Payroll Essentials for US Startups Hiring Their First Employees

Hiring your first employees is an exciting milestone for your startup, but it also brings new responsibilities. Payroll is one of the most critical areas to manage properly from the beginning. Mistakes in payroll can lead to compliance issues, financial penalties, and unhappy employees.

Payroll services are essential to ensure your employees are paid accurately and on time while adhering to legal requirements. Let’s explore the key payroll essentials every US startup needs to know.

Setting Up Payroll Correctly

Before you issue your first paycheck, you need to ensure your payroll system is set up properly. Here’s how to do it:

Register with Tax Authorities

• Employer Identification Number (EIN): Obtain an EIN from the IRS. This is required for reporting taxes.
• State Requirements: Register with your state’s labor and tax agencies to handle unemployment insurance, state income tax withholding, and other requirements.

Classify Your Workers

• Employees vs. Contractors: Misclassifying workers can lead to significant fines. Employees are subject to payroll taxes, while contractors are not.
• Exempt vs. Non-Exempt Employees: Determine which employees are exempt from overtime pay under the Fair Labor Standards Act (FLSA).

Choose a Payroll System

• Manual Payroll: Suitable for very small teams but prone to errors.
• Payroll Software: Automates calculations, tax filings, and record-keeping.
• Outsourced Payroll Services: Ideal for startups that want to save time and ensure compliance.

Understanding Payroll Components

Payroll isn’t just about writing checks. It involves several components that you need to manage meticulously:

Gross Pay vs. Net Pay

• Gross Pay: Total earnings before deductions (e.g., salary, hourly wages, bonuses).
• Net Pay: Take-home pay after deductions like taxes and benefits.

Tax Withholdings

• Federal Income Tax: Withheld based on IRS Form W-4 completed by your employee.
• Social Security and Medicare (FICA): Both employer and employee contribute 6.2% for Social Security and 1.45% for Medicare.
• State and Local Taxes: Vary by state and locality; check your specific requirements.

✅ Don’t risk costly payroll penalties. Let our experts manage your payroll compliance end-to-end. Learn about our service here.

Employee Benefits

• Health Insurance: If you offer health benefits, these premiums are often deducted pre-tax.
• Retirement Plans: Contributions to 401(k) plans or similar accounts may also be deducted pre-tax.

Overtime and Bonuses

• Overtime Rules: Non-exempt employees must be paid 1.5 times their regular rate for hours worked over 40 in a week.
• Bonuses: These are considered part of taxable wages.

Staying Compliant with Payroll Regulations

Compliance is critical in payroll to avoid fines and legal issues. Here’s what to keep in mind:

Maintain Accurate Records

• Retention Period: Keep payroll records for at least three years.
• What to Keep: Time sheets, wage calculations, tax filings, and employee information.

Meet Payroll Tax Deadlines

• Deposit Schedules: Follow the IRS deposit schedule (monthly or semi-weekly) for federal payroll taxes.
• Quarterly Filings: File IRS Form 941 quarterly to report income taxes and FICA contributions.
• Annual Filings: Issue W-2 forms to employees and file W-3 forms with the Social Security Administration.

Follow State-Specific Laws

• Minimum Wage: Ensure you meet the federal or state minimum wage, whichever is higher.
• Pay Frequency: Adhere to your state’s rules on how often employees must be paid.

Worker’s Compensation Insurance

Required in most states, this insurance covers employees in case of work-related injuries.

Summary

Managing payroll for the first time can feel overwhelming, but getting it right is essential for your startup’s success. It’s important to set up your payroll system correctly by registering with the tax authorities, classifying workers properly, and choosing the right payroll system. Understanding the various payroll components, including gross pay, net pay, tax withholdings, employee benefits, overtime, and bonuses, will help ensure accuracy.

Expert Payroll Services, Zero Hassle

Running payroll shouldn’t keep you up at night. Our in-house payroll team handles all the complexities—from withholding calculations to tax deposits. We ensure compliance, manage deadlines, and keep your books updated automatically.

Get comprehensive payroll support without the need for multiple providers. Your dedicated Customer Success Manager is just a message away for any questions.

Ready to get started? Chat with us now, email [email protected], or use our contact form.