Hiring your first employee is a milestone. It means the business is real, it's growing, and you need help. But somewhere between "you're hired" and their first paycheck, most founders hit a wall: how does payroll actually work?

You're not alone. Payroll is one of those things that sounds simple — pay people, file some taxes — until you realize there are federal forms, state registrations, withholding tables, and deadlines that can trigger penalties if you miss them. No one taught you this. You're figuring it out between product sprints and investor calls.

This guide walks you through everything you need to set up payroll for your first hire, step by step, without the jargon.

Step 1: Make Sure You Have an EIN

Before you can pay anyone, the IRS needs to know your business exists. Your Employer Identification Number (EIN) is essentially a Social Security Number for your company — it's what you'll use on all tax filings.

If you already have one (you should, if you've formed an LLC or C-Corp), you're good. If not, apply at irs.gov/ein — it takes about 10 minutes and is free.

No EIN = no payroll. This comes first.

Step 2: Classify Your Hire Correctly — Employee vs. Contractor

This is the step most first-time founders skip, and it can come back to bite them hard.

Employees get a W-2 at year end. You withhold income taxes, pay employer-side Social Security and Medicare (7.65%), and follow federal/state employment laws.

Contractors get a 1099. They handle their own taxes. You pay what you agreed and that's it — no withholding, no employer taxes.

The temptation is to classify everyone as a contractor because it's simpler and cheaper upfront. But the IRS and state labor departments have specific tests to determine the correct classification. Misclassifying an employee as a contractor can result in back taxes, penalties, and even lawsuits.

Quick rule of thumb: If you control how and when someone does their work, they're likely an employee. If you're just buying a deliverable or outcome, they might be a contractor.

When in doubt, talk to a lawyer or use the IRS's own worker classification tool.

This guide focuses on hiring a W-2 employee — the more complex scenario.

Step 3: Register for State Payroll Taxes

Federal taxes are handled through the IRS. But you also need to register with your state's tax agency to handle:

• State income tax withholding (most states)

• State unemployment insurance (SUI/SUTA)

• Any local city or county taxes (depending on where you operate)

Every state is different. Google "[your state] employer payroll registration" and you'll find the right agency. Most states now have online portals where this takes 20–30 minutes.

You'll typically receive a state employer ID number after registering — you'll need this for your payroll software.

Note: If you're remote and your employee works in a different state than your business, you may need to register in their state too. This is called "nexus" — it's a whole thing. Payroll software handles this automatically once you flag where each employee works.

Step 4: Collect the Required Paperwork

Before your new hire receives their first check, they need to complete two federal forms:

Form I-9 (Employment Eligibility Verification) Confirms that your employee is legally authorized to work in the US. You need to physically (or remotely, with proper procedures) verify their identity documents — passport, driver's license + Social Security card, etc. Keep this on file. You don't submit it to anyone, but the government can audit it.

Form W-4 (Employee's Withholding Certificate) Tells you how much federal income tax to withhold from each paycheck. Your employee fills this out based on their personal situation. The newer versions (2020+) are simpler — no more allowances, just straightforward questions.

If you're using payroll software (more on this below), both forms are handled digitally during onboarding.

State equivalent of W-4: Most states have their own withholding form too. Again, payroll software will prompt for this.

Step 5: Choose Your Payroll Software

Here's the honest truth: you should not be doing payroll manually. The calculations change constantly (tax tables, limits, rates), the filing deadlines are unforgiving, and one mistake can mean IRS penalties. A good payroll tool costs $40–$100/month and handles everything automatically.

The main options for early-stage startups:

Gusto — Best for Most Startups

Gusto is the go-to for startups hiring their first employee. It runs full-service payroll (meaning it files and pays all your taxes for you), handles onboarding paperwork digitally, offers basic benefits like health insurance and 401(k), and integrates with most accounting software.

Pricing starts at around $46/month plus $6 per employee/month. It's not the cheapest option, but the time it saves and the mistakes it prevents more than justify the cost when you have 1–5 employees.

Best for: First-time hires, teams that want everything in one place, founders who want to spend zero time thinking about payroll compliance.

