Life changes
You Hired Your First Employee: Payroll Setup Steps
The first hire turns you into an employer, with forms to collect, state accounts to open and tax to deposit on a schedule. It is very manageable once it is set up correctly from the first paycheck.
Reviewed by LaToya Clark-Thompson, FounderLast updated
Make sure it is an employee
If you control how, when and where the work is done, supply the tools and the person works only for you, they are probably an employee, not a contractor. Paying an employee on a Form 1099 shifts their payroll taxes onto them and exposes the business to back taxes and penalties. Employee vs. contractor walks through the factors.
Before the first paycheck
- Have an EIN for the business. Payroll cannot run on your Social Security number
- Collect Form W-4 for federal withholding and the SC W-4 for South Carolina withholding
- Complete Form I-9 to verify the person can work in the United States, and keep it on file (it is not sent to the government)
- Register a withholding account with SCDOR
- Register with the South Carolina Department of Employment and Workforce for state unemployment insurance
- Report the new hire to the South Carolina new hire reporting program
- Check whether you need workers’ compensation coverage, which in South Carolina depends on how many people you employ and your type of business
- Enroll in EFTPS so you can make federal tax deposits electronically
Setting up payroll for a new SC business and the SC payroll tax guide go deeper on each account.
What payroll involves after that
Every paycheck withholds federal income tax, South Carolina income tax and the employee’s share of Social Security and Medicare. You add the employer’s matching share, plus federal and state unemployment tax. Then:
- Federal withholding and payroll taxes are deposited on a monthly or semiweekly schedule, which the IRS assigns based on how much you report
- Form 941 is filed each quarter, and Form 940 for federal unemployment once a year
- South Carolina withholding is deposited and reported to SCDOR, and unemployment wages are reported to DEW
- At year end, W-2s go to each employee and, with Form W-3, to the Social Security Administration
Why the deposits matter so much
The income tax and employee share of Social Security and Medicare you withhold is the employee’s money held in trust. If it is not deposited, the IRS can hold the people responsible for payroll personally liable through the Trust Fund Recovery Penalty (see Letter 1153). Late deposits also carry their own penalties. It is the one area of small business tax where falling behind gets expensive quickly, which is why we recommend automating it. If it has already slipped, see behind on payroll taxes.
How we set it up
Our payroll services cover the registrations, each pay run, the deposits, the quarterly and annual filings and year-end W-2s. Send us your EIN, the new employee’s W-4, SC W-4 and pay details, and any state account numbers you already have. If you are deciding whether to handle it yourself, DIY payroll vs. a service lays out what each involves, and the payroll compliance checklist is useful either way.
Frequently asked questions
What forms does a new employee fill out?
At minimum, Form W-4 for federal withholding, the SC W-4 for South Carolina withholding, and Form I-9 to verify eligibility to work, along with the identity documents the I-9 lists. You keep the I-9 and both W-4s on file. Many employers also collect a direct deposit authorization. The new hire must then be reported to the state’s new hire reporting program.
Do I need to register with the state to have employees in South Carolina?
Yes. You need a withholding account with the South Carolina Department of Revenue for state income tax, and an unemployment insurance account with the Department of Employment and Workforce. New hires are reported to the state too. Whether you need workers’ compensation depends on your headcount and business type, so check with the SC Workers’ Compensation Commission.
How often do I have to deposit payroll taxes?
Most new employers start on a monthly deposit schedule for federal payroll taxes, made electronically through EFTPS. The IRS moves employers to a semiweekly schedule once their reported payroll taxes pass a set level, and very large single-day liabilities must be deposited the next business day. Your schedule is set from your past filings, and South Carolina has its own deposit schedule for state withholding.
Can I pay my first employee as a contractor to keep it simple?
Not if they are actually an employee. Classification depends on how the work is controlled, not on what you call it or what the person agrees to. Misclassifying a worker can leave the business owing the payroll taxes that should have been withheld, plus penalties and interest. The payroll mistakes guide covers this and other first-year errors.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
Related pages
You started a business
Structure, EIN, licenses, a separate account, books and estimated taxes for a new business, in order.
Learn moreYour business is growing
How an S corp election saves tax, what it adds to your workload, and how to tell if your profit is there yet.
Learn moreYou are closing a business
Final returns, last payroll, asset sales, state accounts and dissolution for a business that is winding down.
Learn moreYou bought a business vehicle
Standard mileage or actual expenses, depreciation choices and the records a business vehicle deduction needs.
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