Quick Answer
Before you run your first payroll, five areas must be fully set up: your federal Employer Identification Number (EIN) and EFTPS account for tax deposits, your federal withholding process using Form W-4, your FICA obligations (7.65% each from employer and employee), your state employer tax registration, and a recordkeeping system that meets the three-to-four-year federal retention minimums. Miss any one of these and you face deposit penalties starting at 2% for deposits that are even one to five days late, climbing to 15% after IRS notice.
Table of Contents
The 5 Areas Every New Employer Must Cover Before First Payroll
Payroll compliance for a brand-new employer is not a single task — it is a set of interlocking registrations, elections, and ongoing obligations that all need to be in place before wages are paid. Employers who start running payroll before completing their setup often end up with mismatched tax IDs, incorrect withholding tables, and deposit accounts that were never activated — all of which generate penalties that compound while you sort out the errors.
The five areas are federal employer setup, federal withholding mechanics, FICA obligations, state registration, and recordkeeping. Each has a distinct set of tasks. Work through them in order, because later areas depend on earlier ones: you cannot register for EFTPS without an EIN, and you cannot calculate correct FICA without understanding the wage base and split. This guide walks through each area in the sequence a new employer should actually follow.
Federal Employer Setup: EIN and EFTPS
Your first task as a new employer is obtaining an Employer Identification Number from the IRS. The EIN is the federal tax identifier for your business — every payroll tax return, W-2 form, and EFTPS deposit will be linked to it. You cannot file Form 941 or deposit payroll taxes without one.
Apply online at irs.gov/ein. The application is free, takes about 15 minutes, and issues the EIN immediately upon completion. Do not use a third-party service that charges a fee for this — the IRS application is the only source, and there is no processing time advantage to using a paid service. If you are a sole proprietor who already has an EIN for your business, that EIN works for payroll too; you do not need a separate one.
Once you have an EIN, enroll in the Electronic Federal Tax Payment System at eftps.gov. This is the only authorized system for making federal payroll tax deposits. EFTPS enrollment takes one to two weeks to complete because the IRS mails a PIN to your business address — plan accordingly and do not wait until payroll day to enroll. Once enrolled, you can schedule deposits in advance and receive confirmation numbers for every payment.
Federal Employer Setup Checklist
- ☐ Apply for EIN at irs.gov/ein (free; instant online issuance)
- ☐ Save your EIN confirmation letter (CP 575) — you will need it repeatedly
- ☐ Enroll in EFTPS at eftps.gov — allow 7–10 business days for PIN delivery
- ☐ Confirm your deposit schedule: new employers default to monthly depositors
- ☐ Set up EFTPS payment reminders or calendar alerts for the 15th of each month
- ☐ Understand the $100,000 next-day rule: if a single-day payroll liability hits $100,000, you must deposit by the next business day regardless of your normal schedule
New employers start on a monthly deposit schedule, meaning the combined employer FICA, employee FICA, and federal income tax withheld from all payrolls in a given month are due by the 15th of the following month. This schedule is reviewed annually by the IRS using a 12-month lookback period. As your payroll grows, you may be moved to a semi-weekly schedule — at that point, deposits are due by Wednesday for payrolls paid the prior Wednesday through Friday, and by Friday for payrolls paid the prior Saturday through Tuesday.
Federal Withholding: W-4 and FWT Mechanics
Federal income tax withholding (FWT) is calculated based on each employee's Form W-4. The 2020 redesign eliminated withholding allowances in favor of a dollar-based system. Employees now either use the standard withholding tables or complete the optional multiple jobs and additional withholding sections on the current W-4.
Collect a completed W-4 from every employee before their first paycheck. If an employee does not submit a W-4, federal regulations require you to withhold as if the employee is single with no adjustments — which is typically the highest withholding rate. You are not permitted to withhold nothing simply because no W-4 was submitted.
Federal Withholding Setup Checklist
- ☐ Collect a signed Form W-4 from each employee before first paycheck
- ☐ Enter W-4 data into your payroll system accurately — a transposition error in an employee's filing status can mean under-withholding that the employee discovers at tax time
- ☐ Use IRS Publication 15-T (Employer's Tax Guide to Withholding) for the current withholding tables
- ☐ Keep W-4 forms on file — you do not send them to the IRS unless specifically requested
- ☐ Know when W-4 updates take effect: a new W-4 submitted by the 30th of any month must be put into effect by the start of the following pay period
- ☐ Certain employees may claim exempt from withholding on their W-4 — this requires re-certification annually by February 15
Federal withholding is calculated using either the wage bracket method (simpler, table-based) or the percentage method (more precise, required for automated systems). Most payroll software uses the percentage method automatically. The key inputs are gross wages for the period, the employee's filing status, any Step 3 child tax credit amounts from the W-4, and any additional withholding the employee elected.
