Hiring your first employee is a huge milestone. It also introduces one of your most serious legal responsibilities: payroll. Get it wrong, and the penalties can be severe. But understanding a few key concepts makes it manageable.
First, know the difference between an employee and an independent contractor. This is a legal distinction, not a personal one. The IRS uses a "right to control" test. Do you control what, how, and when the work is done? If yes, they are likely an employee. Misclassifying someone as a contractor to avoid payroll taxes is a common and costly mistake.
Speaking of taxes, it’s not just about writing a paycheck. You are responsible for withholding the correct amount of federal and state income tax, Social Security, and Medicare (FICA) from their wages. On top of that, you must pay a matching portion of FICA taxes yourself, plus federal and state unemployment insurance (FUTA and SUTA). This is where many new employers get tripped up.
You must also adhere to strict timelines. Withheld taxes must be deposited with the IRS on a specific schedule (monthly or semi-weekly). You must file quarterly payroll tax returns (Form 941) and annual forms like W-2s. Missing deadlines leads to immediate fines and interest.
Because of this complexity, most small businesses use a payroll service. For a reasonable fee, they handle all calculations, tax payments, and filings. They ensure compliance and protect you from costly errors. It’s an investment in peace of mind.
Treating payroll with the seriousness it deserves protects your business, your team, and your own sanity. It’s the foundation of being a trustworthy, compliant employer.