Payroll Basics Before You Hire Your First Employee

Register before you pay

An employer generally needs a federal employer identification number and registrations with the state for withholding and for unemployment insurance. Some states have extra programs such as disability or family leave contributions. The agencies publish the steps, and registration is usually done online. Gather the confirmation letters in one folder.

Hiring in another state? Employer registration in another state.

Workers compensation insurance is a separate requirement in many places. Ask your insurance agent about coverage before the person starts, because gaps are costly.

Collect new-hire paperwork

Each new employee fills out a federal withholding form and a state one if your state uses it. You also have to verify eligibility to work through the federal employment eligibility form, within the time frame it sets. Keep these forms separate from the general personnel file, as they contain sensitive information.

Get the employee's legal name exactly as it appears on their Social Security card. A mismatch causes year-end filing errors that take time to fix.

Decide how you will run payroll

You can run payroll yourself, use a payroll service, or have your bookkeeper or accountant process it. A service typically calculates withholding, makes tax deposits, files the quarterly and annual forms, and produces wage statements. Compare fees, support and what happens when a filing is missed.

Whoever runs it, you remain responsible for the taxes. Ask providers whether they stand behind the accuracy of filings and what recourse you have, and read the answer in writing.

Set up the accounting side

Payroll entries in the books include gross wages, employer payroll taxes, employee withholding held in liability accounts, and net pay. If your payroll provider syncs with your accounting software, check the mapping on the first run so wages land in the right accounts.

Add accounts for payroll liabilities by tax type so you can reconcile what you owe at any date. A single catch-all account hides errors.

Pick a pay schedule and write a policy

Common schedules are weekly, every two weeks, twice a month and monthly. State law may limit your options. Pick a schedule you can fund reliably and communicate it in writing, along with how overtime, time off and expense reimbursements are handled.

Run a test calculation for the first employee with your provider or advisor before payday. Surprises are better found on paper than on a paycheck.

A pre-payday checklist you can print

Three days before the first payday, confirm you have the registration numbers, a signed withholding form, the eligibility verification form completed, the bank details for direct deposit if used, the pay rate in writing, and workers compensation coverage in force. Then run a trial payroll and compare the net pay to your own estimate.

After the first real payroll, check the tax deposit due date your provider shows, then place it on your calendar. Many first-time employers miss the first deposit simply because nothing reminded them. MCC Solutions can reconcile the first few payrolls in your books if you would like a second set of eyes.

Common questions

This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.