To set up payroll for your first employee, you must first secure an Employer Identification Number from the IRS. Once you have your EIN, gather a signed Form W-4 and a completed Form I-9 from your new hire on or before their first day of work. Next, consult your state labor office to establish a compliant pay schedule, calculate their gross wages, and withhold all necessary federal, state, and local taxes. Finally, keep accurate records of their hours and pay for at least three years. Setting up payroll is often viewed as a standalone software purchase, but securing your business entity and EIN must happen first.

The Real First Step Is Business Formation and the EIN

The most common mistake new business owners make is treating payroll as a completely separate errand from forming their business. Before you calculate a single tax withholding, you need a legal entity and an Employer Identification Number. The IRS treats the employer as the entity for tax purposes. You absolutely cannot run payroll without an EIN.

Because the EIN is a hard dependency, getting your business entity sorted is step one. The IRS itself notes in Publication 583 that opening a business checking account is one of the first things a new business owner should do. Doing this before choosing payroll software ensures your personal and business funds are completely separated. A founder forming a business now needs the entity, the EIN, a separate business account, and then bookkeeping software, in that exact order.

This sequence is why many new employers lean on a service that houses the formation, the registered agent duties, and the EIN application all in one place. ZenBusiness handles these foundational formation steps and offers an ADP payroll partnership for when you are ready to hire. You can secure your EIN to hire employees, set up a business bank account, and file taxes from a single starting point. Starting here and then connecting to a payroll provider keeps your compliance tasks centralized.

Step 1: Classify Your Worker Correctly

Before adding someone to a payroll system, you must determine whether they are an employee or an independent contractor. The IRS weighs three distinct categories to make this determination. The first is behavioral control, which looks at whether the employer directs how the work is done. The second is financial control, examining who provides the tools and how the worker is paid.

The third category is the type of relationship, which considers written contracts and whether employee benefits are provided. The agency makes it clear that there is no magic or set number of factors that makes the worker an employee or an independent contractor. Furthermore, no one factor stands alone in making this determination. You must evaluate the entire scope of the working relationship.

Employers who guess incorrectly face severe financial consequences. An employer who classifies an employee as an independent contractor without reasonable basis may be held liable for employment taxes for that worker. If you are unsure about a worker's status, you can file Form SS-8 to request an official IRS determination. However, it may take at least six months to receive a determination on your filing.

This long timeline forces most new employers to make a careful judgment before the first paycheck goes out. Business structure also dictates how you pay yourself. S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made. The IRS has the authority to reclassify payments made to shareholders from non-wage distributions to wages.

Step 2: Gather the Required Forms

Once you classify a worker as an employee, you must collect mandatory paperwork before they start working. All U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States. This form verifies the identity and employment authorization of individuals hired for employment. You must keep this form on file and make it available for inspection if requested by government officials.

Tax withholding requires its own specific documentation. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. The W-4 dictates how much federal income tax you must withhold from their paychecks.

This document remains in effect until the employee gives you a new one. Employees can adjust their withholdings if their life circumstances change. When a replacement is given, withholding begins no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4. You must implement these changes promptly to avoid withholding errors.

Finally, you need the employee's name and SSN to enter on Form W-2. Accurate reporting is critical because the Social Security Administration uses this information to record employee earnings. Discrepancies between the name on the W-2 and the Social Security card can cause processing delays and penalty notices.

Step 3: Establish a Compliant Pay Schedule

Setting a pay schedule is not simply a matter of employer preference or cash flow convenience. Pay frequency is set by state law and varies widely across the country. There is no single federal rule dictating when a paycheck must be issued to your team. You must align your payroll schedule with the regulations of the state where your employees perform their work.

For example, California requires wages at least twice per calendar month on days designated in advance. Colorado requires monthly payments for most workers. Meanwhile, Connecticut requires weekly payments unless a longer interval is approved by the labor commissioner.

Because these rules are highly specific to your location, you cannot rely on national averages or general business advice. Employers must research their local jurisdiction thoroughly. Individuals should consult the relevant state labor office for official information. Getting the pay frequency wrong can result in wage claims and Department of Labor investigations.

Step 4: Calculate Wages and Keep Accurate Records

If you choose to run payroll yourself, maintaining precise records is entirely your responsibility. The Fair Labor Standards Act mandates strict recordkeeping for all covered employees. Under the FLSA, payroll records are kept three years. This includes records containing employee information, hours worked, and total wages paid.

