You’re ready to hire.
You need payroll systems.
You want compliance.
You need a checklist.
EIN setup. State IDs. Payroll systems. Compliance. Your preparation.
This guide shows you how.
Complete checklist. Setup requirements. System configuration. Your readiness.
Read this. Complete the checklist. Post your job.
Key Takeaways
- Get your EIN first—EIN is required for payroll, tax withholding, and employee reporting before you can legally hire
- Register for state tax IDs—state unemployment insurance, income tax withholding, and workers' compensation require separate state registrations
- Choose payroll software—select payroll software that integrates with your EIN and handles tax calculations and reporting
- Set up direct deposit—configure direct deposit systems to pay employees efficiently and comply with payment requirements
- Test your systems—verify payroll calculations, tax withholdings, and reporting before processing your first payroll
Table of Contents
Why Setup Matters
Setup ensures legal compliance.
What happens without setup:
- Payroll violations occur
- Tax compliance issues arise
- Legal problems develop
- Employee payment delays
What happens with setup:
- Payroll runs smoothly
- Tax compliance is maintained
- Legal requirements are met
- Employees are paid on time
The reality: Setup prevents problems.
EIN Setup
Complete EIN setup:
Get Your EIN
What to do:
- Apply for EIN
- Provide business information
- Submit required documents
- Receive confirmation
Why it matters: EIN is required for payroll.
Verify EIN Status
What to verify:
- EIN is active
- Information is correct
- Documents are filed
- Records are updated
Why it matters: Verification prevents problems.
Update EIN Records
What to update:
- Business address
- Responsible party
- Entity information
- Contact details
Why it matters: Updated records ensure accuracy.
Pro tip: Complete EIN setup. Get EIN, verify status, update records. See our EIN guide for application.
State IDs
Register for state IDs:
State Unemployment Insurance
What to register:
- State unemployment account
- Employer account number
- Tax rate information
- Reporting requirements
Why it matters: Unemployment insurance is required.
State Income Tax Withholding
What to register:
- State tax account
- Withholding registration
- Tax rate information
- Reporting requirements
Why it matters: Income tax withholding is required.
Workers’ Compensation
What to register:
- Workers’ comp account
- Coverage requirements
- Premium information
- Reporting requirements
Why it matters: Workers’ compensation is required.
Pro tip: Register for all state IDs. Unemployment, income tax, workers’ comp. See our hiring guide for state requirements.
Payroll Systems
Set up payroll systems:
Choose Payroll Software
What to choose:
- Software that integrates with EIN
- Tax calculation capabilities
- Reporting features
- Employee self-service
Why it matters: Software enables payroll processing.
Configure Tax Settings
What to configure:
- Federal tax settings
- State tax settings
- Local tax settings
- Withholding calculations
Why it matters: Tax settings ensure accuracy.
Set Up Direct Deposit
What to set up:
- Bank account information
- Direct deposit authorization
- Payment schedules
- Employee enrollment
Why it matters: Direct deposit enables efficient payment.
Pro tip: Set up payroll systems. Choose software, configure taxes, set up direct deposit. See our hiring guide for payroll setup.
Compliance Requirements
Meet compliance requirements:
Federal Requirements
What to comply with:
- Federal income tax withholding
- Social Security and Medicare taxes
- Federal unemployment tax
- Employee reporting
Why it matters: Federal compliance is required.
State Requirements
What to comply with:
- State income tax withholding
- State unemployment insurance
- Workers’ compensation
- State reporting
Why it matters: State compliance is required.
Record Keeping
What to keep:
- Employee records
- Payroll records
- Tax records
- Compliance documents
Why it matters: Record keeping supports compliance.
Pro tip: Meet all requirements. Federal, state, record keeping. See our hiring guide for compliance.
Testing and Verification
Test and verify systems:
Test Payroll Calculations
What to test:
- Gross pay calculations
- Tax withholding calculations
- Net pay calculations
- Deduction calculations
Why it matters: Testing ensures accuracy.
Verify Tax Withholdings
What to verify:
- Federal tax withholdings
- State tax withholdings
- Local tax withholdings
- Total withholdings
Why it matters: Verification prevents errors.
Test Reporting
What to test:
- Payroll reports
- Tax reports
- Employee reports
- Compliance reports
Why it matters: Testing ensures proper reporting.
Pro tip: Test everything. Calculations, withholdings, reporting. See our hiring guide for testing.
Your Next Steps
Complete the checklist. Set up systems. Post your job.
This Week:
- Review this checklist
- Get your EIN
- Register for state IDs
- Choose payroll software
This Month:
- Complete EIN setup
- Register for all state IDs
- Set up payroll systems
- Test and verify systems
Going Forward:
- Process payroll regularly
- Maintain compliance
- Update systems as needed
- Scale your payroll
Need help? Check out our EIN application guide for getting your EIN quickly, our hiring guide for employee requirements, our timeline guide for hiring phases, and our registered agent guide for business address setup.
