Quick overview

A payroll tax compliance checklist helps new employers set up processes that keep payroll tax withholding, deposits, and reporting accurate and on time. New businesses that treat payroll tax compliance as a series of specific tasks — not an afterthought — reduce the chance of penalties, interest, and costly audits. This guide is based on best practices I’ve used in my practice advising small businesses for 15+ years and on current IRS and Department of Labor guidance.

Sources: IRS — Payroll Taxes; IRS — About Form 941; U.S. Department of Labor — Wages. (See links in the Resources section.)

Why a checklist matters

Payroll taxes fund Social Security, Medicare, and unemployment insurance. The IRS and state agencies expect employers to withhold employee taxes, match employer portions where required, deposit funds on a set schedule, and file returns. Gaps in any of these steps lead to penalties or potential trust fund recovery penalties for responsible parties. In short: it’s not optional.

In my practice I regularly see the same issues in new businesses: missing EINs, bad worker classification, late deposits, and sloppy records. Fixing those early is far cheaper than responding to an audit.

The core payroll tax compliance checklist (step-by-step)

Follow this sequence when you first hire employees and set up payroll. Use it as a checklist you review every quarter.

  1. Register your business for taxes
  • Apply for an Employer Identification Number (EIN) from the IRS — you need this before filing or depositing employment taxes. (IRS: Apply for an EIN)
  • Register with your state tax agency for withholding and state unemployment insurance (SUI) accounts. Each state has its own portal and timelines.
  1. Classify workers correctly
  • Use the IRS common-law rules and Form SS-8 guidance when unsure. Misclassification (employee vs. independent contractor) is a top cause of back taxes and penalties. If you treat someone as a contractor but the IRS determines they are an employee, you may be liable for withheld taxes, employer taxes, and penalties.
  • Document the facts used to classify each worker: job description, control over work, payment method, and contract terms.
  1. Set up payroll systems and controls
  • Choose payroll software or a payroll service that supports federal and multi-state compliance, tax deposits, and automatic form generation (W-2s, 941s, 940s, 1099s).
  • Establish internal controls: who approves payroll, who runs it, who reconciles payroll tax liabilities, and who signs deposit authorizations.
  • Decide on pay frequency and confirm how it affects withholding and state requirements.
  1. Understand withholding and employer tax obligations
  • Withhold federal income tax and employee FICA (Social Security and Medicare). Employers generally match FICA and pay any employer-only taxes (e.g., FUTA net of allowable credits).
  • Be aware of special withholdings like the employee portion of the Medicare surtax and voluntary deductions (health insurance, retirement deferrals).
  1. Learn deposit schedules and make timely payments
  • The IRS assigns a federal deposit schedule (monthly or semiweekly) based on your lookback period and total tax liability. Follow your EFTPS (Electronic Federal Tax Payment System) schedule and set calendar reminders.
  • Understand state deposit rules: some states require separate electronic payments and different deposit frequencies.
  1. File required federal forms and state returns
  • Quarterly: Form 941 (Employer’s Quarterly Federal Tax Return) to report wages and tax liabilities to the IRS.
  • Annually: Form 940 (FUTA) for federal unemployment taxes; Forms W-2 and W-3 for employee wages; Form 1099-NEC for nonemployee compensation when appropriate (generally $600 or more in a year).
  • Check state-specific forms and due dates for unemployment and withholding returns.
  1. New hire reporting and garnishments
  • Report new hires to your state’s new hire registry within the state-required timeframe — this supports child support enforcement and wage reporting.
  • For wage garnishments and levies, follow federal and state legal orders exactly. Mistakes here can create personal liability for responsible officers.
  1. Maintain accurate records
  • Keep payroll records that show hours worked, wage rates, tax deposits, tax returns, and employee authorizations. The IRS generally recommends keeping employment tax records for at least four years after tax due date or payment, whichever is later — confirm specific retention guidelines with the IRS or your state agency.
  1. Perform routine reconciliation and internal audits
  • Reconcile payroll reports to general ledger balances monthly and payroll tax liabilities to deposits quarterly. An unreconciled liability is often the first indicator of missed deposits or incorrect withholding.
  • Correct errors promptly. File corrected forms when necessary (e.g., Form 941-X to fix Form 941 mistakes).
  1. Prepare for audits and understand relief options
  • Keep documentation that supports worker classification, tax deposits, and tax return calculations. If audited, timely and complete records speed resolution.
  • Learn about penalty relief options: reasonable cause relief, first-time penalty abatement (for some penalties), and installment agreements. If you miss a deposit, act quickly: voluntary disclosure and correction often reduce penalties.

