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US Payroll Guide

The US Payroll Setup Checklist: A Step-by-Step Guide

Hiring your first US employee is exciting. Setting up payroll can be intimidating. This checklist breaks down the process into clear, manageable steps.

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TL;DR:

To set up US payroll, a business must: 1) Obtain Federal and State tax IDs; 2) Choose a payroll provider; 3) Select a pay schedule; 4) Gather employee information (W-4, I-9, direct deposit); 5) Onboard employees onto the payroll system; and 6) Run the first payroll and confirm tax deposits are made. Outsourcing to a provider like Gusto is standard practice.

Direct Question Answer

What is this about? A step-by-step checklist for new employers setting up a compliant payroll system in the USA for the first time. Who is it for? Founders, small business owners, and HR managers hiring their first W-2 employee. When is it relevant? Before the first hire starts, as registration and setup must be completed before the first payday.

Decision Summary

Who should act? Any business hiring W-2 employees in the US must follow this checklist. Who can ignore? Businesses exclusively using 1099 independent contractors do not set up payroll, but they have separate reporting requirements.

Setting up payroll for the first time is a major milestone that officially turns your startup into an employer. It's also a process that must be done correctly to avoid significant legal and tax penalties down the road. While using a professional payroll provider is a must, you still need to complete several foundational steps to get started.

This checklist outlines the critical steps every US company must take before running its first payroll.

Your 6-Step Payroll Setup Checklist

Step 1: Obtain Your Tax Identification Numbers

You cannot run payroll without being registered as an employer. This requires two key numbers:

  • Federal Employer Identification Number (EIN): If you don't already have one from forming your company, you must obtain one from the IRS. It's the master ID for all federal tax purposes.
  • State Payroll Tax IDs: You must register with the tax department of the state where your employee works. This will give you state-level account numbers for withholding and unemployment taxes.

Step 2: Choose a Payroll Provider

Do not attempt to do payroll manually. The risk of error is too high. Choose a reputable payroll provider like Gusto, Rippling, or ADP. They will handle all tax calculations, payments, and filings. YourLegal's payroll service helps you get set up with these leading providers.

Step 3: Select a Pay Schedule

Decide how often you will pay your employees. Common schedules in the US are:

  • Weekly: 52 pay periods per year.
  • Bi-weekly (every two weeks): 26 pay periods per year. This is the most common schedule.
  • Semi-monthly (twice a month, e.g., 15th and last day): 24 pay periods per year.
  • Monthly: 12 pay periods per year.
Your state may have laws dictating the minimum pay frequency.

Step 4: Gather Employee Information

For each new W-2 employee, you must collect the following before their first payday:

  • Form W-4: This form tells you the employee's tax filing status and how much federal income tax to withhold.
  • Form I-9: This form verifies the employee's identity and eligibility to work in the US. You must physically or virtually inspect their identification documents.
  • Bank Account Details: For setting up direct deposit.
  • State-Specific Forms: Some states have their own withholding allowance certificates.

Step 5: Onboard Employees into Your Payroll System

Enter all the information from Step 4 into your chosen payroll provider's system. This includes the employee's name, address, Social Security Number, salary or hourly rate, and tax withholding details from their W-4. Double-check everything for accuracy.

Step 6: Run Your First Payroll

Once everything is set up, you are ready to run your first payroll. Your payroll provider will automatically:

  • Calculate gross pay, all tax withholdings, and net pay.
  • Initiate direct deposits to your employees.
  • Set aside the withheld taxes and your employer-side taxes for payment to the government.
After running payroll, verify in your provider's dashboard that the tax deposits to the IRS and state agencies have been scheduled.

Congratulations, You're an Employer!

Following this checklist ensures your payroll system is built on a compliant foundation. By partnering with a professional provider, you can be confident that you are meeting your legal and tax obligations, allowing you to focus on leading your growing team.