Hiring your first employee is exciting—but it also means it’s time to get serious about payroll. And if you're thinking, “Where do I even start?”—you're not alone.
Between tax forms, pay schedules, and staying compliant with state and federal laws, setting up payroll can feel overwhelming. But it doesn’t have to be.
In this guide, we’ll walk you through everything you need to know to set up payroll confidently—and avoid common (and costly) mistakes.
Step 1: Get the Legal Stuff in Order
Before you run your first paycheck, make sure you’ve set up the foundation correctly. Here's what you need:
1. Employer Identification Number (EIN)
Think of this as your business's Social Security number. You’ll need it to report taxes and forms to the IRS.
You can apply online through the IRS website for free.
2. Register with Your State
Each state has its own rules for income tax and unemployment insurance. You’ll need to register with your state’s Department of Revenue and state unemployment agency to handle tax withholding and reporting.
3. Set Up Workers’ Compensation Insurance
Most states require you to carry workers’ comp, even if you only have one employee. This protects you and your team in case of a workplace injury.
Step 2: Gather Employee Payroll Documents
Before you can pay anyone, you need some paperwork from your employees:
Required Forms:
- W-4 – Tells you how much federal income tax to withhold
- I-9 – Verifies work eligibility
- State withholding forms – (varies by state)
- Direct deposit authorization – If paying via direct deposit
Keep these documents organized and secure—they’ll be important at year-end and during audits.
Step 3: Choose a Pay Schedule and Method
Decide:
- How often you’ll pay employees (weekly, bi-weekly, semi-monthly, or monthly)
- How you’ll pay them (check, direct deposit, or pay card)
Tip: Bi-weekly pay is the most common for small businesses and makes budgeting easier.
Make sure your schedule follows state labor laws—some states have rules about minimum pay frequency.
Step 4: Choose a Payroll System
This is where many small business owners get stuck. You have three main options:
1. Do It Yourself (Manually)
Good for very small teams (1–2 employees), but comes with a high risk of mistakes.
You’ll need to calculate taxes, fill out forms, and file on time—every pay period.
2. Use Payroll Software
A great middle-ground. It automates tax calculations, filings, and direct deposits. You’ll still be in the driver’s seat, but with fewer headaches.
3. Partner with a Payroll Provider Like Cadence
Want payroll off your plate completely? A provider like Cadence handles everything: payments, taxes, filings, year-end forms, and even questions from employees.
This is a great fit for business owners who want to focus on running their business—not on chasing down tax deadlines.
Step 5: Calculate and Withhold the Right Taxes
For every paycheck, you’ll need to calculate and withhold:
- Federal income tax
- Social Security and Medicare (FICA)
- Federal unemployment tax (FUTA)
- State and local income taxes (if applicable)
- State unemployment tax
You also need to match the FICA and unemployment tax amounts as an employer. These amounts must be deposited with the IRS and state agencies on a regular schedule.
Step 6: File Payroll Taxes and Submit Reports
Throughout the year, you’re responsible for filing reports and making deposits. Here’s what that includes:
Regular Deposits:
- Federal tax deposits (often bi-weekly or monthly)
- State income and unemployment taxes
Quarterly Filings:
- Form 941 – Reports income and payroll taxes
- State unemployment insurance reports
Annual Filings:
- Form 940 – Annual unemployment tax
- W-2s and W-3 – Sent to employees and the Social Security Administration
- 1099-NECs – For contractors, if applicable
Missing these deadlines can lead to fines, so it’s important to either automate them or keep a clear calendar.
Step 7: Stay Compliant and Organized
Payroll isn’t just about cutting checks. You’re responsible for:
- Keeping payroll records for at least 3–4 years
- Following labor laws for minimum wage and overtime
- Issuing correct year-end forms to employees and contractors
If you’re not confident in these areas, outsourcing payroll to a partner like Cadence can give you peace of mind and save time (and money) in the long run.
Final Thoughts: Payroll Doesn’t Have to Be Overwhelming
Getting payroll right the first time matters—but it doesn’t have to be intimidating. With the right setup and a reliable partner, you can pay your people, stay compliant, and keep your business moving forward.
Whether you're hiring your first employee or your fifteenth, a simplified solution like Cadence makes sure payroll isn’t what keeps you up at night
