Preparing payroll for your first employee

Before your first employee starts, arrange the required employer accounts, insurance, payroll process and hiring paperwork. Budget wages plus employer costs, and hold enough cash to pay on time even when a customer pays late.

Add employer costs to the agreed wage

Every line below stacks on the wage you agreed to. The rates move year to year and several depend on your state and your trade, so what helps is knowing each line exists and where the current number lives.

Unemployment taxes apply only to wages up to a wage base, so they cost more early in the year and taper off. Workers' comp premiums depend on the job classification and insurer or state program. Get the comp quote for the actual code before you settle the wage.

The accounts that have to be open before the first Friday

In this order, because some feed the next:

A federal EIN. If you have been a sole proprietor filing under your Social Security number, you need one now. The IRS EIN application is free and can issue a number online if you are eligible. Obtain it before registering the payroll accounts that require it.

A state withholding account, opened with your state's department of revenue or taxation. A handful of states have no personal income tax withholding at all, and some cities and school districts levy their own on top, so confirm what applies where the work happens rather than where you live.

A state unemployment insurance account, usually at a separate agency — labor, workforce, or employment security, depending on the state. They assign an account number and a new-employer rate you need before the first payroll runs.

Workers' compensation coverage. Check your state's employee-count and construction rules before the first shift. Texas generally makes coverage optional for private employers, but exceptions apply, including workers on government projects. Non-subscribers still have notice and reporting obligations. Arrange any required coverage and certificate before the employee works.

Your state's new-hire reporting registry. Find your deadline and submission method in the federal directory of state new-hire reporting requirements. It is a reporting obligation, separate from payroll tax registration.

What goes in the employee's file on day one

The employee fills in the W-4; you do not advise them on it. Most states with an income tax have their own withholding certificate, and a few accept the federal form instead.

For Form I-9, the employee completes Section 1 no later than the first day of employment. Complete Section 2 within three business days after that day; if the job lasts fewer than three business days, both sections are due on day one. Follow USCIS document-examination instructions, retain the form, and check whether E-Verify applies.

For work covered by the Davis-Bacon and Related Acts, use the applicable wage determination, including fringe benefits, and submit weekly certified payroll. Confirm coverage and any state or local prevailing-wage requirements in the project documents.

Running it yourself, or handing it to someone

By hand, a cycle means calculating gross and overtime, then withholding federal and state income tax plus the employee's FICA. Deposit the withheld taxes and employer Social Security and Medicare share electronically. Publication 15 explains monthly and semiweekly schedules, the $100,000 next-day rule and limited small-liability exceptions. On top of that: Form 941 each quarter (or Form 944 once a year, if the IRS writes to put you there), Form 940 for FUTA once a year with quarterly deposits after liability passes the threshold in the instructions, your state's equivalent filings, and W-2s generally by January 31, moving to the next business day when the deadline falls on a weekend or legal holiday. See the IRS employment-tax overview.

Compare the time and responsibility you would retain under these options:

Full-service payroll software files and deposits for you at a base fee plus a per-employee fee. Ask specifically whether it handles your state's filings, not just federal.

Your bookkeeper or CPA runs it. Confirm which registrations, payments and filings are included, especially if work crosses state or local tax boundaries.

A professional employer organization (PEO) may handle payroll and other employment services under a co-employment arrangement. Compare its contract, benefits and exit terms. An IRS-certified PEO generally has sole federal employment-tax liability for remuneration it pays to qualifying work site employees. That protection does not cover every worker or every arrangement; verify certification and coverage.

The withheld money was never yours

The income tax and the employee's FICA you take out of the check are trust fund taxes. You hold that money for the government; do not treat it as available operating cash. When cash gets tight it looks like a short loan, but spending it on operations can leave you unable to meet a tax deadline. The IRS trust fund recovery penalty can reach a responsible person who willfully fails to collect or pay those taxes; an LLC does not remove that liability.

Payday does not care whether the customer paid

One helper at 40 hours a week and $24 is $1,920 gross for a two-week cycle before a dollar of employer cost, and that money moves on schedule if the employee is paid for all 80 hours, regardless of whether the GC's check cleared. Weather closures may change hours worked, but applicable reporting-time, leave and wage rules still matter.

A workable starting rule: hold two full pay cycles including employer taxes and the comp premium, separate from operating cash, before the first employee starts, and rebuild it any month you dip in. The other half of the fix is on the front end — deposits and progress payments permitted for the project, with dates that you include in the cash forecast. Do not assume a deposit may cover all materials; state caps may restrict it.

The rate you rebuilt has to reach the customer

Once you know your real loaded cost per hour, your old pricing is out of date, and the gap shows up as thinner margin on every job you win. Calculate a selling rate that covers loaded labor cost, overhead and profit, then save it in your DoneQuote catalog. Review the draft's labor hours and prices before sending; updating the catalog does not reprice previously sent quotes.

Work backwards from the first payday

Pick the start date and count back. Comp quote and EIN first: confirm the cost before agreeing the wage, and obtain the identifier needed for payroll registration. Withholding and unemployment accounts next, allowing for agency processing time and your provider's setup requirements. Arrange provider setup before payroll, then complete employee forms and the new-hire report by their own deadlines.

If that does not fit before your helper's first Friday, move the start date. A late payroll, or a site you cannot send him to without a comp certificate, costs more than three more weeks of doing the work yourself.