The First Real Test of Your Back Office: Pre-Launch Payroll Checklist

First US Payroll Run: A Pre-Launch Checklist for Startups

Transitioning from paying 1099 contractors to processing your first W-2 employee payroll is the first real test of your back office. It’s a move from simple payments to a complex system of tax withholding, registration, and compliance. For early-stage SaaS and Biotech founders managing finance themselves, this step can feel overwhelming. The process isn't just about paying someone; it’s about establishing a legal and financial framework that satisfies federal and state authorities. Getting it wrong leads to penalties and operational delays that a startup cannot afford. The key to a smooth first payroll run is understanding the critical steps that must happen long before you hit “pay.” This guide provides a pre-launch checklist on how to set up payroll for a startup in the US, focusing on the foundational requirements before, during, and after your first hire.

Part 1: Foundational Infrastructure (Before Your First Hire)

Before you post a job description or extend an offer, two pieces of administrative infrastructure are essential. Attempting to hire a W-2 employee without them is like trying to build a house with no foundation. These are non-negotiable prerequisites for any US payroll setup.

Secure a Federal Employer Identification Number (EIN)

First, your business needs a federal tax ID. According to the IRS, “A Federal Employer Identification Number (EIN) is a business's federal tax ID issued by the IRS, required for paying W-2 employees.” This nine-digit number is how the federal government identifies your company for all tax purposes, including filing Form 941 (Employer’s Quarterly Federal Tax Return) and issuing W-2s at year-end. Think of it as a Social Security Number for your business. The good news is that, as the IRS states, “Applying for an EIN is free and can be done online via the IRS website.” This process is typically immediate, and you should secure your EIN as soon as your company is incorporated.

Establish a Dedicated Business Bank Account

Second, you must have a dedicated business bank account. While it might seem convenient to run early expenses through a personal account, this creates significant bookkeeping problems in systems like QuickBooks and complicates payroll. All modern payroll platforms require a business bank account to debit for payroll runs, including employee direct deposits and tax payments. This separation ensures a clean audit trail, simplifies reconciliation, and is a non-negotiable prerequisite for US GAAP compliance and financial clarity. Operating without one signals a lack of financial discipline to potential investors and auditors.

Part 2: First Hire Triggers and Critical Decisions

Once you’ve found the right person, the clock starts on two critical compliance tasks that directly address the most common and costly payroll setup mistakes. These decisions are your responsibility as the founder; a payroll platform will execute based on your inputs, but it cannot make these strategic determinations for you.

Step 1: Decide Their Classification (The Most Common Stumble)

Misclassifying workers is one of the quickest ways to attract audits and financial penalties from both the IRS and state labor departments. This step involves two layers of decision-making that have profound legal and financial implications.

W-2 Employee vs. 1099 Independent Contractor

The first decision is whether your new hire is a W-2 employee or a 1099 independent contractor. This isn't a choice based on preference or cost; it's a determination based on the nature of the working relationship. The primary distinction is that “Worker classification (employee vs. contractor) is primarily determined by the level of control a business has over how, when, and where the work is done.” If you dictate their hours, provide the primary tools for their work, and control the methodology of their tasks, they are almost certainly a W-2 employee subject to payroll tax withholding.

Exempt vs. Non-Exempt Status

If they are a W-2 employee, a second classification is required: Exempt or Non-Exempt. This decision has direct financial implications. The Fair Labor Standards Act (FLSA) states that “Employee status (Exempt vs. Non-Exempt) determines eligibility for overtime pay.”

• Non-Exempt employees must be paid overtime, typically 1.5 times their regular rate, for any hours worked over 40 in a workweek.
• Exempt employees are not eligible for overtime. For an employee to qualify as exempt, they must meet both a salary test and a duties test.

The Department of Labor provides a clear salary-level test: “Under the FLSA, employees paid less than $35,568 per year ($684 per week) are generally considered non-exempt. This salary threshold is subject to change.” However, meeting the salary threshold is not enough. The employee’s primary job duties must also fit into specific professional, administrative, or executive categories. Getting this wrong can expose your startup to significant back-wage claims, making it a critical part of your new business payroll requirements.

Step 2: Register in Every State Where an Employee Works

The most significant operational bottleneck in the US payroll setup steps is state-level registration. The rule is simple but the execution is not: “Employer registration is required in every state where a W-2 employee works.” This concept, known as "payroll nexus," means you must register as an employer not just where your company is incorporated, but in every single state where you have an employee living and working. This process involves opening two key accounts:

1. A State Income Tax (SIT) Withholding Account to remit the state income taxes you withhold from employee paychecks.
2. A State Unemployment Insurance (SUI) Account to pay state unemployment taxes, which fund benefits for laid-off workers.

