Key Steps to Set Up Payroll for New Hires

When you bring new talent on board, it’s not just about onboarding paperwork or setting up a desk. One of the most critical administrative responsibilities for any growing business is setting up payroll correctly and efficiently. Whether you’re hiring your first employee or adding to a growing team, understanding the key steps to set up payroll for new hires is essential for ensuring compliance, accuracy, and a smooth experience for your employees.

This process can seem overwhelming—especially for small businesses and startups—but with a strategic and structured approach, you can turn it into a streamlined routine. Payroll setup involves more than just writing checks. It includes tax compliance, employee classification, accurate data management, and choosing the right tools to automate the process.

Let’s explore this process step by step, highlighting best practices, real-world considerations, and tools like 1eor that help businesses simplify their payroll responsibilities.

Why Payroll Setup Matters for New Hires

Before we get into the key steps to set up payroll for new hires, it’s important to understand why this process matters so much. Payroll isn’t just about paying salaries. It’s about building employee trust, staying legally compliant, and making sure your company avoids costly errors or audits.

Here are a few reasons why setting up payroll correctly is essential:

• Ensures legal compliance with federal and state tax regulations.

• Builds employee confidence through on-time, accurate paychecks.

• Avoids hefty penalties due to misclassification or tax filing issues.

• Establishes internal processes that scale with business growth.

A poorly managed payroll process can quickly erode employee satisfaction and lead to serious financial and legal problems. That’s why mastering the key steps to set up payroll for new hires isn’t just recommended—it’s non-negotiable.

Step 1: Collect Required Employee Information Accurately

The first step to set up payroll starts even before the employee’s first day. You need to collect accurate documentation and tax information to ensure that every paycheck is legal and traceable. The basic documents you must gather include:

• Form W-4 (for federal tax withholding)

• I-9 Employment Eligibility Verification

• State tax withholding forms (varies by location)

• Direct deposit details (bank account and routing number)

• Social Security Number (SSN)

• Date of hire and employment status (full-time, part-time, contract)

Accurate employee classification is critical. Misclassifying a worker as an independent contractor instead of a full-time employee can result in serious IRS penalties. Make sure your HR and accounting teams work together to review documentation thoroughly.

Also, consider implementing digital onboarding solutions to automate this process. Tools like 1eor help simplify the collection and storage of tax forms, making your records compliant and secure from day one.

Pro Tip: Set up a checklist for every new hire to ensure nothing is missed in the documentation stage.

Step 2: Apply for Employer Identification Number (EIN)

Your business needs a valid EIN (Employer Identification Number) from the IRS to process payroll. Think of it as your business’s Social Security Number—it’s used to report taxes and employee information to government agencies.

Here’s how to get your EIN:

• Apply online through the IRS website.

• You’ll receive your EIN immediately upon completion.

• Store the number securely and provide it to your payroll provider or accountant.

If you operate in multiple states, you may also need to register for state and local tax accounts, including:

Tax Type	Registration Required
State Withholding Tax	Yes (in most states)
State Unemployment Tax	Yes
Local Payroll Tax	Depends on the city/county

Failing to register for the appropriate tax accounts can delay payroll processing and cause legal issues. A platform like 1eor offers a centralized dashboard to help manage multi-state tax registrations effortlessly.

Remember: Your EIN is also required to file end-of-year tax documents like W-2s and 1099s.

Step 3: Decide on Payroll Schedule and Policies

A structured payroll schedule helps build consistency and transparency. Determine how often you’ll pay employees—weekly, bi-weekly, semi-monthly, or monthly—and communicate this clearly in your employee handbook.

When deciding on a schedule, consider the following:

• Legal requirements in your state (some states mandate minimum pay frequency).

• Cash flow management of your business.

• Employee expectations—some may prefer more frequent pay.

Also, establish policies regarding:

• Overtime and how it will be calculated.

• Deductions, including benefits, taxes, and garnishments.

• Paid time off (PTO) accrual and tracking.

• Handling of bonuses and commissions.

These policies should be documented clearly and aligned with local labor laws. Be consistent. Discrepancies in application can lead to lawsuits or complaints. Having software like 1eor ensures these policies are built into your payroll workflow automatically.

A good payroll schedule reduces administrative hassle and helps avoid late or incorrect payments.

Step 4: Choose the Right Payroll System

Now comes the technical part—selecting a payroll system. This decision can either simplify your HR and finance workflow or become a nightmare of manual calculations and compliance worries.

There are three main options:

1. Manual payroll processing
   • Only viable for very small teams

   • High risk of error and time-consuming

2. Outsource to a payroll service provider
   • Delegates tasks like tax filing, pay calculations

   • More secure and accurate, but comes at a cost

3. Use cloud-based payroll software (Recommended)
   • Automates tax filings, paycheck generation, direct deposit

   • Tracks deductions, PTO, overtime

   • Scalable and integrates with HR platforms

Tools like 1eor lead the way by combining compliance tools, global payroll capabilities, and automated tax filing under one dashboard. This is particularly helpful for startups scaling across states or even countries.

Before choosing a system, assess:

• Number of employees and future hiring plans

• Compliance requirements in your operating regions

• Need for integration with accounting tools like QuickBooks or Xero

The right system can save you hundreds of hours annually and prevent thousands in penalties.

