How do I set up payroll for my first employee? You must start with an Employer Identification Number from the IRS. Once you have an EIN, you can register with your state labor agencies and open a dedicated business checking account. You then select a payroll schedule that meets your state's minimum frequency laws and choose a payroll provider. When they start work, your new hire must complete Form W-4 for tax withholding and Form I-9 to verify their eligibility to work in the United States. If you are starting from scratch without an EIN or business account, a formation service like ZenBusiness can handle the business setup and request an introduction to ADP.

Step 1: Establish your business entity and secure an EIN

Running payroll requires a formal business identity recognized by the federal government. The Internal Revenue Service tracks employment taxes, wage withholding, and business tax liabilities using an Employer Identification Number. You cannot legally hire an employee, withhold taxes from their paycheck, or submit a Form W-2 at the end of the year without this identifier. Even if you operate your business as a sole proprietorship, the act of hiring an employee triggers the immediate requirement to obtain an EIN.

Securing your EIN is a critical part of the broader process of separating your business finances from your personal money. Commingling funds is a common mistake for new employers. Establishing a clear boundary is essential. The IRS points out in its guidance that opening a separate business checking account is a fundamental step for new businesses. Mixing personal and business funds makes payroll reconciliation incredibly difficult and can jeopardize your liability protection if you run a formal entity like a limited liability company.

If you are setting up your business entity specifically to hire your first employee, handling the formation, the EIN, and the bank account in one place prevents administrative delays. For founders starting from scratch, ZenBusiness offers an approach that covers this entire foundational phase. It handles the entity formation, secures the EIN from the IRS, provides dedicated bookkeeping tools, and gives you a direct path to setting up a payroll service. This allows you to check off the legal prerequisites before you ever calculate a wage payment.

Additionally, the structure of your business dictates who must be on the payroll. For business owners operating an S corporation, the first employee on the payroll is frequently the owner themselves. The IRS strictly mandates that S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation. Crucially, this reasonable wage must be paid before any non-wage distributions may be made. Attempting to avoid payroll taxes by taking only distributions is a compliance violation, and the IRS has the authority to reclassify payments made to shareholders from non-wage distributions to wages.

Step 2: Classify your worker correctly

Before adding any individual to a payroll system, you must be absolutely certain they are legally classified as an employee. Business owners sometimes attempt to classify workers as independent contractors to simplify their paperwork burden and avoid paying the employer portion of employment taxes. The IRS treats worker misclassification seriously and investigates these arrangements closely.

Classification turns on control, not on a label or a contract. Simply drafting an agreement that calls someone an independent contractor does not make them one in the eyes of the government. The IRS weighs three specific categories of evidence when evaluating a worker's status. The first is behavioral control, which asks whether the employer has the right to direct and control how the worker does the task for which they are hired. The second is financial control, which examines whether the business has a right to direct or control the financial and business aspects of the worker's job. The third is the type of relationship, which looks at written contracts, employee benefits, and whether the services provided are a key aspect of the regular business of the company.

There is no magic or set number of factors that makes the worker an employee or an independent contractor, and no one factor stands alone in making this determination. It is a holistic review of the working arrangement.

Misclassification has a significant price. An employer who classifies an employee as an independent contractor without a reasonable basis may be held liable for employment taxes for that worker. This can result in massive back-tax bills and penalties. If you are entirely unsure about a worker's status after reviewing the guidelines, you or the worker can file Form SS-8 to ask the IRS for an official determination. However, you must plan ahead: it may take at least six months to receive a determination on your filing.

Step 3: Gather required new hire documentation

Onboarding your first employee requires specific federal documentation before they can legally begin work and receive a paycheck. You must collect and retain these forms to verify the employee's identity, confirm their work authorization, and calculate their federal tax withholding accurately.

Form I-9 is required for everyone. All U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States. This form is governed by U.S. Citizenship and Immigration Services and proves the employee is legally permitted to work in the country.

You must also secure tax withholding information. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. This document tells you exactly how much federal income tax to withhold from their paycheck based on their filing status and dependents.

A W-4 remains in effect until the employee gives you a new one. Life events frequently cause employees to update this form. If an employee submits a replacement form later in their tenure, withholding begins no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4.

Finally, you need the employee's exact legal name and Social Security Number. You need the employee's name and SSN to enter on Form W-2 at the end of the calendar year. Collecting and verifying this data on day one prevents frantic corrections and filing errors when annual tax reporting deadlines arrive.

Step 4: Determine the proper pay schedule

You do not have unlimited freedom when deciding how often to issue paychecks to your employee. Pay frequency is set by state law and varies widely across the country. You must check the specific labor regulations in the state where your employee performs their work, which may be different from the state where your business is headquartered if you hire remote staff.

The U.S. Department of Labor tracks these requirements and highlights the significant differences between jurisdictions. For example, California requires wages to be paid at least twice per calendar month on days designated in advance. Colorado requires employees to be paid monthly. Connecticut takes a stricter approach, requiring weekly payments unless a longer interval is approved by the labor commissioner.

Because these rules differ sharply from state to state, the Department of Labor notes that individuals should consult the relevant state labor office for official information. Choosing an established payroll provider that automatically alerts you to your state's minimum frequency laws can help prevent compliance failures and wage claims.