Furthermore, the records wage computations are based on, including time cards and wage rate tables, must be kept for two years. Losing these records violates federal rules and leaves you defenseless in the event of a wage dispute. You must establish a secure physical or digital filing system from day one. Good recordkeeping is the foundation of defending your payroll practices during an audit.

How Do You Decide Between DIY Payroll and Paying a Service?

Doing payroll yourself means you take full responsibility for calculating withholdings perfectly every single pay period. You must consult IRS withholding tables, track state tax bracket changes, and remit the exact amounts on time. You also have to file quarterly tax returns and generate year-end W-2 forms for every employee. This manual process saves money on software subscriptions but demands hours of careful administrative work.

A service automates the calculation, the tax remittance, and the filing schedules. Software providers move the administrative burden away from your desk and reduce the risk of missed deadlines. The tradeoff is an ongoing monthly base fee plus a per-employee charge. Evaluating your own comfort with tax forms and your available free time will determine which path is right for your business.

Software Options to Consider

If the compliance burden of doing it yourself feels overwhelming, paying a software provider is the standard alternative. Below is a look at the prominent options available on the market. This list is alphabetical rather than a ranking.

ADP

As a major incumbent in the payroll space, ADP handles compliance, tax filings, and human resources for businesses of all sizes. ADP does not publish payroll pricing and quotes per business. To get an exact figure for your company, you must speak with a representative and discuss your specific employee count and pay schedule. You can learn more at ADP.

Gusto

Gusto is a widely used payroll service known for automating local, state, and federal tax filings. As of October 6, 2026, the Simple plan costs $49 per month plus $6 per person. Upgrading to the Plus plan costs $80 per month plus $12 per person. Their highest tier, the Premium plan, runs $180 per month plus $22 per person. You can learn more at Gusto.

OnPay

OnPay provides straightforward payroll functionality without requiring users to navigate complex tier structures. Pricing is highly transparent across the board. As of October 6, 2026, the service costs $49 per month as a base fee plus $6 per worker. The public page quotes a starting price of $55 per month, which accounts for a business paying its first single employee. You can learn more at OnPay.

Patriot Software

Patriot Software is a reliable choice for businesses focused strictly on tight budgets. Patriot is cheaper at the very bottom end of the market compared to heavyweights. As of October 6, 2026, Basic Payroll runs $17 per month plus $4 per employee. The Full Service tier, which handles tax filings on your behalf, costs $37 per month plus $5 per employee. If you only need to pay independent contractors, it is worth noting that Square is hard to beat for contractor-only payment. You can learn more at Patriot Software.

QuickBooks Payroll

For businesses already keeping their books in the Intuit ecosystem, QuickBooks Payroll keeps financial data synced in one place. As of October 6, 2026, the Workforce Payroll plus Simple Start bundle is $88 per month plus $6.50 per employee. The Essentials bundle is $125 per month plus $6.50 per employee. The Premium plus Plus tier costs $203 per month plus $10 per employee. The company often highlights a promotional rate of 50 percent off the base for three months, but that is not the ongoing price. You can learn more at QuickBooks Payroll.

SurePayroll

SurePayroll targets small businesses and households managing nannies or domestic workers. As of October 6, 2026, general business payroll starts at $29 per month plus $7 per worker. Adding multi-state capabilities costs an extra $9.99 per month for businesses crossing state lines. For domestic employers, household payroll starts at $39 per month. You can learn more at SurePayroll.

ZenBusiness

ZenBusiness is an all-in-one platform built for founders who want one place to set up and run the business, with payroll handled by a partner. As of October 6, 2026, the ZenBusiness Starter plan is $0 plus state fees. The Pro plan is $199, and the Premium plan is $299. The Pro and Premium plans renew at their annual prices. The EIN and operating agreement are included from Pro up and are $99 each on Starter. You can also add registered agent services at $199 per year, Money Pro bookkeeping for $30 per month, and a website for $129 per year.

For paying employees, ZenBusiness recommends RUN Powered by ADP. Customers request the connection directly from the dashboard, and an ADP representative follows up to quote based on your needs. A ZenBusiness customer may be eligible for promotional pricing. However, payroll itself is ADP's, quoted by ADP per business, and not included in any ZenBusiness plan price. ADP is a separate service with its own platform, billing, and support. It is not integrated into the ZenBusiness dashboard. You can learn more at ZenBusiness.

Sources

This article provides general information rather than legal, tax, or accounting advice, and local requirements vary and change over time.