Step 5: Set Up Direct Deposit and Payroll Tax Withholding

Once your system is in place, the next critical step is to set up direct deposit and ensure accurate tax withholding. Direct deposit is the preferred payment method for most businesses and employees today. It’s faster, more secure, and reduces the risk of lost or stolen checks.

To activate direct deposit, collect the following from your employees:

• Bank name

• Routing number

• Account number

• Type of account (checking/savings)

• Written authorization

Most payroll platforms like 1eor allow employees to input this securely through a self-service portal, reducing administrative workload for HR.

At the same time, you’ll need to ensure all federal, state, and local payroll taxes are correctly withheld. This includes:

• Federal income tax (based on W-4)

• Social Security and Medicare (FICA)

• Federal Unemployment Tax (FUTA)

• State income tax (if applicable)

• State Unemployment Insurance (SUI)

Here’s a quick table showing payroll tax components:

Tax Type	Employer Pays?	Employee Pays?
Federal Income Tax	No	Yes
Social Security	Yes (6.2%)	Yes (6.2%)
Medicare	Yes (1.45%)	Yes (1.45%)
FUTA	Yes (0.6%)	No
SUI	Varies	Varies

Missteps here can be costly and damaging. Failure to deposit withheld taxes on time is one of the most serious offenses in the eyes of the IRS. Fortunately, automated tools like 1eor calculate, withhold, and submit taxes to the correct agencies—giving you peace of mind.

Direct deposit and compliant tax withholding show professionalism and improve employee satisfaction.

Step 6: Run Your First Payroll Cycle

Running your first payroll is a milestone—especially for startups and small businesses. This is the moment where all your preparation turns into execution.

Here’s a breakdown of what to do:

1. Input work hours and salaries
   • For hourly employees, pull accurate timesheets

   • For salaried employees, confirm base pay and any bonuses

2. Confirm tax deductions and benefits
   • Retirement contributions, insurance premiums, etc.

   • Check against employee records for accuracy

3. Review gross pay and net pay
   • Gross pay = Base wage before deductions

   • Net pay = Take-home pay after all deductions

4. Process payroll
   • Use your payroll system to issue payments via direct deposit

   • Generate pay stubs for employee records

5. Submit payroll taxes
   • Based on your pay schedule and tax filing obligations

Even after automation, always double-check the numbers in your first cycle. Errors in paycheck amounts or deductions can damage employee trust quickly. That’s why platforms like 1eor are built with safeguards, audit trails, and error detection to make sure your first run is smooth.

Your first payroll sets the tone for your company’s reliability. Nail it with preparation and smart tools.

Step 7: Maintain Payroll Records and Generate Reports

One of the most overlooked key steps to set up payroll for new hires is recordkeeping. But it’s vital—not just for audits or legal compliance, but also for financial tracking, forecasting, and HR decision-making.

By federal law, you’re required to retain payroll records for at least three years, including:

• Time cards or digital logs

• Pay rate and wage calculations

• Pay stubs or summaries

• Tax documents (W-2, W-4, 1099)

• Direct deposit authorizations

Additionally, these records must be accessible in case of a Department of Labor (DOL) audit or employee inquiry. Your payroll system should also allow you to:

• Generate payroll summaries

• Track employee earnings history

• Monitor withholding patterns

• Export reports for tax filing or accounting audits

Advanced platforms like 1eor provide real-time payroll dashboards and downloadable reports for each employee, pay cycle, or department—making your life easier and more compliant.

Efficient payroll recordkeeping saves you time, protects your business, and supports better HR decisions.

Step 8: Stay Compliant with Changing Laws

One of the most challenging aspects of payroll is that laws change constantly. Whether it’s a new tax code, updated minimum wage laws, or evolving worker classification standards, staying compliant is an ongoing task.

Here’s how to stay ahead:

• Subscribe to updates from the IRS, DOL, and your state’s tax agency

• Regularly review your payroll system’s compliance features

• Audit your payroll process quarterly to catch errors early

• Consult with a tax advisor or HR professional when needed

The beauty of using full-service platforms like 1eor is that they stay up to date for you. They apply new laws and tax rates automatically, update compliance settings, and even alert you of necessary action steps—so you’re never caught off guard.

Non-compliance can cost thousands in penalties—automation is your safety net.

Final Thoughts: Your Payroll System is Your Foundation

The key steps to set up payroll for new hires aren’t just administrative tasks—they are fundamental to your business’s credibility, compliance, and culture. When done right, payroll boosts employee morale, supports accurate reporting, and eliminates costly legal risks.

Let’s recap the core steps:

• Collect complete and accurate employee info

• Obtain your EIN and register for state/local tax IDs

• Define a clear payroll schedule and policies

• Choose the right payroll system

• Set up direct deposit and tax withholding

• Run your payroll accurately and on time

• Maintain detailed records

• Stay compliant as laws evolve

A robust payroll system isn’t an expense—it’s an investment in your company’s success.

If you want a reliable, scalable, and automated way to manage all of these steps, platforms like 1eor are ideal partners. They combine compliance automation, global payroll services, and user-friendly dashboards to help businesses of all sizes set up payroll quickly and accurately.