Hiring your first employee: the payroll taxes and filings you just signed up for

What changes with your first hire

Paying a contractor is mostly a year-end task: collect a W-9, then file a 1099 in January. Hiring an employee is an ongoing one. You become responsible for withholding taxes from someone else’s pay, adding your own employer taxes on top, depositing both on a schedule, and reporting it all quarterly and annually.

The withheld amounts are called trust fund taxes because you’re holding the employee’s money for the government. That’s why the IRS treats late or missing payroll deposits more seriously than most other tax problems. Get the setup right in the first month and the rest becomes routine.

Before the first paycheck: registrations

• Employer Identification Number (EIN). If your business doesn’t already have one, apply on IRS.gov. It’s free. A sole proprietor who has been using a Social Security number needs an EIN once they have employees.
• Electronic deposit access. Federal payroll tax deposits must be made electronically, through EFTPS, your IRS business tax account, or a payroll provider. EFTPS enrollment can take several days, so start early.
• State withholding account, in any state that has an income tax where the employee works.
• State unemployment insurance account. New employers are usually assigned a standard new-employer rate until they build their own experience history.
• Local registrations where they apply, such as city or county income or payroll taxes.
• Workers’ compensation coverage, discussed below.

Onboarding paperwork: W-4, I-9 and new-hire reporting

Three items happen in the first days of employment, and each has its own rule.

• Form W-4. The employee fills it out so you know how much federal income tax to withhold. If they don’t give you one, withhold as if they were a single filer with no other adjustments. Many states have their own withholding certificate as well.
• Form I-9. The employee completes Section 1 no later than the first day of work. You complete Section 2, examining their identity and work authorization documents, within three business days of the first day of work for pay. Keep the form for three years after hire or one year after employment ends, whichever is later. You don’t file it with any agency.
• New-hire reporting. Federal law requires you to report each new or rehired employee to the state directory of new hires within 20 days of hire, and some states require it sooner. Reports are used mainly for child support enforcement, and states can fine employers who don’t report.

The taxes, with 2026 rates

Payroll taxes come in two groups: what you withhold from the employee, and what you pay yourself.

• Social Security: 6.2% withheld from the employee and 6.2% paid by you, on wages up to $184,500 for 2026.
• Medicare: 1.45% withheld and 1.45% paid by you, on all wages. Once an employee’s wages from you pass $200,000 in a year, you must also withhold an extra 0.9% Additional Medicare Tax; there’s no employer match.
• Federal income tax withholding, based on the employee’s W-4 and the IRS tables in Publication 15-T.
• FUTA (federal unemployment): 6.0% on the first $7,000 of each employee’s wages, paid only by you. Paying your state unemployment tax on time generally earns a credit of up to 5.4%, for a net rate of 0.6%, or $42 per employee per year. Employers in a credit reduction state pay more; for 2025, California employers owed an extra 1.2%.
• SUTA (state unemployment): paid by the employer in most states, at a rate and wage base set by the state. A few states also withhold a small employee share or require contributions for state disability or paid family leave programs.

A worked example

Say you hire an office manager at $60,000 a year, paid semimonthly, in a state with an income tax. Each month’s gross pay is $5,000. You withhold $382.50 for Social Security and Medicare (7.65%), plus federal and state income tax based on their W-4 and state form. You add your own matching $382.50.

If federal income tax withholding runs about $450 a month, your monthly federal deposit is roughly $1,215: $765 of combined Social Security and Medicare plus $450 of withholding. Over a quarter that’s about $3,645, well above the $2,500 level below which small employers may pay with the quarterly return instead of depositing.

For the year, your employer taxes are $4,590 of Social Security and Medicare, $42 of net FUTA if you pay state unemployment on time, plus state unemployment and workers’ compensation. As a rough planning figure, budget 8% to 12% above gross wages for taxes and insurance, before any benefits.