Rippling — Best for Fast-Growing Teams

Rippling is built for companies moving fast. Beyond payroll, it handles IT (devices, software access), HR, and benefits — all from one platform. The onboarding experience is particularly slick.

It's more expensive than Gusto and overkill for a solo hire, but if you're planning to grow quickly and want infrastructure that scales, it's worth considering.

Best for: Startups planning to hire multiple people quickly, teams that want HR + IT + payroll in one system.

QuickBooks Payroll — Best if You're Already on QuickBooks

If your accounting is already in QuickBooks, their payroll add-on is a natural fit. It keeps everything connected, so your payroll expenses flow directly into your books without manual entry.

Best for: Founders already using QuickBooks Online for accounting.

Wave Payroll — Best Budget Option

Wave offers free accounting software, and their payroll add-on is one of the cheaper full-service options (around $35/month + $6/employee in tax-service states). The interface is simpler than Gusto, but it does the job.

Best for: Founders who are very early stage and extremely cost-conscious.

For most founders hiring their first person, Gusto is the recommendation. The onboarding flow walks you through everything, it files your taxes automatically, and customer support is actually helpful.

Step 6: Set Up Your Pay Schedule

Before you run your first payroll, you need to decide when you're paying your employee. Common options:

• Weekly — every 7 days (most admin work, preferred by some hourly workers)

• Bi-weekly — every 14 days (26 pay periods/year, most common in the US)

• Semi-monthly — twice a month, e.g., 1st and 15th (24 pay periods/year)

• Monthly — once a month (least admin, but employees often prefer more frequent pay)

Most startup employees expect bi-weekly or semi-monthly. Check your state's requirements too — some states mandate a minimum pay frequency.

Once set, changing your pay schedule is annoying. Pick one and stick with it.

Step 7: Run Your First Payroll

With your EIN, state registration, employee paperwork, and payroll software in place, you're ready to go.

Here's what happens when you run payroll:

1. You enter (or confirm) hours worked / salary for the period

2. The software calculates gross pay

3. It deducts federal income tax (based on W-4), Social Security (6.2%), Medicare (1.45%), state taxes, and any other withholdings (health insurance premiums, 401k contributions, etc.)

4. The employee receives net pay via direct deposit

5. The software automatically remits the withheld taxes + employer-side taxes to the IRS and state on the correct schedule

At the end of the year, your payroll software generates W-2s for each employee and files them electronically.

That's it. If you've done everything above, your first payroll run is clicking a few buttons.

Key Deadlines to Know

Even with payroll software handling most filings, you should be aware of major deadlines:

• Federal payroll tax deposits: Usually within a few business days of running payroll (your software handles this)

• Form 941: Filed quarterly — summarizes federal payroll taxes for the quarter

• Form 940: Filed annually — federal unemployment tax (FUTA)

• W-2s to employees: Due January 31 of the following year

• W-2 filing with IRS: Also January 31

Most payroll software handles all of these automatically. Your job is to make sure bank account and payment info stay current.

Common Mistakes to Avoid

Mixing up contractor and employee classification. Already covered, but worth repeating — this is the most expensive mistake new employers make.

Paying yourself as an employee without setting up payroll. If you're a single-member LLC or a C-Corp founder taking salary, you need to be on payroll too. You can't just transfer money to yourself and call it a salary.

Forgetting about employer taxes. Your payroll cost isn't just the salary. Add ~7.65% for FICA (Social Security + Medicare employer match), plus federal and state unemployment taxes. Budget for this when making hiring decisions.

Missing state registration. You can have Gusto set up perfectly and still face penalties if you forgot to register with your state's unemployment insurance agency first.

The Short Version

If you want to simplify all of this into a checklist:

1. Get your EIN (irs.gov)

2. Classify your hire correctly (employee vs. contractor)

3. Register for state payroll taxes

4. Sign up for Gusto (or equivalent)

5. Complete I-9 and W-4 during onboarding

6. Set your pay schedule

7. Run payroll and let the software handle the rest

Payroll sounds scary until you realize most of it is handled by software once you've done the initial setup. The hard part is the first time. After that, it's a 10-minute task every two weeks.

Tools mentioned in this article: Gusto · Rippling · QuickBooks Payroll · Wave Payroll