Practical startup timeline (first 90 days)

  • Day 0–7: Apply for EIN, register with state withholding and SUI agencies, choose payroll software or a payroll provider.
  • Day 7–30: Classify workers and collect W-4s/I-9s; set up pay schedules and enroll in EFTPS; set up state deposit accounts.
  • Month 1–3: Run first payroll, make deposits, and reconcile; file first required deposits/returns. Review internal controls and document payroll processes.

In a client engagement, I once helped a restaurant owner complete these steps in three weeks, avoiding a common mistake: failing to register for state unemployment tax until they had employees, which would have left them retroactively liable.

Common mistakes and how to avoid them

  • Not obtaining an EIN before paying wages — avoid by applying for an EIN as soon as you plan to hire.
  • Misclassifying workers — document the classification analysis and consult a CPA or employment attorney if unclear.
  • Missing deposit deadlines — enroll in EFTPS and set automated reminders; consider outsourcing deposits to a reputable payroll provider.
  • Poor recordkeeping — adopt a consistent filing system (digital and backup) and retain records for the recommended time.

When to outsource payroll

Outsourcing can reduce risk when you’re short on time or expertise. Consider outsourcing if:

  • You operate multi-state payrolls.
  • You need automated tax deposits and filings.
  • You do not have staff to reconcile payroll taxes monthly.

If you outsource, do not offload oversight. Verify deposits and review provider reports monthly. I regularly recommend a second-person review of payroll runs even when a service provider executes the work.

Response plan for missed deposits or an IRS notice

  1. Stop the error: correct payroll calculations and withhold any due amounts from the next payroll only where allowed by law.
  2. Contact IRS or state agency early — interest and penalties grow quickly; voluntary correction often reduces penalty exposure.
  3. Collect and preserve documentation showing why the mistake occurred and steps taken to fix it — this supports reasonable cause penalty relief requests.
  4. If contacted about unpaid trust fund taxes, consult a tax attorney or CPA immediately. Trust fund recovery penalties can attach personally to responsible parties.

See our related guides: Handling Payroll Tax Deposits: Employer Best Practices and Payroll Forms 101: Understanding W-2, 1099, and 941.

Practical checklist (printable)

  • [ ] Obtain EIN and state tax IDs
  • [ ] Classify each worker; document the decision
  • [ ] Collect Form W-4 and I-9 for employees
  • [ ] Choose payroll software or provider
  • [ ] Enroll in EFTPS and state electronic payment systems
  • [ ] Set deposit calendar (monthly/semiweekly or state schedule)
  • [ ] Withhold federal and state taxes correctly; match employer FICA
  • [ ] File Form 941 quarterly; Form 940 annually; W-2/W-3 and 1099s annually
  • [ ] Reconcile payroll to GL monthly and tax liabilities to deposits quarterly
  • [ ] Retain payroll records per IRS/state guidance

Professional disclaimer

This article is educational and does not replace personalized tax or legal advice. Payroll tax rules are complex and state-specific. Consult a qualified CPA, tax attorney, or payroll professional for advice tailored to your business.

If you want, I can convert the practical checklist into a printable one-page PDF or provide a simple spreadsheet template for tracking deposits and reconciliations.