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FAQs - Frequently Asked Questions About Payroll Setup Basics: EIN, State IDs, and Systems You Need Before Posting a Job
Why do you need an EIN before you can legally set up payroll and hire employees?
An EIN is required for federal tax withholding, employee reporting, and payroll processing—without it, you can't legally pay employees or file payroll taxes.
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The Employer Identification Number (EIN) is your business's tax identity with the IRS. Payroll software requires it to calculate and withhold federal income taxes, Social Security, and Medicare from employee paychecks.
You also need the EIN to file payroll tax returns (Form 941), issue W-2s to employees, and report payments to the IRS. Banks require it to set up business accounts for direct deposit processing.
Attempting to hire without an EIN means you can't legally withhold taxes, can't report wages, and can't process compliant payroll. Get your EIN first, verify it's active and correct, then proceed with the rest of your payroll setup.
What state-level registrations are required before running payroll?
You need a state unemployment insurance account, state income tax withholding registration, and workers' compensation coverage before processing your first payroll.
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State unemployment insurance (SUI) registration gives you an employer account number and establishes your tax rate for unemployment contributions. This is separate from your federal EIN and must be set up with your state's labor or employment department.
State income tax withholding registration establishes your account for withholding and remitting state income taxes from employee wages. Some states also require local income tax registration.
Workers' compensation insurance is required in most states and must be obtained before your first employee starts. Coverage requirements and premium rates vary by state and industry. Without all three registrations, your payroll isn't compliant even if your EIN is active.
What should you look for when choosing payroll software for your first hire?
Choose software that integrates with your EIN, handles federal and state tax calculations automatically, offers reporting features, and provides employee self-service options.
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The most important feature is reliable tax calculation—the software must accurately calculate federal income tax, Social Security, Medicare, state income tax, and any local taxes based on current rates and employee W-4 information.
Look for EIN integration so the software connects your tax ID to all filings and payments. Reporting features should include payroll reports, tax reports, and employee records. Direct deposit capability is essential for efficient payment processing.
Employee self-service—where employees can access pay stubs, update their information, and view tax documents—saves you administrative time. Start with a simple, reliable solution rather than the most feature-rich option, and scale up as your team grows.
What compliance requirements must be met for both federal and state payroll taxes?
Federal requires income tax withholding, Social Security/Medicare taxes, unemployment tax, and employee reporting. States add state income tax, state unemployment, and workers' compensation requirements.
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Federal compliance involves withholding federal income tax based on employee W-4 forms, calculating and withholding Social Security (6.2%) and Medicare (1.45%) taxes with matching employer contributions, paying Federal Unemployment Tax (FUTA), and reporting all employee wages.
State compliance adds state income tax withholding (rates vary by state), State Unemployment Insurance contributions (rates vary by employer history), and workers' compensation insurance premiums.
Record keeping is critical for both levels—you must maintain employee records, payroll records, tax records, and compliance documents. Federal and state agencies can audit payroll records, so organized documentation protects your business.
How should you test payroll systems before processing your first actual payroll?
Run test calculations for gross pay, tax withholdings, net pay, and deductions, then verify the numbers match manual calculations and that reporting functions generate correct outputs.
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Start by testing payroll calculations: enter a sample employee with known wages and withholding information, then verify that gross pay, federal tax withholding, Social Security, Medicare, state taxes, and net pay all calculate correctly.
Verify tax withholdings specifically by comparing the software's output against IRS Publication 15 (federal) and your state's withholding tables. Discrepancies at this stage are much cheaper to fix than after actual paychecks go out.
Test reporting functions by generating sample payroll reports, tax reports, and employee reports. Verify the numbers reconcile and that formats match what federal and state agencies require. If possible, process a test payroll run before your first live payroll to confirm end-to-end functionality.
What is the complete setup checklist a business owner should follow before posting their first job?
Get your EIN, register for state unemployment and tax accounts, obtain workers' compensation, choose and configure payroll software, set up direct deposit, and test all systems.
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The checklist begins with EIN setup: apply for your EIN, verify it's active, and update records to ensure accuracy. Then register for all required state IDs—state unemployment insurance, state income tax withholding, and workers' compensation.
Next, set up your payroll infrastructure: choose payroll software, configure federal and state tax settings, set up direct deposit with bank account information and employee enrollment, and configure payment schedules.
Finally, test everything before going live: verify payroll calculations, confirm tax withholdings match requirements, test reporting functions, and run a sample payroll. Only after all systems are verified should you post your job listing and begin hiring.
Sources & Additional Information
This guide provides general information about payroll setup requirements. Your specific situation may require different considerations.
For EIN application, see our EIN Application Guide.
For hiring employees, see our Hiring Guide.
For hiring timeline, see our Timeline Guide.
For registered agent services, see our Registered Agent Guide.
Consult with professionals for advice specific to your situation.