Supplemental wages — bonuses, commissions, back pay — are withheld at either 22% flat (optional flat rate method) or at the employee's normal rate applied to the aggregate. If a bonus exceeds $1 million in a calendar year, the portion above $1 million is withheld at 37%.
FICA Obligations: Social Security and Medicare
FICA taxes are the most straightforward payroll tax calculation once you understand the structure: employer and employee each pay 7.65% on covered wages, split between Social Security (6.2% each) and Medicare (1.45% each). Unlike federal income tax, FICA is not based on a W-4 — it applies automatically to every employee's wages up to the applicable wage bases.
| Tax Component | Employee Rate | Employer Rate | 2026 Wage Base |
|---|---|---|---|
| Social Security | 6.2% | 6.2% | $176,100 (stops at cap) |
| Medicare | 1.45% | 1.45% | No cap — all wages |
| Additional Medicare | 0.9% | Not applicable | Employee wages over $200,000 |
| FICA Total (under wage base) | 7.65% | 7.65% | Combined: 15.3% |
Three mechanical points that trip up new employers:
The Social Security wage base resets every January 1. An employee who earned more than $176,100 in 2025 starts the Social Security calculation fresh on January 1, 2026. You cannot carry over the prior year's wages. Your payroll system should track year-to-date earnings per employee and automatically stop Social Security withholding when the cap is reached — but verify this is configured correctly, especially for high earners hired mid-year.
Additional Medicare begins at $200,000 regardless of filing status. When an employee's year-to-date wages exceed $200,000, you must begin withholding the extra 0.9% Additional Medicare Tax on wages above that threshold. You withhold it from the employee only — there is no employer match. The employee's actual liability may differ at tax time depending on their filing status, but your obligation is to begin withholding at $200,000 without exception.
FICA applies to most fringe benefits and many non-cash wages. Group-term life insurance premiums for coverage above $50,000, taxable employer-provided vehicle use, and certain bonuses are subject to FICA. When in doubt, consult IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits).
FICA Setup Checklist
- ☐ Confirm your payroll system applies 6.2% Social Security to both employer and employee through the $176,100 wage base
- ☐ Confirm 1.45% Medicare applies to both employer and employee with no wage cap
- ☐ Set the Additional Medicare trigger at $200,000 year-to-date employee wages (employee only, 0.9%)
- ☐ Verify FICA applies to tips for tipped employees — tips reported by employees are subject to FICA
- ☐ Check FICA exemption status for any non-resident alien employees, certain student workers, or workers covered by Section 218 agreements
State Registration Basics
Federal payroll compliance is only half of the picture. Every state with an income tax (and most without one) requires employers to register for a state employer account before withholding and remitting state taxes. The specific requirements vary significantly by state, but the core registration pattern is consistent.
Most states have two separate registrations: one for state income tax withholding (handled by the state department of revenue or taxation), and one for state unemployment insurance, or SUI (handled by the state's labor or workforce agency). Some states combine both under one account; others require two separate applications with two separate agencies.
State Registration Checklist
- ☐ Identify which state agency handles employer withholding registration in your state
- ☐ Register for a state withholding account before paying first wages (many states allow online registration)
- ☐ Register separately for state unemployment insurance (SUI) with your state's workforce agency
- ☐ Obtain your state employer account number(s) — you will need these for all state filings and W-2 reporting
- ☐ Identify your state's employee withholding form (most states have their own equivalent of the federal W-4)
- ☐ Confirm your state's deposit frequency rules — some states mirror the federal monthly/semi-weekly system; others have different thresholds
- ☐ Identify quarterly wage report filing deadlines for SUI — most states use the same calendar as federal 941 (April 30, July 31, October 31, January 31)
New employer SUI rates are set by state law — they are not based on your claims history, which you do not yet have. New employer rates typically range from 1% to 4% on the first $7,000 to $40,000 of each employee's wages (the state wage base varies significantly by state). Your rate will be assigned automatically when you register; it changes after you have accumulated enough claims history to generate an experience rating.
States also vary on what triggers registration: some require registration before paying any wages, others set a dollar threshold ($100 or $300 per quarter is common), and others set an employee count threshold. When in doubt, register before the first paycheck to avoid retroactive penalties.
Recordkeeping Minimums
Payroll records are not optional — they are legal requirements with specific minimum retention periods. A payroll audit by the IRS, Department of Labor, or your state agency will request these records going back multiple years, and missing records are treated as evidence against you, not a neutral absence of information.
