Essential Tax Compliance Checklist for New Employers

Why this checklist matters

Starting payroll creates a new set of legal and administrative obligations. In my 15+ years advising small businesses, the most common and costly errors arise from missed deadlines, wrong worker classification, and weak payroll controls. This checklist is a practical, prioritized playbook to help new employers meet federal and state tax obligations, avoid fines, and reduce audit risk.

Sources cited in this guide include the Internal Revenue Service (IRS), U.S. Small Business Administration (SBA), and USA.gov. This is educational information and not individualized tax or legal advice — consult a CPA or tax attorney for your situation.

Quick checklist (one-page view)

Before hiring:

  • Apply for an Employer Identification Number (EIN) from the IRS.
  • Choose a business structure and confirm tax treatment.
  • Register with your state tax agency for payroll and unemployment accounts.
  • Evaluate worker classification (employee vs. independent contractor).

At hiring and pay start:

  • Have new employees complete Form W-4.
  • Verify employee identity and eligibility (Form I-9).
  • Set up payroll system with withholding, benefits, and local taxes.
  • Report new hires to your state’s new-hire reporting program.

Ongoing (payroll period & quarterly):

  • Withhold and remit federal, state, and local income taxes; withhold and deposit Social Security and Medicare (FICA).
  • Make federal tax deposits on the schedule assigned to you (monthly or semiweekly) and file Form 941 or Form 944 as required.
  • Track paid time off, sick pay, and fringe benefits for tax reporting.

Annual and year-end:

  • Prepare and file W-2s to employees and Form W-3 to the SSA by the IRS deadline.
  • Issue 1099-NEC to contractors paid $600+ when applicable.
  • File Form 940 (FUTA) and reconcile state unemployment taxes.
  • Maintain payroll records according to IRS retention guidance.

Step-by-step breakdown and why each item matters

1) Obtain an Employer Identification Number (EIN)

2) Choose and confirm your business structure

  • What: Your structure (sole proprietor, partnership, LLC, S or C corporation) affects how payroll and owner compensation should be treated and what returns are required.
  • Why: For example, owner-operators in corporations who perform services are typically treated as employees for payroll; sole proprietors take owner draws and do not receive W-2 wages the way employees do. Confirm tax consequences with a CPA.
  • Source: SBA guidance on hiring and payroll (https://www.sba.gov/business-guide/manage-your-business/hire-retain-employees).

3) Register for state and local payroll taxes and unemployment insurance

  • What: States require employers to register for withholding tax accounts, state unemployment insurance (SUI), and often have separate new-hire reporting requirements.
  • Why: Missing state registration leads to penalties and interest; state rules vary widely.
  • Note: USA.gov and your state’s department of revenue or labor site list registration steps and contacts (https://www.usa.gov/).

4) Correct worker classification: Employee vs. Contractor

5) Collect Form W-4 and set proper withholding

  • What: Every employee must complete Form W-4 so you can calculate federal income tax withholding.
  • Why: Incorrect withholding can create tax bills, penalties, or unhappy employees. Keep a copy of each employee’s W-4 on file.
  • Source: IRS — Form W-4 and withholding guidance (https://www.irs.gov/forms-pubs/about-form-w-4).

6) Verify work authorization with Form I-9

  • What: Employers must verify identity and authorization to work in the U.S. using Form I-9 and retain the documents on file.
  • Why: I-9 enforcement carries civil and criminal penalties; follow current DHS/ICE guidance.
  • Source: U.S. Citizenship and Immigration Services (USCIS) guidance on Form I-9.

7) Implement a payroll system and withholding deposits

  • What: Decide whether to run payroll in-house, use payroll software, or hire a payroll service/PEO. Set up gross pay, pre-tax deductions, benefits, and tax withholdings.
  • Why: A reliable payroll system reduces calculation errors and missed deposits. Federal deposit schedules (monthly or semiweekly) are assigned based on your tax liability; follow IRS deposit rules and use the Electronic Federal Tax Payment System (EFTPS).
  • Source: IRS Publication 15 (Employer’s Tax Guide) and EFTPS (https://www.irs.gov/).

