Founder's Handbook: Practical Payroll Setup for Startups, From EIN to Ongoing Compliance

Phase 1: Secure Foundational Tax IDs to Set Up Payroll

Setting up your first payroll is a major milestone. You've made your first hire, and while the excitement is real, so is the immediate administrative burden. Paying your new team member is not as simple as a bank transfer. This guide provides a clear, three-phase framework for how to set up payroll for a new US startup correctly from day one. We cover the foundational tax IDs you need, how to choose the right system, and what to know about ongoing compliance as your team grows. Getting US payroll setup right builds a scalable foundation and helps you avoid common, costly mistakes.

The first step in establishing federal payroll tax basics is securing your company’s unique identifier from the IRS. You cannot pay W-2 employees without it.

An Employer Identification Number (EIN) is a federal tax ID number issued by the IRS. A federal EIN is required to open a business bank account and set up a payroll system.

This nine-digit number is fundamental to your operations. You can apply for one online directly with the IRS, and in most cases, the number is issued immediately.

Next, you must address state-level requirements, where the complexity often increases, especially for remote-first teams. Each state where an employee works has its own rules.

Each state where an employee works requires a State Withholding Account for remitting state income taxes and a State Unemployment Tax (SUTA) Account for paying state unemployment taxes.

This means if your company is incorporated in Delaware but your first hire works from California, you must register your business to pay payroll taxes in California. This registration process is separate for each state and can take anywhere from a few business days to several weeks. For unemployment taxes specifically, states assign new businesses a specific SUTA rate. "States assign new businesses a specific 'new employer' SUTA rate," which is not negotiable and is used to calculate your unemployment tax liability.

Consider a SaaS startup in New York hiring a developer in Texas. Before that developer receives their first paycheck, the founder must complete three separate registrations:

1. A Federal EIN, which is usually fast.
2. A Texas State Withholding Account.
3. A Texas SUTA Account.

The Texas registration process might take two weeks to finalize. This means the hiring timeline must account for this administrative lead time. Delaying this step is a common pitfall that can prevent you from running your first payroll on time and create a poor onboarding experience. These foundational IDs are the absolute prerequisite for any payroll setup checklist for new businesses.

Phase 2: Choose a Payroll System to Automate Withholdings

Once you have your tax IDs, the next question is how to manage the mechanics of paying employees and remitting taxes. For W-2 employees, manual payroll using spreadsheets is not a viable or compliant option. You need an automated payroll system to ensure accuracy and timeliness.

Popular payroll providers for US startups include Gusto, Rippling, or QuickBooks Payroll. These platforms are designed to handle the complexities of withholdings, payments, and filings. When you onboard an employee into one of these systems, they will complete key documents electronically.

Employees must complete Form W-4 for federal tax withholding and a corresponding state-level form.

This information tells the system how much federal and state income tax to withhold from each paycheck based on the employee's personal financial situation. The system then calculates the total tax liability for each pay period, which includes both the employee's portion and the employer's matching share.

Payroll taxes for W-2 employees include withholdings for Social Security and Medicare (FICA), as well as federal and state income taxes.

Your payroll provider will typically withdraw the gross payroll amount from your business bank account, pay the employee their net pay, and hold the tax portion to remit to the IRS and state agencies on the required schedule. Choosing a provider is less about finding a single best option and more about what integrates with your existing accounting stack, like QuickBooks, and can scale with your hiring plans.

Phase 3: Manage Ongoing Compliance and Scale Your Team

With your system running, your focus shifts to ongoing compliance and the challenges of scaling. Payroll is not a "set it and forget it" function. It has a regular rhythm of reporting and filing obligations that you, the founder, are ultimately responsible for, even when using a third-party provider.

Your payroll provider automates most of this, but understanding the key payroll tax forms for startups is important for oversight. Quarterly, your provider files key returns on your behalf.

