Hiring your first employee is a milestone — and the moment your business steps into a new world of federal and state obligations. Payroll is not just cutting a check; it is a web of withholding, employer taxes, filings, and deadlines, each with its own penalty for getting it wrong. The good news: once the system is set up correctly, it largely runs on a predictable rhythm. Here is what every new employer needs to have in place.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
Before Anyone Starts: Your Setup Checklist
You need a federal Employer Identification Number (EIN) before you run payroll — it is the account the IRS uses to track your employment taxes. You will also register with your state for income-tax withholding and unemployment insurance. On or before a new hire's first day, have them complete Form W-4 (which tells you how much federal income tax to withhold) and Form I-9 (which verifies their identity and legal authorization to work in the U.S.). If an employee never gives you a completed W-4, the IRS requires you to withhold as if they are single with no adjustments. Most states also require you to file a new-hire report shortly after the start date.
What You Withhold From Each Paycheck
From every employee's wages you withhold three things: federal income tax (based on their W-4), the employee's Social Security tax of 6.2%, and the employee's Medicare tax of 1.45%. Social Security applies only up to an annual wage base that is adjusted each year (for 2026 it is $184,500); Medicare has no wage cap. High earners trigger an Additional Medicare Tax of 0.9% on wages above $200,000 — you withhold it, but there is no employer match. Many states and some localities require income-tax withholding on top of the federal amount.
What the Employer Pays On Top
Withholding is only half the picture. As the employer, you match the Social Security and Medicare amounts dollar for dollar — another 6.2% and 1.45% straight out of your own pocket. You also owe federal unemployment tax (FUTA): a headline rate of 6.0% on the first $7,000 of each employee's wages, though paying your state unemployment tax on time earns a credit of up to 5.4%, which drops the effective FUTA rate to just 0.6%. Separately, your state unemployment (SUTA) tax is billed at an experience-based rate the state assigns you. Budget for these employer costs — they are real money beyond the wage itself.
Depositing the Taxes: Rhythm and Rules
The federal income tax and FICA you withhold, plus your employer FICA match, must be deposited electronically through the Electronic Federal Tax Payment System (EFTPS) — never mailed with a check. Your schedule is either monthly or semiweekly, determined by your tax history: report $50,000 or less over the IRS lookback period and you are a monthly depositor, sending each month's taxes by the 15th of the following month. There is also a hard rule — accumulate $100,000 of liability on any single day and it is due the next business day. Missing a deposit deadline triggers penalties quickly, so calendar them.
The Filings and Their Deadlines
Most employers file Form 941 quarterly to report wages and the taxes withheld, due April 30, July 31, October 31, and January 31. Very small employers whose annual employment-tax liability is $1,000 or less may be told by the IRS to file Form 944 once a year instead. FUTA is reconciled annually on Form 940, due January 31. After year-end, you must furnish each employee a Form W-2 and file copies (with transmittal Form W-3) with the Social Security Administration — both by January 31. These dates are firm, and late W-2s carry per-form penalties.
Employee or Contractor? Get It Right First
Before any of this applies, confirm the person is actually an employee and not an independent contractor. Misclassifying a worker to sidestep payroll taxes is one of the costliest mistakes a small business can make — the IRS can claw back the taxes you should have withheld, plus penalties and interest. When a worker's role, hours, and tools are controlled by you, they are almost certainly a W-2 employee. If you are unsure, resolve that question before you run a single payroll.
How VarStan Helps
First-time payroll is where good intentions meet unforgiving deadlines. As a CPA-led firm, we set up your EIN and state accounts, choose and configure the right payroll system, calculate withholding and employer taxes correctly, and keep your 941, 940, and W-2 filings on schedule so nothing slips. If you are about to bring on your first hire — or you have been running payroll by hand and want a second set of eyes — a short conversation now can save you a stack of penalty notices later. Reach out and we will map out exactly what your business needs.