8) File required employment tax returns on schedule

  • Common federal returns and forms every new employer must know:

  • Form 941 (quarterly federal payroll tax return) or Form 944 (annual return for eligible small employers)

  • Form 940 (FUTA annual federal unemployment tax return)

  • Form W-2 (report wages and withholdings to employees and SSA by the deadline)

  • Form 1099-NEC (report contractor nonemployee compensation)

  • Why: Missing filing deadlines leads to penalties and interest. W-2 and Form 1099-NEC are typically due to recipients by January 31; federal deposits and Form 941 deadlines are set by the IRS calendar.

  • Source: IRS — Forms and Publications section and specific form pages (https://www.irs.gov/forms-pubs).

9) New-hire reporting to state agencies

  • What: Most states require employers to report newly hired or rehired employees to a state directory within a short window after hire.
  • Why: New-hire reporting is used for child support enforcement and benefits programs. Check your state’s labor or child support agency for the exact process and deadline.
  • Source: USA.gov and state agencies (https://www.usa.gov/).

10) Maintain accurate payroll records and retention

  • What: Keep payroll records, tax returns, deposit receipts, Forms W-4, I-9, and employment tax returns.
  • Why: Proper recordkeeping supports tax filings and defends against audits. The IRS provides recordkeeping guidance; retain records at least several years (the exact period depends on the type of record and your situation).
  • Source: IRS — Recordkeeping (https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping).

Common mistakes new employers make (and how to avoid them)

  • Waiting to apply for an EIN until after payroll needs to start. Apply immediately once you know you’ll hire.
  • Treating contractors like employees (and vice versa). Use the IRS tests and, when necessary, a written contract and consistent practice.
  • Ignoring state requirements. Federal compliance is only half the story; state withholding, unemployment insurance, and workers’ compensation vary.
  • Underfunding tax deposits. If you miscalculate deposits, you can be liable for penalties; auto-debit and payroll services help prevent this.

In my practice, I frequently see small employers save more in penalties than the annual cost of a basic payroll service.

Practical timeline for a first-time hire (sample)

  • 30+ days before first payroll: Choose business structure and apply for EIN (if not already obtained). Register with state payroll/unemployment tax agencies.
  • 14–7 days before payroll: Set up payroll software or provider. Draft offer letter and prepare employee forms (W-4, I-9).
  • Day 1 of employment: Collect W-4 and I-9. Report new hire to the state. Ensure benefits deductions are set up.
  • Ongoing: Deposit taxes per IRS schedule, run payroll accurately each pay period, and file returns on time.
  • Year-end: Issue W-2s and 1099s to recipients and file required returns by the IRS deadlines.

Helpful resources and internal references

Professional tips

  • Hire a CPA early. The upfront cost for an initial consultation is often lower than the cost of correcting mistakes later.
  • Automate deposits. Enroll in the Electronic Federal Tax Payment System (EFTPS) and consider direct-deposit payroll.
  • Build a calendar of tax due dates and set reminders a week before each deadline.
  • Keep employee files organized and secure; only share access to payroll functions with trusted personnel.

FAQs (brief)

Q: When do I need to file Form 941 versus Form 944?

A: Most employers file Form 941 quarterly. The IRS may notify certain small employers that they can file Form 944 annually. Check your IRS account or consult a tax professional.

Q: Do I have to issue 1099s to every contractor?

A: Issue Form 1099-NEC for nonemployee compensation of $600 or more in a calendar year in most cases, but exceptions apply (e.g., corporations in many circumstances). See IRS rules on Form 1099-NEC.

Final takeaway

Tax compliance is continuous, not a single task. Start with the EIN, establish a reliable payroll system, classify workers correctly, and stay on top of deposits and filings. When in doubt, bring in a professional — the cost of prevention is typically much less than the cost of correction.

Disclaimer: This article is educational and does not replace individualized legal, tax, or accounting advice. For help specific to your business, consult a qualified tax professional or attorney.