How to Properly Put an Employee on Payroll

Properly onboarding a new employee involves accurately integrating them into the payroll system. This process is fundamental for legal compliance, employee satisfaction, and business financial health. Meticulous payroll setup prevents issues like incorrect tax withholdings, penalties, and employee disputes. Establishing a robust payroll foundation streamlines operations.

Establishing Employer Accounts and Gathering Employee Information

Before processing payroll, employers must establish necessary accounts with government agencies and collect specific information from each new employee. A Federal Employer Identification Number (EIN) is the business’s federal tax ID, essential for federal tax purposes, including hiring employees. It can be obtained free from the IRS website.

Businesses must also register with relevant state agencies for state unemployment taxes and state income tax withholding, which vary by jurisdiction. Contact your state’s Department of Labor and Department of Revenue for specific requirements and state tax identification numbers. These registrations ensure compliance with local tax and unemployment insurance laws.

Once employer accounts are established, collecting accurate employee information is the next step. Two forms are important: Form W-4, Employee’s Withholding Certificate, and Form I-9, Employment Eligibility Verification.

Form W-4 is completed by the employee to determine the correct amount of federal income tax to withhold from their wages. Employees indicate their tax filing status, account for multiple jobs, claim dependents, and note any additional withholding or deductions.

Form I-9 verifies an employee’s identity and authorization to work in the United States. Employers must complete their portion, examine original documents, and record the information. Employees provide one document from List A (identity and employment authorization) or one from List B (identity) and one from List C (employment authorization). Examples include a U.S. passport (List A) or a driver’s license (List B) combined with a Social Security card (List C).

Employers should also gather the employee’s full legal name, current address, and Social Security number. For direct deposit, bank information including the bank name, routing number, and account number is necessary. Collecting this information ensures accurate and compliant payroll processing.

Setting Up Your Payroll System and Calculations

After establishing employer accounts and gathering employee information, the next phase involves setting up the payroll system and performing calculations. Businesses have several options for managing payroll, from manual processing to specialized software or full-service providers. The choice depends on factors like business size, payroll complexity, and budget.

Gross pay is the total amount an employee earns before deductions, encompassing wages, salaries, commissions, and bonuses. This figure is the baseline for all calculations. Various deductions are subtracted from gross pay to arrive at the employee’s net pay.

Deductions can be categorized as pre-tax or post-tax. Pre-tax deductions, such as health insurance premiums, Section 125 plans, and contributions to traditional 401(k) retirement plans, are subtracted from gross pay before income taxes are calculated, reducing the employee’s taxable income. Post-tax deductions, like wage garnishments, union dues, or Roth 401(k) contributions, are taken out after taxes have been calculated and withheld.

Calculating payroll taxes involves both employee and employer contributions. Employee-paid taxes include federal income tax withholding, determined using the employee’s Form W-4 and IRS tax tables. Social Security and Medicare taxes, known as FICA taxes, are also withheld.

For 2025, the Social Security tax rate is 6.2% for both employee and employer, applied to wages up to a limit of $176,100. The Medicare tax rate is 1.45% for both, with no wage limit. An additional Medicare Tax of 0.9% applies to wages exceeding $200,000, paid only by the employee.

Employers also pay their share of FICA taxes, matching employee contributions. Additionally, employers are responsible for Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) taxes. FUTA is 6.0% on the first $7,000 of wages, though credits can reduce this rate. SUTA rates vary by state and employer experience. After all deductions and taxes, the remaining amount is the employee’s net pay.

Meeting Ongoing Payroll Obligations

After payroll calculation and employee payment, employers have continuing obligations for federal and state compliance. A primary responsibility is timely remittance of payroll taxes to government agencies. Federal payroll taxes, including withheld income, Social Security, and Medicare taxes, are deposited using the Electronic Federal Tax Payment System (EFTPS). Deposit schedules vary, and penalties can be assessed for late or incorrect deposits.

State payroll taxes, such as state income tax withholding and state unemployment taxes, must also be remitted according to state-specific requirements. Each state may have its own payment portal or method and varying deposit frequencies. Consult your state’s tax authority for precise instructions to avoid non-compliance issues.

New hire reporting is another ongoing requirement. Federal law mandates reporting basic information about new and rehired employees to a designated state agency within 20 days of hire. This reporting aids child support enforcement. Information typically includes the employee’s name, address, Social Security number, and the employer’s name, address, and Federal Employer Identification Number.

Maintaining comprehensive payroll records is essential for compliance and audits. Employers must retain various documents, including payroll registers, timecards, tax forms like Form W-4, Form W-2, and Form 941, and employment agreements. The IRS requires employment tax records to be kept for at least four years after the tax due date or payment date. The Fair Labor Standards Act (FLSA) requires retention of payroll records for a minimum of three years, with supporting wage computation records for two years.

Employers are required to file periodic payroll tax returns. This includes quarterly filings of Form 941, Employer’s Quarterly Federal Tax Return, which reports income, Social Security, and Medicare taxes withheld, plus the employer’s share. Annually, employers must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, and provide employees with Form W-2, Wage and Tax Statement, summarizing their annual earnings and tax withholdings.