Step 5: Choose a payroll service for a single employee

Running manual payroll calculations for a single employee is technically possible but carries a high degree of risk. Tax rates change, filing deadlines are strict, and calculation mistakes result in government penalties. Using a dedicated software service automates wage withholding, tax payments, and year-end reporting.

Below is an alphabetical list of major payroll services available to small businesses. The order is alphabetical rather than a ranking. All prices noted are verified as of October 6, 2026.

ADP

ADP is a long-standing institution in the payroll space, handling operations for businesses ranging from single-employee startups to massive global enterprises. RUN Powered by ADP is their proprietary product tailored specifically for small businesses with 1 to 49 employees. ADP does not publish payroll pricing and quotes per business.

Gusto

Gusto offers a modern platform that bundles payroll processing, benefits administration, and human resources tools. It is highly regarded by small businesses seeking an intuitive, user-friendly interface. Gusto Simple costs $49 per month plus $6 per person. The Plus tier is $80 per month plus $12 per person, and Premium is $180 per month plus $22 per person.

OnPay

OnPay provides a full-service payroll product with a single, straightforward pricing tier that includes HR features and multi-state processing capabilities. It is designed to scale smoothly as your business grows. OnPay costs $49 per month plus $6 per worker. The public page quotes a start price of $55 per month, which accurately reflects the total cost for a business with one employee.

Patriot Software

Patriot Software focuses on delivering affordable, no-frills payroll functionality for small businesses. It is an exceptionally cost-effective option for a single-employee setup. Basic Payroll is $17 per month plus $4 per employee. Full Service, where Patriot handles your tax filings on your behalf, is $37 per month plus $5 per employee.

QuickBooks Payroll

QuickBooks Payroll integrates natively with QuickBooks Online, making it a logical choice for business owners already utilizing Intuit's accounting software suite. Workforce Payroll with Simple Start is $88 per month plus $6.50 per employee. The Essentials bundle is $125 per month plus $6.50 per employee, and Workforce Premium with Plus is $203 per month plus $10 per employee. They frequently offer 50 percent off the base price for three months, but this is a promotional rate and not the ongoing price.

Square Payroll

Square Payroll is built to synchronize seamlessly with the Square point-of-sale ecosystem. It is a highly competitive option for retail, salon, or food service businesses hiring their first staff member. Square Payroll costs $35 per month plus $6 per person. They also offer a contractor-only plan at $6 per contractor per month.

SurePayroll

SurePayroll, backed by Paychex, targets the very small business market, including niche needs like household employers. SurePayroll pricing starts from $29 per month plus $7 per worker. A multi-state add-on is available for $9.99 per month, and specialized household payroll plans start at $39 per month.

ZenBusiness

ZenBusiness handles the heavy lifting of business formation and compliance. It is the best starting point for a founder who needs an EIN and a business bank account before they can even think about running their first payroll. The Starter plan is $0 plus state fees. Pro is $199 and Premium is $299. The registered agent service is $199 per year, Money Pro for bookkeeping is $30 per month, and the website add-on is $129 per year. Pro and Premium renew at their annual prices, and the EIN and operating agreement are included from Pro up and are $99 each on Starter.

For actual wage payments, ZenBusiness partners with ADP. This means payroll itself is ADP's service, quoted by ADP per business, and not included in any ZenBusiness plan price. A ZenBusiness customer requests the connection from their dashboard, and an ADP representative follows up to discuss employee count and pay schedule to provide a quote. Customers may be eligible for promotional pricing through this partnership.

Note that ADP is a separate service with its own platform, its own billing, and its own support. The day-to-day payroll processing and tax filing happen entirely within ADP's system, not inside the ZenBusiness dashboard. This arrangement gives you a single place to form your entity and manage baseline compliance while relying on a specialized payroll giant to issue paychecks. If you only need to pay a single contractor, Square is hard to beat, and Patriot is cheaper at the very bottom end for simple payroll. However, if you are establishing a new entity and hiring an employee for the first time, securing your EIN through ZenBusiness and then requesting the ADP introduction from its dashboard keeps the setup steps in order.

Step 6: Process payroll and maintain records

Once the entity is legally formed, the worker is correctly classified, the required tax forms are signed, and the software is configured, you are ready to process wages. You will enter the hours worked or the agreed-upon salary amount into your provider's system. The software calculates gross pay, subtracts federal and state income taxes, deducts any employee benefits, and generates the final net pay amount for direct deposit or a printed check.

After the paycheck is issued, your obligations as an employer transition to strict recordkeeping. The federal government mandates specific retention periods for employment records to ensure workers are paid fairly and taxes are remitted properly. Under the Fair Labor Standards Act, payroll records must be kept for three years. Furthermore, the records that wage computations are based on, including time cards and wage rate tables, must be kept for two years.

Maintaining these records meticulously protects your business in the event of a regulatory audit or a labor dispute regarding overtime or minimum wage laws. Most modern payroll software platforms store these documents digitally, but you as the employer are ultimately responsible for ensuring they remain secure and accessible for the required timeframe.

Sources

This article provides general information rather than legal, tax, or accounting advice, and requirements vary and change.