Deposit schedules

Withheld taxes and your matching share aren’t paid when you file a return. They’re deposited on a schedule set by the size of your past payroll.

Your schedule depends on a lookback period, the four quarters from July 1 of the second preceding year through June 30 of the prior year. If you reported $50,000 or less in that period, you’re a monthly depositor. In your first year as an employer, you’re a monthly depositor unless the $100,000 rule applies.

• Monthly depositors deposit each month’s taxes by the 15th of the following month.
• Semiweekly depositors deposit taxes for Wednesday, Thursday or Friday paydays by the following Wednesday, and for Saturday through Tuesday paydays by the following Friday.
• If you accumulate $100,000 or more of taxes on any day, deposit by the next business day. You then become a semiweekly depositor for the rest of that year and the next.
• FUTA is deposited quarterly once the undeposited amount exceeds $500; below that it carries forward. With one employee, you’ll often pay it with Form 940.

The filing calendar

• Form 941, quarterly, due the last day of the month after each quarter ends: April 30, July 31, October 31 and January 31. When the date falls on a weekend, it moves to the next business day, so the third-quarter 2026 return is due November 2, 2026. Very small employers the IRS notifies may file an annual Form 944 instead.
• Form 940, the annual FUTA return. The 2026 return is due February 1, 2027, or February 10 if all FUTA tax was deposited on time.
• Forms W-2 and W-3. Furnish W-2s to employees and file them with the Social Security Administration by February 1, 2027 for 2026 wages. If you file 10 or more information returns of any kind, you must file electronically.
• New for 2026 W-2s: qualified overtime pay (the premium portion required under federal overtime law) is reported in box 12 with code TT, and reported tips with code TP. If your first hire is an hourly employee who works overtime, make sure your payroll system tracks it separately.
• State returns: quarterly withholding and unemployment reports, and an annual reconciliation in most states.

Workers’ compensation

Workers’ compensation is set by state law, not the IRS, and most states require it as soon as you have employees, though some exempt very small employers or certain roles. Texas is the notable exception: most private employers may choose not to carry it, but must then give notices and lose some legal protections against injury lawsuits.

Coverage is usually bought from a private insurer or, in a few states, a state fund. Premiums are based on payroll and job classification, and many carriers offer pay-as-you-go billing through your payroll provider so premiums track actual wages.

First-year penalties and how to avoid them

Most first-year payroll penalties come from missed dates, not from miscalculated tax. The costs add up quickly.

• Late deposits. The failure-to-deposit penalty is 2% if you’re 1 to 5 days late, 5% at 6 to 15 days, 10% after 16 days, and 15% if still unpaid after an IRS notice demanding payment. Put deposit dates on the calendar or let a payroll provider make them.
• Using withheld taxes for cash flow. Unpaid trust fund taxes can be assessed personally against owners and others responsible for paying them through the Trust Fund Recovery Penalty. This is the one to never gamble on.
• Late or wrong W-2s. For forms due in 2027, penalties run $60 per form if corrected within 30 days, $130 by August 1, and $340 after that, for each copy that should have gone to the SSA and to the employee.
• Missing state registrations. Paying wages before you have state withholding and unemployment accounts leads to penalties and back filings.
• Paying the owner wrong. If you’re an S corp owner putting yourself on payroll, your wages are subject to all of the above, and the salary needs to be reasonable for the work you do.

Doing it yourself or using a provider

You can run payroll yourself with IRS Publication 15 and your state’s employer guide. For most owners with one to a few employees, a payroll service is worth the modest cost: it calculates withholding, makes deposits, files quarterly returns and W-2s, and often handles new-hire reporting and state filings too.

A provider doesn’t move the legal responsibility off you. Check your EFTPS account or IRS business tax account a few times a year to confirm deposits are landing. When Tally Tax reviews a new employer’s setup, that deposit history, the state accounts and the first Form 941 are the first things we check.

Frequently asked questions