Hiring Your First Employee: Tax Compliance Checklist for Small Business

Going from "just me" to "me + 1 employee" is the single biggest compliance jump in a small business's life. Miss a step and you're paying penalties before the new hire's first paycheck.

Pre-hire checklist (one-time setup)

1. Get an EIN File Form SS-4 online — free, instant. Most banks already require this even for sole props.

2. Register for state unemployment (SUTA) Each state has its own portal:

• California: EDD e-Services
• Texas: TWC Unemployment Tax
• New York: NYS DOL
• Florida: Florida DOR

3. Register for state income tax withholding Required in 41 states + DC. The same portals usually handle this.

4. Workers' compensation insurance Required in 49 states (Texas is the only state where it's optional, but most employers carry it). Get quotes from your business insurance broker; cost varies wildly by industry.

5. Disability/paid family leave (CA, NY, NJ, MA, RI, HI, CT, OR, CO, WA, DC) Separate from SUTA. Withholding rates and rules vary by state.

6. Set up a payroll provider DIY payroll is technically possible but rarely worth it. Standard options:

• Gusto — best for SMBs, $40 base + $6/employee/mo
• Rippling — better for growing teams, ~$8/employee/mo
• ADP RUN — older but reliable
• QuickBooks Payroll — integrated with QB if you use it

Day-of-hire checklist (per employee)

1. Form W-4 — Employee's Withholding Certificate The employee fills it out. You use it to calculate federal income tax withholding. Pub 15-T has the percentage tables.

2. Form I-9 — Employment Eligibility Verification USCIS Form I-9 verifies the employee can legally work in the US. Must be completed within 3 business days of start date. Keep on file for 3 years from hire date OR 1 year after termination, whichever is later. Penalties for missing I-9s: $272–$2,701 per violation (2025 amount).

3. State withholding form (if applicable) Most states have their own version (CA DE 4, NY IT-2104, etc.).

4. New Hire Report Per the Personal Responsibility and Work Opportunity Reconciliation Act, report each new hire to your state's directory within 20 days of hire date. Used for child support enforcement.

5. Direct deposit authorization (best practice — most employees prefer it)

Ongoing compliance

Each pay period — withhold and pay:

• Federal income tax (employee's W-4)
• Social Security 6.2% (employee) + 6.2% (employer) on wages up to $176,100 (2025 cap)
• Medicare 1.45% (employee) + 1.45% (employer) on all wages
• Additional Medicare 0.9% on employee wages > $200K (employee only)
• State income tax
• State disability/PFL where applicable

Each quarter:

• Form 941 — federal payroll tax return. Due April 30, July 31, Oct 31, Jan 31.
• State unemployment return (varies by state)
• State income tax withholding return
• Pay accumulated FICA + withholding via EFTPS

Each year:

• W-2 — issued to employee by Jan 31. Sent to SSA + state by Jan 31.
• W-3 — transmittal of W-2s to SSA
• Form 940 — annual FUTA (Federal Unemployment Tax). 6% on first $7K of wages per employee, less a 5.4% credit for SUTA payments → effective 0.6% in most cases.
• 1099-NEC for any contractor paid ≥ $600 (separate from employees)

The 2 biggest penalty traps

1. Trust Fund Recovery Penalty (TFRP) If you withhold employee FICA + federal income tax and DON'T remit it to the IRS, the IRS can pursue YOU PERSONALLY under IRC § 6672 — even if your business is an LLC or corporation. 100% penalty on top of the underlying tax. This is one of the only situations where corporate veil protection doesn't apply.

2. Late deposit penalties Per IRC § 6656:

• 1-5 days late: 2%
• 6-15 days late: 5%
• 16+ days late: 10%
• Notice issued: 15%

If you accumulate $50K+ in payroll taxes, you must use EFTPS for same-day deposits. Smaller employers deposit semi-weekly or monthly.

Cost of one employee, fully loaded

For an employee paid $60,000/year in California:

Item	Annual cost
Gross wages	$60,000
Employer FICA (7.65%)	$4,590
FUTA	$42
CA SUTA + ETT	~$840
Workers' comp (~3%)	~$1,800
Health insurance (typical employer share)	$7,000
Payroll service	$500
Total cost	~$74,772

Roughly 25% on top of base salary in low-cost states; 30-40% in high-cost states with mandated benefits.

How Accountaxed handles it

Accountaxed integrates with Gusto and Rippling via CSV export, categorizes payroll runs as Wages, employer taxes as Taxes & Licenses, and benefits as Employee Benefits. Your IRS forms (Form 1120-S Line 7-8, Schedule C Line 26) populate automatically.

Set up payroll integration → · IRS Pub 15 Employer's Tax Guide