NerdyGirl Accounting
Payroll Setup Checklist
Set up payroll correctly the first time — 6 steps, 42 action items
Step 1 — Classify Your Workers
(0/6)Determine if workers are employees or independent contractors
IRS uses behavioral control, financial control, and type-of-relationship tests
Apply the IRS 20-factor test for each worker relationship
Apply your state's worker classification test (some states are stricter than IRS)
Document your classification decision for each worker
Keep on file in case of IRS audit
For contractors: collect W-9 before first payment
For contractors: set up 1099-NEC tracking (required if paying $600+ in a year)
Step 2 — Federal Registration
(0/8)Obtain Employer Identification Number (EIN) from IRS
Apply free at irs.gov/ein — takes minutes online
Register for EFTPS (Electronic Federal Tax Payment System)
Required for depositing federal payroll taxes — eftps.gov
Understand federal payroll tax obligations: Social Security (6.2%), Medicare (1.45%)
Understand FUTA (Federal Unemployment Tax) — 6% on first $7,000 per employee
Reduced to 0.6% if state unemployment taxes paid on time
Determine payroll tax deposit schedule (monthly vs. semi-weekly based on lookback period)
Understand Form 941 (quarterly payroll tax return) filing requirements
Understand Form 940 (annual FUTA return) filing requirements
Understand W-2 filing requirements (due January 31 each year)
Step 3 — State Registration
(0/6)Register with your state's Department of Revenue for income tax withholding
Not required in states with no income tax: TX, FL, NV, WA, WY, SD, AK
Register with your state's unemployment insurance agency (SUTA)
Obtain state employer account numbers
Check if your state requires additional registrations (disability insurance, paid family leave)
CA, NJ, NY, HI, RI, WA, MA, CT, OR, CO have mandatory programs
Understand your state's new hire reporting requirements
Most states require reporting within 20 days of hire
Check local payroll tax requirements (some cities have local income taxes)
Step 4 — Choose Payroll Software
(0/6)QuickBooks Online Payroll — best if already using QBO for bookkeeping
Core: $45/mo + $6/employee | Premium: $80/mo + $8/employee
Gusto — best for growing teams, excellent onboarding experience
Simple: $40/mo + $6/employee | Plus: $80/mo + $12/employee
ADP Run — best for larger businesses, strong compliance support
Pricing by quote; generally more expensive than QBO/Gusto
Paychex Flex — best for businesses with complex needs
Pricing by quote; good for multi-state employers
Confirm software handles your state(s) automatically
Confirm software files and pays payroll taxes on your behalf (full-service payroll)
Step 5 — New Hire Paperwork
(0/8)Form I-9 — Employment Eligibility Verification (must complete within 3 days of hire)
Keep on file for 3 years after hire or 1 year after termination, whichever is later
Form W-4 — Employee's Withholding Certificate
New 2020 form; employees should update if life changes (marriage, new child, etc.)
State withholding form (if your state has income tax)
Direct deposit authorization form
Employee handbook acknowledgment
Benefits enrollment forms (health insurance, 401k, etc.)
Report new hire to your state's new hire reporting agency
Set up employee in payroll software with correct tax withholding
Step 6 — Run Your First Payroll
(0/8)Determine pay frequency (weekly, bi-weekly, semi-monthly, monthly)
Most common: bi-weekly (26 pay periods/year) or semi-monthly (24 pay periods/year)
Set up pay schedule in payroll software
Enter employee pay rates, hours, and any additional compensation
Review payroll preview before approving — check gross pay, deductions, net pay
Approve payroll and confirm direct deposit timing (typically 2-4 business days)
Verify payroll taxes were deposited correctly
File quarterly Form 941 on time (April 30, July 31, October 31, January 31)
Distribute W-2s to employees by January 31 each year