Payroll tax rates, thresholds, and deadlines change from year to year. Figures below reflect 2026 federal rules as of publication — always confirm current numbers with the IRS or a licensed payroll professional before filing.
You've decided to hire your first employee. Congratulations — that's a real milestone. It also means you've just inherited a stack of federal requirements you didn't have to think about when it was just you.
Payroll for small business sounds intimidating because it's usually explained in acronyms. Let's walk through it in plain English instead — what you actually need to do, in the order you need to do it.
Getting Payroll for Small Business Right From the Start
If you don't already have an Employer Identification Number, get one before your first hire. You'll need it for every payroll tax filing that follows — think of it as your business's Social Security number for tax purposes.
The Paperwork Every New Hire Needs
Form W-4 — tells you how much federal income tax to withhold from their paycheck. They fill this out on or before day one.
Form I-9 — verifies the employee is legally allowed to work in the US. They complete Section 1 by their first day; you complete Section 2 within 3 business days of their start date. There's no grace period on this one — penalties start at a few hundred dollars per form for simple paperwork errors, and climb sharply for willful violations.
State new-hire reporting — federal law requires you to report every new hire to your state's new-hire directory within 20 days (some states require it sooner — check yours). Most of what's needed is already on the W-4: name, address, Social Security number, hire date, and your EIN.
Imagine hiring someone, getting busy with the day-to-day, and forgetting this last step entirely. It happens more than you'd think, and the penalty compounds per hire you miss. Set a reminder the day you make an offer, not the day they start.
What You're Actually Withholding and Paying
Once your employee is on the books, every paycheck involves two separate obligations: what you withhold from their pay, and what you owe on top of it.
FICA (Social Security and Medicare): You withhold 6.2% for Social Security and 1.45% for Medicare from the employee's wages — and you match both amounts yourself. That's 7.65% withheld, plus another 7.65% you pay as the employer, for 15.3% combined. Social Security tax stops once an employee's wages hit the annual wage base ($184,500 for 2026); Medicare has no cap.
FUTA (federal unemployment tax): This one's on you alone — employees don't pay it. The rate is 6.0% on the first $7,000 of each employee's wages, but most employers get a credit of up to 5.4% for paying state unemployment tax on time, bringing the effective rate down to 0.6% — roughly $42 per employee per year.
State taxes: Your state almost certainly has its own income tax withholding and unemployment insurance requirements on top of the federal ones. These vary enough by state that they're worth a separate conversation with a local payroll resource or your accountant.
The Filing Rhythm
Form 941 (quarterly): Reports the federal income tax, Social Security, and Medicare tax you've withheld and owe. Due the last day of the month after each quarter ends — so April 30, July 31, October 31 (or the next business day), and January 31 (or the next business day). If you've made all your tax deposits on time during the quarter, you get an extra 10 days to file.
Form 940 (annual): Reports your FUTA tax for the year, due January 31.
W-2s (annual): Due to both your employees and the Social Security Administration by January 31.
Depending on how much payroll tax you owe, the IRS may also require you to make deposits monthly or semiweekly throughout the quarter, separate from the Form 941 filing itself — this is determined by a lookback period the IRS calculates for you.
Should You Run Payroll Yourself?
You can, especially with just one or two employees — but the tradeoff is real. Payroll software (Gusto, QuickBooks Payroll, and similar tools) handles the tax calculations, filing deadlines, and deposits automatically for a monthly fee, which for most first-time employers is worth the peace of mind. Running it manually means owning every deadline and calculation yourself, with real financial penalties if something slips.
Neither choice is wrong — it depends on how much time you have and how comfortable you are owning the compliance side directly.
One Classification Question to Settle First
Before any of this applies, make sure the person you're bringing on is actually an employee and not a contractor — the requirements above are for W-2 employees only. If you're not sure which one fits, see our guide on how to tell W-2 from 1099.
Getting your first hire's paperwork right sets the pattern for every hire after it — a little care up front saves you a much bigger headache later.
If running payroll yourself feels like more than you want to take on, that's exactly the kind of conversation AccountAble Academy's Command the Conversation module prepares you to have with a CPA — knowing what to ask and what to hand off. See what's inside the course.