When Is Payroll Required?

The answer is simple and absolute: you are legally required to run payroll as soon as you hire your first employee. An employee is anyone you have the right to control not just the result of the work, but also how the work is done. Before you issue their first paycheck, your business must be fully set up as an employer.

Before you can legally pay an employee, you must:

• Have a Federal Employer Identification Number (EIN).
• Register for payroll tax accounts with the state where the employee works (for State Unemployment Tax and income tax withholding).
• Have the employee complete Form W-4 (for federal withholding) and Form I-9 (to verify employment eligibility).
• Choose a payroll provider to handle the calculations and filings.

It's critical to understand that these requirements do not apply to independent contractors. You do not run payroll for contractors. However, misclassifying an employee as a contractor to avoid payroll is a major compliance violation with severe penalties. If you control the worker's hours, tools, and methods, they are almost certainly an employee, and you must run payroll.

Payroll is not something you can 'figure out later'. The legal obligation begins with your first hire. Engaging a professional payroll service before you bring on your first team member is the only way to ensure you are compliant from day one and protected from significant legal and financial risk.