirements
· State tax deposit deadlines
· State payroll returns
· New-hire reporting deadlines
· Workers' compensation requirements
· Year-end W-2 preparation
· Employee recordkeeping requirements
Payroll deadlines can be easy to overlook when you're also managing sales, customers, bookkeeping, operations, and other parts of a growing business.
Hiring Employees Means Taking on New Tax Responsibilities
Hiring your first employee is a major step for a small business. With that growth comes additional responsibilities for payroll, employment taxes, reporting, and recordkeeping.
The key is to establish your payroll process before your first employee is paid. Collect the required information, complete the appropriate forms, understand your federal and state obligations, and establish a system for tracking tax deadlines.
If you're unsure whether your business is ready to handle payroll internally, working with an experienced tax or accounting professional can help you establish an organized process and reduce the risk of missed filings or payments.
ContNow Tax Preparation LLC can help small business owners with tax preparation, bookkeeping, payroll-related support, and financial recordkeeping as their businesses grow.
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