Your payroll provider cannot legally process payroll for an employee in a given state without these account numbers. A scenario we repeatedly see is a startup hiring its first remote engineer in Pennsylvania or New York. The founder, assuming registration is quick, promises a start date two weeks out. However, the reality is that “State registration processing times vary widely, from 1-2 business days (e.g., Arizona, Colorado) to 4-8 weeks (e.g., California, New York, Pennsylvania).” The state takes over a month to issue the required account numbers. The payroll platform is blocked, the employee's first paycheck is delayed, and the company is forced to pay a gross advance outside of the system, creating a reconciliation nightmare and immediate compliance risk. This is the top pain point for founders: failing to secure state account numbers in time blocks payroll processing and incurs immediate fines.

Part 3: Understanding Payment Mechanics and Deadlines

With your federal and state registrations complete, the final piece of the puzzle is understanding how and when to remit the taxes you withhold. Misunderstanding deposit schedules is a frequent source of trouble for new employers, leading to late payments and automatic penalties.

Federal Payroll Tax Deposit Deadlines

Federal taxes include federal income tax, Social Security, and Medicare. For these, new businesses have a default schedule. The IRS notes that “Most new businesses are default monthly depositors for federal payroll taxes (Form 941 taxes).” This simplifies the process, as you only have one deadline to track each month. Specifically, “The deadline for monthly federal tax depositors is the 15th of the month following the month in which wages were paid.” For example, all federal taxes for wages paid in May are due by June 15th.

As your business grows and your tax liability increases, you may be required to switch schedules. According to the IRS, “The semi-weekly deposit schedule applies to businesses with over $50,000 in tax liability during a defined lookback period.” It is crucial to know that these payments cannot be made by check. The IRS mandates that “Federal tax deposits must be made electronically through the Electronic Federal Tax Payment System (EFTPS).” In practice, your payroll platform will handle these EFTPS payments automatically, but you are ultimately responsible for ensuring the funds are available and the payments are made on time.

State Payroll Tax Deposit Schedules

State tax agencies operate independently from the IRS and have their own deposit schedules and rules. These can vary significantly, with some states requiring monthly deposits while others may require quarterly payments, especially for very small employers. Your assigned frequency is typically determined when you receive your SIT and SUI account numbers. Managing this complexity across multiple states is a primary benefit of using a dedicated payroll service, which can automate these variable payments on your behalf.

Your Pre-Launch Payroll Checklist

Setting up your first US payroll run correctly is about proactive compliance, not just processing a payment. The reality for most pre-seed startups is that the founder must own the strategic decisions that enable the payroll software to function correctly. To avoid the most common pitfalls, follow this state payroll compliance checklist.

1. Address State Registration Immediately. The moment an offer letter is signed for an employee in a new state, begin the SIT and SUI registration process. Do not commit to a start date until you have those account numbers in hand. This single step prevents the most common cause of payroll delays.
2. Confirm Your Worker Classifications. Before entering a new hire into your payroll system, be certain about their status as a W-2 employee or 1099 contractor, and if W-2, their status as Exempt or Non-Exempt. Use the “level of control” test and the FLSA salary and duties tests as your guides. This decision dictates everything from tax withholding to overtime obligations.
3. Understand Your Tax Deposit Cadence. As a new employer, you are likely a monthly federal depositor with a deadline of the 15th of the following month. Verify your state deposit schedule as well. While your payroll platform automates the payment through EFTPS, knowing these deadlines helps you manage cash flow and ensure funds are available.

Remember that the platform executes, but you direct. Your job is to provide the correct inputs, EIN, state account numbers, and worker classifications, so the system can handle the calculations and payments accurately and on time. Building this foundation correctly from your first hire will save you from costly compliance headaches as your team grows. For a broader primer see the payroll compliance overview.

Frequently Asked Questions

Q: How long does it take to set up payroll for the first time in the US?
A: The timeline is driven by state registration. While getting a federal EIN is fast (often instant online), waiting for state tax account numbers can take anywhere from a few days to over six weeks. You should budget at least one to two months for the entire US payroll setup process before your first employee’s start date.

Q: Can I pay an employee before my state registration is complete?
A: You should not run official payroll through a platform without the required state account numbers, as it is not legally compliant. Paying an employee a "gross advance" outside of payroll creates significant tax and reconciliation problems later. It is always better to delay the start date until registration is complete.

Q: What are the most critical new business payroll requirements?
A: The three most critical requirements are obtaining a Federal EIN, opening a business bank account, and completing employer registration in every state where an employee works. These foundational steps must be completed before you can legally withhold and remit taxes, which is the core function of a compliant payroll system.