Payroll Setup: The First-Employee Checklist For LLCs

Updated: October 2026 · Industry Advisors · Education, not legal or tax advice.

Hiring the first employee is one of the biggest single steps an LLC takes. It doubles the compliance footprint overnight — payroll tax withholding, unemployment insurance, workers' comp, W-4 collection, and a stack of state-specific registrations that vary widely. Founders who treat payroll as "I'll figure it out when I hire" discover the setup takes 3–5 weeks and often blocks the actual hire.

This is the pre-hire checklist. Everything that needs to be in place before the first paycheck runs.

Why Payroll Setup Starts Before The Hire

Payroll obligations attach the moment an employee starts working. If federal registrations aren't in place, tax deposits accrue interest and penalties on day one. If state unemployment insurance isn't registered, back premium plus penalty applies. The safest posture: complete all setup 2–4 weeks before the start date, then run a small test payroll.

Founders who take short-cuts here — paying the first hire "under the table" or through a personal Venmo transfer while setup is pending — create liability that lasts for years. The IRS treats misclassification and unreported wages seriously; state departments of labor treat them even more seriously.

Step 1 · Federal Registrations

EIN — Confirm Active

You already have an EIN from formation. Confirm it's active by looking up your CP-575 letter or requesting an EIN Verification Letter (147C). The IRS treats the EIN as your employer identifier for all payroll filings.

EFTPS Enrollment

The Electronic Federal Tax Payment System is required for federal payroll deposits. Enrollment takes 5–10 business days for the initial PIN letter to arrive by mail. Start this at least 3 weeks before the first paycheck. Detail at eftps.gov.

Federal Employer Registrations

• Form 941 (quarterly) — federal income tax withholding + FICA (Social Security + Medicare)
• Form 940 (annual) — Federal Unemployment Tax Act (FUTA), 6.0% on the first $7,000 per employee
• Form W-2 (annual) — due January 31 to employees + SSA
• Form W-3 (annual) — W-2 transmittal summary

Step 2 · State-Level Payroll Registrations

State Income Tax Withholding

Register with your state Department of Revenue (or equivalent). Nine states have no personal income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) — in those states, no state income tax withholding is required.

For everyone else, expect a form (each state's is different), a wait time of 5–14 days for account activation, and a filing schedule (monthly, quarterly, or annually) based on your withholding volume.

Unemployment Insurance

All 50 states require unemployment insurance registration once you have any employees. Registration goes through the state's Department of Labor, Employment Security Department, or similar agency. The employer pays UI premium (not deducted from employee wages) at a rate that varies by state and industry, typically 1–6% of the first $7,000–$15,000 in wages per employee per year.

Paid Family Leave And Paid Sick Leave

Growing number of states — California, New York, New Jersey, Rhode Island, Washington, Massachusetts, Connecticut, Colorado, and Oregon among them — require employer participation in state paid family leave programs. Additional withholding or premium applies. Confirm your state's rules.

Step 3 · Workers' Comp — The Third Leg

Workers' comp is required in every state except Texas the moment you hire your first employee. Skip it and you carry personal liability for any workplace injury.

Where you purchase coverage varies:

• Private carrier states (46) — shop coverage through licensed insurance brokers
• Monopolistic state fund states (4) — North Dakota, Ohio, Washington, Wyoming. Coverage bought only from the state fund.

Premium is set as a rate per $100 of payroll, varying by industry classification (NCCI codes). Office and remote workers run $0.30–$1.00/$100; construction runs $4–$15/$100. Get quotes 2–3 weeks before start date.

Step 4 · Choosing A Payroll Service

Do-it-yourself payroll is technically possible — the IRS provides Form 941 and Publication 15 (Circular E) with the withholding tables. In practice, DIY payroll is a poor investment of founder time. The main services:

• Gusto — tech-friendly UI, common in startups. $40–$80/month for small teams.
• Rippling — HR + payroll integration, good for growing teams. $8/employee/month + base.
• ADP — enterprise-scale, better for teams > 20. Pricing custom.
• OnPay — lean small-business focus. $40 base + $6/employee/month.
• Square Payroll — tight integration if using Square for point-of-sale. $35 + $6/employee.

All handle federal deposits, state deposits, W-2 generation, and 1099 filing. State registration is usually your responsibility, though most services will guide the process.

Step 5 · Onboarding Paperwork Checklist

• Form I-9 — employment eligibility verification, must be completed within 3 days of start
• Form W-4 — federal tax withholding certificate
• State W-4 equivalent — for states with income tax (varies by state name)
• Direct deposit authorization — bank routing/account for ACH payroll
• Employee handbook acknowledgment — if you have one
• Confidentiality / IP assignment agreement — especially important for tech companies (see Contract vs TOS post)
• Emergency contact information
• Beneficiary designations — if offering group life or 401(k)

Quick Tool · First-Hire Readiness Check

Step 6 · The Recurring Payroll Cadence

Once payroll is running, the cadence is:

• Every pay period — run payroll; withhold federal, state, FICA
• Weekly or bi-weekly — federal payroll tax deposits via EFTPS (depending on prior year's tax liability)
• Quarterly — Form 941 federal, plus state withholding + unemployment
• Annually — Form 940 FUTA, Form W-2 to employees + SSA (January 31)

The Q4 compliance checklist covers the year-end payroll close, including W-2 prep, 1099 issuance, and the payroll reconciliation.

Step 7 · Contractor Vs Employee — Don't Misclassify

Founders often try to "contract" what should be an employee relationship to avoid payroll setup. The IRS and state labor departments audit this aggressively.

The IRS applies a 20-factor common-law test, but the practical signals are:

• Does the worker set their own schedule? (Contractor → yes; Employee → no)
• Do they have other clients? (Contractor → yes; Employee → usually no)
• Do they use their own equipment? (Contractor)
• Are they integrated into your team meetings, workflows, tools? (Employee)
• Do you dictate how the work is done, not just what? (Employee)

California, New Jersey, and Massachusetts apply the stricter ABC test that presumes employee status unless all three conditions are met. Misclassification penalties are severe: back payroll taxes, unemployment premium, workers' comp premium, plus interest and penalty. Talk to a labor-and-employment attorney before treating any long-term worker as a contractor.

Common First-Hire Mistakes

• Starting the hire before setup is complete. Payroll runs from day one; delays don't excuse penalties.
• Skipping workers' comp because it's just one person. One workplace injury is enough to end an LLC without coverage.
• Misclassifying as 1099. The IRS and state labor departments watch this.
• Forgetting local income tax. Ohio cities, some PA municipalities, NYC, and others levy local income tax on wages.
• Not offering a state-mandated benefit. Paid family leave, sick leave, retirement plans — several states now mandate these.

Conclusion

The first hire is a structural change to your LLC. Handled with a 5-week runway and a good payroll service, it's routine. Handled reactively — employee starts, you scramble — it produces penalty bills that materially exceed the actual cost of clean setup.

Next step: if you're planning to hire in the next quarter, enroll in EFTPS today. That single step has the longest lead time (5–10 business days for the PIN letter) and blocks everything downstream.

Sources And Further Reading

• IRS · Employment Taxes
• SBA · Hire and Manage Employees
• US Dept of Labor · Hiring Basics

The Everyday Owner's Blueprint includes the payroll-setup worksheet, state-by-state registration links, and onboarding paperwork templates.

Industry Advisors · 30 Wall Street, New York, NY 10005. Education, not legal or tax advice.