Form 941, the Employer's Quarterly Federal Tax Return, is used to report wages and federal taxes withheld each quarter. This form reconciles what you have paid in wages with the federal income, Social Security, and Medicare taxes you have withheld and paid.

Annually, there is a separate filing for federal unemployment taxes.

Form 940 is used to report and pay annual Federal Unemployment Tax (FUTA). This is a separate federal unemployment tax system that complements the state-level SUTA programs.

Miscalculating or late-filing these forms can trigger IRS penalties and create unexpected hits to your cash flow. These responsibilities culminate in year-end tasks such as employee and contractor reporting, which includes W-2 and 1099 preparation.

A scenario we repeatedly see is the challenge of multi-state expansion. As your startup grows, especially in sectors like Biotech or Deeptech that hire specialized talent nationwide, you will trigger new state payroll compliance for startups. "Hiring an employee in a new state establishes 'nexus,' which triggers the legal requirement to register for payroll tax accounts in that state." Each new state means repeating the registration process from Phase 1.

Here, a critical distinction emerges: direct registration versus using a Professional Employer Organization (PEO). With direct registration, you handle each state's paperwork yourself or through your payroll provider. This gives you direct control but can be slow. A PEO acts as a co-employer and is already registered in most states, allowing you to hire and onboard an employee in a new state much faster. For a fast-growing startup, the speed offered by a PEO can be a significant advantage, though it often comes at a higher cost.

A Practical Payroll Setup Checklist for New Businesses

Navigating US payroll setup for the first time can feel overwhelming, but it boils down to a logical sequence of foundational, systemic, and ongoing steps. Following a clear plan helps prevent the most common errors faced by early-stage founders. Here is a practical summary of the hiring employees payroll steps:

1. Foundation First, Always: Before you can pay anyone, secure your federal Employer Identification Number (EIN) from the IRS. It is the key that unlocks everything else, from your business bank account to your payroll system. Do not delay this step.
2. State Registrations Are Not Instant: For every state where you hire an employee, you must register for state withholding and unemployment (SUTA) tax accounts. This process creates a lag time, so build a 2 to 4 week buffer into your hiring timeline for each new state.
3. Automate to Mitigate Risk: Use a reputable payroll provider like Gusto, Rippling, or QuickBooks Payroll. Manual calculations for W-2 employee withholdings (FICA, federal, and state taxes) are a recipe for error. A good system ensures taxes are calculated, remitted, and filed correctly via forms like the 941 and 940.
4. Plan for Scale: Understand that hiring in a new state creates a "nexus" and new registration duties. As you grow, evaluate the trade-off between direct state-by-state registration and using a PEO. The right choice depends on your hiring velocity, complexity, and budget.

By treating payroll as a core business system rather than just an administrative task, you build a compliant and scalable foundation for growth. For more resources, see the payroll overview hub.

Frequently Asked Questions

Q: Can I pay my first employee as a 1099 contractor to simplify payroll?
A: While it may seem simpler, you can only classify a worker as a 1099 contractor if they meet strict IRS criteria for independence. Misclassifying a W-2 employee as a contractor can lead to significant penalties, back taxes, and legal issues. Always consult legal counsel to ensure proper worker classification.

Q: Do I need a full payroll system if I only have one W-2 employee?
A: Yes. Even for a single employee, the requirements for tax withholding, remittance, and filing (like Forms 941 and 940) are the same. Manual calculations are prone to error, making an automated payroll provider the safest and most compliant option for any business paying W-2 wages.

Q: How long does it actually take to set up payroll for a new hire?
A: Securing a federal EIN can be instant online. However, state registrations for withholding and unemployment taxes are the main variable. You should budget two to four weeks for each new state registration to be safe. This administrative lead time must be factored into your hiring timeline.

Q: What is the main difference between a payroll provider and a PEO?
A: A payroll provider (like Gusto) manages your tax calculations and payments under your company's own tax IDs. A Professional Employer Organization (PEO) acts as a co-employer, allowing you to use their existing state tax registrations, which can significantly speed up hiring in new states.