Hiring a first employee before year-end? How to set up payroll in 8 steps

You just hired a seasonal weekend worker to start in November, just in time for the holiday rush. It's your first employee, and you're not sure what comes next. The good news is that setup follows a fixed order, regardless of how many employees you have or what type of business you run, and it starts with one federal number. Eight steps get your first hire set up and paid on time, and a handful of federal dates keep you on track once the holidays wind down.

Here's how to set up payroll for a hire late in the year, based on Xero’s guide to small business payroll.

1. Apply for an employer identification number (EIN)

Applying for an EIN means getting the federal ID for your business's employment taxes. Think of it as a Social Security number for your business. Every form you file depends on it, so it comes before anything else in payroll.

Even a single weekend hire puts you on payroll, and the IRS requires an EIN once you have employees. If you've run the business on your own until now, that first hire is when the number becomes necessary, and gives each later step a business identity to attach to. You can apply online through the IRS website and the number is created immediately. Before you start the application, have all the details it asks for handy, such as your Social Security number, legal business name and entity type.

With the EIN in hand, this step is done, and a first-hire checklist covers the rest of the pre-hire paperwork. But don't wait until right before your employee's start date to apply, as the EIN is just the first step in the hiring process. Applying early leaves room for the state registration that comes next.

2. Register with state tax agencies

Registering with state tax agencies means opening your business's payroll accounts with the state. The EIN covers federal taxes, but each state runs its own withholding and unemployment insurance accounts. Those accounts are where the state taxes from each paycheck go. You register for state withholding, where it applies, and unemployment insurance. The withholding account collects the state income tax you take out of your employee's pay, while the unemployment insurance account is where your business pays into the state fund that supports workers who lose their jobs.

Then you report your new hire to the state directory. Federal rules allow 20 days for that report, and some states require it sooner. Filing it around the same time as your registration means one fewer date to track once the holiday rush starts. Once both accounts exist and the hire is reported, the state side is set and the paperwork moves to your employee.

3. Collect employee paperwork

Up next is collecting two forms from your new hire: a W-4 and I-9. These are usually filled out on the employee's first day. One sets how much tax comes out of each paycheck, and the other confirms your hire is eligible for the job.

The completed W-4 sets federal withholding, so you withhold the correct federal income tax from your employee's pay. They fill it out based on their own tax situation, and you enter the details into payroll. The I-9 confirms they're authorized to work in the U.S. Your employee completes Section 1 of the I-9, stating their work authorization status. You then have three business days to complete Section 2, where you review their identity and employment authorization documents (either a passport, or a driver's license plus a Social Security card) and record the information.

For a weekend worker, reviewing the documents during that first shift keeps you well inside the window. With both forms complete, you have what you need to calculate pay and a record showing your hire is eligible to work. This step wraps up when Section 2 is signed, which leaves just one more decision about the role itself.

4. Classify each employee correctly

It's now time to classify your employee as exempt or nonexempt. While you've likely already made this distinction during the hiring process, deciding if the employee is hourly or salary, you'll need to confirm it for payroll. Classifying each employee correctly means marking the role exempt or nonexempt, and that label decides who earns overtime. You make the choice once per role, and every paycheck for that role follows from it.

Nonexempt employees earn overtime and are often paid hourly, with time-and-a-half past 40 hours a week. Exempt employees draw a fixed salary regardless of hours, as long as the role passes federal salary and duties tests. The classification tells you or your payroll system whether to pay from tracked hours or a set salary.

To classify the role, look at how you pay it and what the job involves, then pick the label that fits. A counter worker paid by the hour to ring up holiday orders sits in the nonexempt category. Because that pay depends on hours, you track every hour your employee works from the first shift. Settling it upfront means your employee gets the pay they've earned, and you budget for busy weeks before they arrive. So you need to set this classification before the employee's first shift, then you can move on to when each paycheck goes out.

5. Choose a pay schedule

Now that you've hired your employee and submitted the necessary paperwork, they're ready to start working. But you'll need to pay them on a schedule, so up next is choosing your pay frequency.

Before you decide, check your state's minimum pay frequency requirements. State laws set how often employers must pay, and requirements vary. Some states require employees to be paid weekly, while others might only require monthly. Your state sets the minimum frequency, but you can pay more often than that if you want.

Once you know what's allowed, pick the schedule that works best for your cash flow based on your income and expenses: weekly, biweekly, semi-monthly or monthly. Weekly pay suits hourly seasonal work, since each check covers the week just worked, but it means running payroll every week. Biweekly pays every other week, which cuts the number of runs in half.

