How Do You Set Up Payroll for Your First Employee?

Setting up payroll for your first employee takes six things: an Employer Identification Number, registration with the Mississippi Department of Revenue and the Mississippi Department of Employment Security, a completed Form W-4 and Form I-9 from the employee, a written pay schedule, a payroll system that calculates and withholds tax, and a calendar of deposit and filing deadlines. Most of that is paperwork that can be finished in a week. The part that catches owners out is what comes after the first paycheck, because withheld tax has to be deposited on a federal schedule and reported quarterly, and missing those dates carries penalties that are entirely avoidable. This guide walks through the setup in order, explains what changes in the books once payroll exists, and covers the deadlines Ledger Group Services tracks for employers in Madison and across Mississippi.

Table of Contents

1. Before You Hire: Employee or Contractor?
2. Step 1: Get an EIN
3. Step 2: Register With Mississippi
4. Step 3: Collect the Employee’s Paperwork
5. Step 4: Choose a Pay Schedule
6. Step 5: Set Up Withholding and Run the First Check
7. Step 6: Learn Your Deposit and Filing Calendar
8. What Changes in Your Books
9. What the First Payroll Actually Costs You
10. Frequently Asked Questions

Before You Hire: Employee or Contractor?

This question has to be settled before anything else, because the answer decides whether payroll is needed at all. A contractor invoices, gets paid in full, and receives a 1099 at year end. An employee is paid wages with tax withheld and receives a W-2. Classifying someone as a contractor when the working relationship looks like employment is one of the more expensive mistakes a small employer can make, and the correction is retroactive.

The test turns on control: who decides when, where, and how the work is done, who supplies the tools, and whether the worker is free to serve other clients. Our post on employee versus independent contractor walks through the factors in detail. If the answer is employee, the rest of this guide applies.

Step 1: Get an EIN

An Employer Identification Number is the business equivalent of a Social Security number and every employer needs one. Applying online through the IRS takes a few minutes and the number is issued immediately at the end of the session. Sole proprietors who have been operating under their own Social Security number need an EIN before they can run payroll.

Do this first, because the state registrations in the next step ask for it.

Step 2: Register With Mississippi

Two state registrations are required before the first check. The first is with the Mississippi Department of Revenue for state income tax withholding, which produces a withholding account number. The second is with the Mississippi Department of Employment Security for state unemployment insurance, which produces an employer account number and an assigned contribution rate.

New employers receive a standard starting unemployment rate that adjusts over time based on claims experience. Both registrations are free. Both are easy to forget, and the consequence of forgetting is that tax is withheld from an employee with nowhere to remit it.

Step 3: Collect the Employee’s Paperwork

Three documents, collected before the first day or on it.

• Form W-4. Tells you how much federal income tax to withhold. Mississippi has its own withholding exemption certificate that serves the same purpose at the state level.
• Form I-9. Verifies the employee is authorized to work. It has to be completed within three business days of the start date and kept on file. It is not sent anywhere, but it must be produced on request.
• Direct deposit authorization and a voided check, if paying electronically.

New hires also have to be reported to the state new hire directory, generally within a short window of the start date. Most payroll systems file that report automatically once the employee record is created.

Step 4: Choose a Pay Schedule

Weekly, biweekly, semimonthly, or monthly. The choice matters more than it looks.

Biweekly means twenty six pay runs a year and two months that contain three of them, which surprises owners who budget payroll as a flat monthly figure. Semimonthly means twenty four runs on fixed dates, which is easier to budget but harder to calculate overtime against, since the pay period does not line up with the workweek. For hourly staff, weekly or biweekly is usually the cleaner choice.

Whatever you pick, put it in writing, and change it rarely. Employees plan around pay dates.

Step 5: Set Up Withholding and Run the First Check

Every paycheck splits into gross pay, what the employee has withheld, and what the employer owes on top. Withheld from the employee: federal income tax, state income tax, and the employee half of Social Security and Medicare. Owed by the employer on top of gross wages: the matching half of Social Security and Medicare, federal unemployment tax, and state unemployment tax.

The federal withholding tables and the employer rules live in IRS Publication 15, and the IRS also keeps a plain overview of employer obligations on its hiring employees page. Payroll software applies all of it automatically, which is the main argument for using software rather than a spreadsheet even for a single employee. Our post on payroll tax basics breaks down each component.

Run the first check a few days early in a test or preview mode. Confirm the net pay, the withholding amounts, and the employer taxes look sensible before money moves.

Step 6: Learn Your Deposit and Filing Calendar

This is the part that creates penalties, so it deserves attention.

Withheld federal tax plus the employer match is deposited on either a monthly or a semiweekly schedule. Which one applies is assigned by the IRS based on the tax reported during a prior lookback period, and nearly every first time employer starts on the monthly schedule. Deposits are made electronically. On top of the deposits, a quarterly return reports wages and taxes, an annual federal unemployment return is filed after year end, and W-2 forms go to employees and to the Social Security Administration in January. State withholding and unemployment have their own parallel deadlines.

Put every one of those dates on a calendar the day payroll is set up. Our compliance calendar covers the recurring filing dates a small business has to hit across the year.

What Changes in Your Books

Payroll adds accounts and a new monthly reconciliation. At minimum the books need a wages expense account, an employer payroll tax expense account, and separate liability accounts for federal withholding, state withholding, and the employer taxes owed but not yet deposited.

The liability accounts are the ones to watch. Money withheld from an employee is not the company’s money. It sits in a liability account until it is deposited, and that balance should return to zero on schedule every period. A withholding liability that keeps growing is the clearest early sign that deposits are being missed.

What the First Payroll Actually Costs You

Budget for more than the wage. Employer payroll taxes add a meaningful percentage on top of gross pay, and workers compensation insurance is required once there are employees. There is also the administrative time, which is small per pay run and constant.

Owners who plan only for the hourly rate are reliably short in the first quarter. Plan for the fully loaded cost instead, and the first employee stops being a cash flow surprise. Our guide to small business payroll covers the mistakes that show up after the first few months.

Frequently Asked Questions

How long does it take to set up payroll for your first employee?

The EIN is immediate. State registrations typically take a few business days to return account numbers. Plan for a week from start to first paycheck, and do not schedule a start date before the registrations are back.

Do I need payroll software for one employee?

It is strongly advisable. Software applies the current withholding tables, makes the deposits on schedule, and files the quarterly returns. Doing that by hand for one employee carries most of the risk of doing it for twenty.

Can I pay my first employee as a contractor to keep it simple?

Only if the relationship genuinely meets the contractor test. If you set the hours and direct the work, the worker is an employee, and misclassification is corrected with back taxes and penalties.

What happens if I miss a payroll tax deposit?

Penalties are assessed on a sliding scale that increases the longer the deposit is late, with interest on top. Deposit as soon as the miss is discovered rather than waiting for the quarterly return.

Ready to Hire Without the Payroll Headache?

Ledger Group Services handles payroll for employers in Madison, MS and across the state, from the first registration through the quarterly filings. Request a consultation and we will set it up before your new hire’s first day.