A Complete Payroll Setup Checklist for First-Time Employers

You hired someone—now what?

Starting a business is thrilling, but when that first hire comes along, reality hits: you now have to pay them... legally, on time, and with the right tax withholdings.

You’re not alone if this part feels overwhelming. Most new business owners don’t get into business to figure out tax forms, federal IDs, or pay schedules. This guide is for you—the owner doing it all and just trying to do it right.

Let’s walk through a clear payroll setup checklist so you can avoid IRS letters, avoid paying people incorrectly, and start off on the right foot.

Step 1: Apply for Your Employer Identification Number (EIN)

What is an EIN?

Think of it like a Social Security number—but for your business. The IRS uses this number to track your business’s tax responsibilities.

How to get it:

You can apply online for free on the IRS website. You’ll have it instantly.

Step 2: Register with Your State

State tax accounts you need:

You’ll likely need two registrations:

• State withholding tax account (for income tax)
  
  
• State unemployment insurance account (SUTA)
  
  

Pro tip:

Every state is different. Tennessee? No state income tax, but you still need a SUTA account. If you're unsure, Cadence helps clients get registered all the time—it’s one of the first headaches we remove.

Step 3: Decide on a Payroll Schedule

What’s a good payroll schedule?

Choose from:

• Weekly
  
  
• Bi-weekly (every two weeks)
  
  
• Semi-monthly (1st and 15th)
  
  
• Monthly
  
  

Most small businesses go bi-weekly to balance employee satisfaction with administrative effort.

Tip for first-timers:

Make sure your schedule aligns with your state’s payday requirements—some states regulate how often you must pay employees.

Step 4: Classify Your Workers Correctly

W-2 vs. 1099:

Misclassifying workers (employee vs. contractor) is one of the fastest ways to trigger audits and penalties.

Ask:

• Do I control how the work is done?
  
  
• Do I supply the tools?
  
  
• Do I set the hours?
  
  

If yes, you probably have an employee—not a contractor.

Real-life example:

We’ve helped business owners who paid someone with a 1099 for months, only to get dinged later. Cleaning that up retroactively is no fun.

Step 5: Collect Employee Paperwork

Make sure you collect:

• Form W-4 (for federal tax withholding)
  
  
• State tax withholding form (varies by state)
  
  
• Form I-9 (for work eligibility)
  
  

Pro tip:

Keep I-9s separate from regular employee files. They can be audited at any time by immigration officials.

Step 6: Set Up a Payroll System

Your options:

• Manual (spreadsheets and IRS forms): not recommended unless you love math and stress
  
  
• DIY software: like QuickBooks
  
  
• Outsourced payroll provider: like Cadence—best if you want peace of mind and compliance handled for you
  
  

Why this matters:

Running payroll is more than cutting checks. You have to:

• Withhold and remit taxes
  
  
• File quarterly forms (like 941s)
  
  
• Issue year-end W-2s or 1099s
  
  

One missed filing can lead to expensive fines.

Step 7: Set Up Direct Deposit (Optional but Smart)

Most employees prefer direct deposit. It’s faster, safer, and easier to track.

What you’ll need:

• Employee’s bank info (routing and account number)
  
  
• Authorization form (keep this on file)
  
  

Many payroll systems offer this as a built-in feature.

Step 8: Keep Payroll Records

Record retention requirements:

• 3 years for payroll records
  
  
• 4 years for tax filings
  
  
• I-9s: 3 years after hire date or 1 year after termination—whichever is later

How Cadence helps:

Cadence stores all payroll data digitally, so you’re always audit-ready (even if the IRS surprises you).

Step 9: Stay Compliant with Ongoing Filings

Don’t forget:

• 941s: quarterly federal tax returns
  
  
• 940: annual FUTA tax
  
  
• W-2s/1099s: due each January
  
  

Feeling overwhelmed?

That’s why most small businesses eventually outsource this. One missed form can cost more than an entire year of payroll service.

Step 10: Evaluate and Adjust As You Grow

As your business grows, you may need to:

• Add benefits (401k, health insurance)
  
  
• Track PTO or sick time
  
  
• Stay compliant with new labor laws
  
  

Payroll isn’t a “set it and forget it” situation—but it doesn’t have to be chaos either.

Conclusion: Start Strong So You Don’t Fall Behind

Hiring your first employee is exciting—but it also opens the door to tax responsibilities, legal requirements, and administrative complexity you didn’t expect.

The good news? Setting up payroll correctly the first time creates a professional foundation for your business and helps you earn trust from your employees from day one.