What to Keep and How Long
- ☐ Payroll registers and wage records — at least 3 years (FLSA); 4 years from later of due date or payment date (IRS)
- ☐ Time and attendance records (time cards, time sheets, punch records) — at least 2 years under FLSA; 4 years under IRS rules; keep 4 years to satisfy both
- ☐ Form W-4 — keep for the duration of employment plus 4 years after the last return using that form
- ☐ Form I-9 — 3 years from hire date or 1 year after termination, whichever is later
- ☐ W-2 copies (Copy D, employer's copy) — 4 years after the return due date
- ☐ EFTPS deposit confirmations — at least 4 years; these prove timely deposits if a penalty notice arrives
- ☐ Employment tax returns (941, 940) — 4 years from due date or date paid, whichever is later
The most common recordkeeping failure for new employers is not maintaining time records for salaried non-exempt employees. Under the FLSA, salaried classification does not automatically mean exempt from overtime — a salaried bookkeeper paid $600 per week may still be non-exempt and entitled to overtime. If you do not track their hours, you cannot prove they did not work overtime, and you cannot defend against a wage claim.
Electronic records are fully acceptable under both FLSA and IRS regulations, provided they can be reproduced in hard copy form and are kept in a manner that prevents alteration. Cloud-based payroll systems automatically retain most required records; verify that your system retains records for the full required period and that you have access to records even if you change payroll providers.
Failure-to-Deposit Penalty Reference
The IRS failure-to-deposit penalties are graduated by how late the deposit is. Understanding this schedule helps you prioritize getting deposits out even when cash flow is tight — a deposit that is six days late costs more than two and a half times what a one-day-late deposit costs.
| Days Late | Penalty Rate | Example: $5,000 Deposit |
|---|---|---|
| 1–5 days | 2% | $100 |
| 6–15 days | 5% | $250 |
| 16+ days | 10% | $500 |
| 10+ days after IRS notice | 15% | $750 |
These penalties apply per deposit, not per quarter. A payroll run that generates a $10,000 deposit obligation, missed by 20 days, produces a $1,000 penalty before interest. Penalties compound across multiple missed deposits. The IRS also charges interest on unpaid amounts at the federal short-term rate plus 3 percentage points.
New employers receive some protection through the First-Time Penalty Abatement program: if you have a clean penalty history for the three years prior to the penalty year (which, as a new employer, you do) and are otherwise compliant, you can request abatement of the first failure-to-deposit penalty. This must be requested — it is not automatic.
Frequently Asked Questions
What do I need before running first payroll?
Before running your first payroll you need five things in place: an EIN from the IRS (free at irs.gov, issued instantly online); EFTPS enrollment for depositing payroll taxes; a completed Form W-4 from each employee; state employer tax account registration; and a defined pay schedule with a documented workweek start day. Without these, you cannot calculate withholding correctly, deposit taxes on time, or prove compliance during an audit.
When do I need to register for state payroll taxes?
Most states require registration before or immediately after you pay your first employee. The trigger is paying wages, not just hiring. Many states set a threshold of $100 to $300 in wages in a quarter, but registering before the first paycheck eliminates the risk of retroactive penalties. Operating without a state account means no ability to file quarterly wage reports or remit state withholding legally.
What's the difference between an EIN and a state tax ID?
An EIN is a federal tax identifier assigned by the IRS, used for federal payroll returns (Form 941, Form 940), W-2s, and EFTPS deposits. A state tax ID is assigned by your state's tax agency and is used for state withholding deposits, state unemployment filings, and state-specific forms. You need both. Having an EIN does not automatically create a state account — you must register separately with your state.
How long do I keep payroll records?
Federal law requires payroll registers and wage records for at least 3 years under the FLSA and 4 years under IRS rules. I-9 forms must be kept for 3 years from hire or 1 year post-termination, whichever is later. Keeping all payroll records for 7 years satisfies every federal retention requirement and most state requirements. Do not destroy records based on the shortest applicable period — use the longest.
What's the first payroll tax deposit I'll need to make?
Your first required deposit is the combined employer FICA (7.65%), employee FICA (7.65%), and withheld federal income tax from your first payroll run. As a new employer on monthly deposit schedule, this is due by the 15th of the month following the payroll month. Deposit through EFTPS. If any single-day payroll liability reaches $100,000, you become a next-business-day depositor for that deposit regardless of your normal schedule.
Get Payroll Right From Day One
Gusto handles EIN verification, EFTPS deposits, W-4 management, FICA calculations, state registrations in all 50 states, and recordkeeping automatically. Purpose-built for new employers who need everything working before that first paycheck goes out.
Legal & Tax Disclaimer
This article is for general informational purposes only and does not constitute legal, tax, or professional advice. Employment laws, tax regulations, and compliance requirements change frequently. The information on this page reflects our understanding as of the date noted above and may not reflect recent changes in federal or state law.
Do not act or refrain from acting based solely on the information in this article. Always consult a qualified attorney, CPA, or HR professional before making payroll or compliance decisions for your business.