Semi-monthly pay lands on two fixed dates each month, like the 1st and 15th, which often lines up with monthly bills but splits some work weeks across two periods. Monthly pay means the fewest runs, though your employee waits longest between checks and the entire month's payroll hits as one lump sum, which can strain cash flow if you haven't set aside enough to cover it.

That rhythm makes every payday predictable for you and your employee. It also tells you exactly when money needs to be ready, which is where the next step helps.

6. Open a dedicated payroll bank account

Opening a dedicated payroll bank account keeps payroll money apart from day-to-day spending. It's a second business account used only for wages and payroll taxes. It isn't required, but it helps you always have money set aside to cover payroll for your employee and any payroll taxes owed, especially during the holiday season when operating costs can swing with inventory or unexpected expenses.

Picture a landscaper replacing a mower or a bakery stocking up for holiday orders. They see their operating balance drop fast. That's why payroll gets its own account, opened under the business name and EIN, where those swings don't reach it. Withheld taxes wait there until they're deposited, which makes every payroll dollar easy to trace at filing time. A separate account is a practical way to keep any payroll tax money out of everyday spending. When filing time comes, the account statement shows each run and deposit in one place.

A transfer scheduled before each payday keeps the account funded. Time it to the pay schedule you set in Step 5 so the money is in place before wages go out. You see at a glance whether payroll is covered, without digging through your operating account.

7. Pick a payroll solution

Now that you have an employee, who (or what) is going to be in charge of calculating pay and taxes? There are three main options: doing it yourself by hand, using payroll software, or hiring an accountant or payroll service. Each has trade-offs in cost, time and risk.

Doing it yourself costs nothing beyond your time, but you are responsible for every calculation, deposit and filing. You calculate gross pay, withholding and employer taxes, then make deposits and file quarterly returns yourself. One missed deadline or math error is your problem, and the IRS won't waive penalties because you're new. The upside is full control and no monthly fees. The downside is that tax tables change, deposit schedules shift with payroll size, and a single mistake can cost more than a year of software.

Payroll software automates the math, tracks deadlines and often handles deposits and filings for you. Monthly fees typically run $40-$150 depending on features and employee count, but the software calculates withholding, reminds you of deposit dates and generates tax forms. You still review each run and approve payments, but the software catches calculation errors before they reach the IRS. The trade-off is the recurring cost and a learning curve as you set up each employee.

Hiring an accountant or full-service payroll provider costs the most, often $100-$300 per month for a single employee, but moves every task off your plate. They process payroll, make deposits, file returns and handle corrections. You send hours worked and approve the final numbers. It's the safest option if you're unsure about tax rules, but you pay for that peace of mind every month.

The method matters less than having one person own each deadline, and you can always start with one and move to another as employee headcount grows or your time becomes more valuable. Whichever you choose, the W-4, pay rate and bank details go in before the first pay period. A payroll compliance overview lists what any method has to cover.

8. Run the first payroll

Your employee's payday has arrived, and it's finally time for the first pay run. Running payroll means turning the hours worked into a paycheck: gross pay, minus withholding, paid out as net pay. It's the moment every earlier step comes together in a single run.

As a first-time employer, you're set on a monthly tax deposit schedule for your first calendar year. This means payroll taxes are due by the 15th of the next month. So November's taxes are due Dec. 15, and December's are due Jan. 15, 2027. Every payroll run you approve in December feeds into January's deposit. If your tax total for the quarter ends up under $2,500, you can pay payroll taxes with your quarterly Form 941 instead of making a separate deposit. The IRS Employer's Tax Guide has the full details.

As you check that first run, your business also owes its own employer share of Social Security and Medicare taxes, a total of 7.65% of wages. It matches what's withheld from your employee's paycheck, so each run costs more than gross wages. Seeing that full cost on the first run shows you what every future payday takes from your account.

You compare withholding against the W-4, save the pay stub and payroll register, and set deposit reminders before calling the run complete. The first run is the pattern for every run after it, so an error you catch now won't carry into later paychecks. The saved records give you the numbers needed for your quarterly and year-end filings, already in one place.

Which payroll deadlines come next after a year-end hire?

Once the costs are clear, the calendar takes over. A late 2026 hire brings these federal dates:

• Fourth-quarter Form 941 quarterly tax and Form 940 annual FUTA return are due Feb. 1, 2027
• W-2s go to employees and the Social Security Administration by Feb. 1, 2027
• The IRS wants employment tax records kept at least four years.

If you work through these eight steps, you'll be ready for your first payday before year-end. This week, gather your Social Security number, legal business name and entity type, then start the EIN application. Next, put the first deposit date from Step 8 on your calendar.

This story was produced by Xero and reviewed and distributed by Stacker.