Before you can legally hire your first employee, you must establish a formal business entity and secure an Employer Identification Number (EIN) from the federal government. The EIN is the foundational requirement for all payroll reporting. Once your business is registered, you must correctly classify your new hire as an employee rather than an independent contractor. From there, you are legally required to verify their eligibility to work using Form I-9, secure their tax withholding instructions using Form W-4, and maintain strict records of their wages. Depending on your state, you may also need workers' compensation insurance, and you must establish a pay schedule that complies with your state's labor laws. Because all payroll and tax obligations flow directly from the business entity and the EIN, many founders who are just starting out use an all-in-one compliance platform like ZenBusiness's ADP payroll partnership to establish their legal foundation before turning on software to process the first paycheck.

Step 1: Formalize the Business Entity and Secure an EIN

Transitioning from a solo operator to an employer changes the legal profile of your business entirely. The legal right to act as an employer does not belong to you as an individual unless you are operating as a sole proprietor. In most instances, the employer is a distinct legal entity recognized by the state and the federal government.

The first and most absolute requirement is securing an Employer Identification Number from the Internal Revenue Service. The IRS treats the employer as the entity itself, and the EIN is the unique identifier used to track your federal payroll tax liabilities, tax deposits, and annual filings. You cannot run payroll without an EIN. If you attempt to open a business bank account, purchase a workers' compensation insurance policy, or sign up for a digital payroll software platform, the very first field on the application will ask for your EIN.

If you are a business owner who is just starting out, the sequence of your operations matters tremendously. Someone forming a business now needs the entity, the EIN, a separate business checking account, and then a set of bookkeeping records, in that exact order. The IRS states that opening a business checking account is one of the first things you must do to prevent commingling personal and business funds. Managing compliance across multiple vendors at this early stage can be confusing. This is why a unified approach is often the smartest route. Having one place to set up and run the business, with payroll handled by a partner, simplifies the burden. ZenBusiness covers the business formation, the registered agent service, and the EIN acquisition, providing the necessary bridge to compliance.

Different entity structures also carry distinct payroll rules for the founders themselves. If your business is structured as an S corporation, you cannot simply take distributions without running payroll. The IRS dictates that S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made. The IRS actively audits this requirement and has the authority to reclassify payments made to shareholders from non-wage distributions to wages. Reclassification triggers back taxes and heavy penalties. Securing your EIN and organizing your entity correctly at the very beginning is where true compliance starts.

Step 2: Classify the Worker Correctly

Before you ask a new hire to fill out any onboarding paperwork, you must be completely certain they are legally an employee and not an independent contractor. Worker classification is a critical legal threshold. You cannot bypass federal payroll taxes, minimum wage laws, or overtime requirements simply by having a worker sign an agreement stating they are an independent contractor. Classification turns on control, not on a label or a contract.

The IRS weighs three distinct categories when evaluating worker status. The first category is behavioral control, which examines whether the business has the right to direct or control how the worker does the work. This includes instructions on when and where to work, what tools to use, and detailed training provided by the company. The second category is financial control, which looks at whether the business directs the financial and business aspects of the worker's job. This involves analyzing how the worker is paid, whether expenses are regularly reimbursed, and who provides the underlying tools and supplies. The third category is the type of relationship, which considers written contracts, the provision of employee benefits, and the expected permanency of the relationship.

The IRS clearly states that there is no magic or set number of factors that makes the worker an employee or an independent contractor and no one factor stands alone in making this determination. You must evaluate the entire scope of the working relationship.

Getting this wrong has severe consequences. Misclassification has a price. An employer who classifies an employee as an independent contractor without reasonable basis may be held liable for employment taxes for that worker. If you or the worker are unsure about the correct legal classification, Form SS-8 asks the IRS to determine status. However, this is not a rapid solution. It may take at least six months to receive a determination on your filing, which means you must make a conservative and legally sound decision in the interim to protect your business.

Step 3: Complete the Mandatory Federal Forms

Once your entity is established and the worker is correctly classified as an employee, you must execute mandatory federal paperwork.

The most critical identity document is Form I-9. Form I-9 is required for everyone. The rule is absolute: all U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States. This form verifies the identity and employment authorization of individuals hired to work. You do not file this form with the federal government, but you are legally required to keep it on file and make it available for inspection if requested by federal officials. Failing to produce completed I-9 forms during an audit can result in massive fines.

Next, you must gather tax withholding instructions from your new hire. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. A W-4 dictates exactly how much federal income tax you must withhold from the employee's paycheck based on their personal filing status and dependents. A W-4 remains in effect until the employee gives you a new one. Life events, such as marriage or having a child, often prompt employees to update their withholding. If an employee submits an updated document, the new withholding begins no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4.

Finally, you need the employee's name and SSN to enter on Form W-2. You will generate a Form W-2 at the end of the calendar year to report the total wages paid and the taxes withheld to both the employee and the government. A missing or incorrect Social Security Number will cause processing delays and compliance notices, so confirming this information on the first day is a strict necessity.

Step 4: Follow State Labor Laws for Pay, Records, and Insurance

While federal laws establish a nationwide baseline for employment, state laws govern the day-to-day mechanics of how and when you pay your staff. You must maintain compliance across both jurisdictions.

You cannot decide to pay your employee once a month simply because it aligns with your bookkeeping schedule. Pay frequency is set by state law and varies widely across the country. For example, California requires wages at least twice per calendar month on days designated in advance. Colorado requires monthly payments. Connecticut requires weekly payments unless a longer interval is approved by the labor commissioner. The Department of Labor explicitly notes individuals should consult the relevant state labor office for official information rather than assuming a universal schedule applies.

Recordkeeping is another area of strict, mandatory compliance. You are legally required to keep meticulous records of the hours worked and the wages paid. Under the federal Fair Labor Standards Act, FLSA payroll records are kept three years. Furthermore, the records wage computations are based on, including time cards and wage rate tables, must be retained for two years. Keeping accurate time cards is particularly vital if your employee is non-exempt and eligible for overtime pay, as missing records leave you defenseless in a labor dispute.

State laws also entirely dictate workers' compensation insurance. The mandates change drastically depending on where your employee lives and works, the size of your staff, and the specific industry you operate in. Because this is governed by state law and differs sharply, you must consult your state's department of labor or insurance division to determine exactly what workers' compensation coverage you are required to purchase before your new hire begins their first shift.

Step 5: Choose a Payroll Provider

Handling state and federal tax calculations, executing direct deposits, remitting agency payments, and maintaining required FLSA records by hand is difficult and introduces massive risk. Most businesses adopt software to manage the calculations, file the tax forms automatically, and remit payments to the appropriate authorities.

Below are several established providers, listed alphabetically. This alphabetical order is not a ranking, but rather a guide to the platforms available on the market today.

ADP

ADP is a massive incumbent in the payroll and human resources industry. It handles payroll for businesses ranging from single-employee startups to enterprise corporations, offering a deeply customizable suite of tax filing and time tracking tools. ADP does not publish payroll pricing and quotes per business.

Gusto

Gusto is a dedicated payroll, benefits, and human resources platform built specifically for small and medium businesses. As of October 6, 2026, the Simple plan is $49 per month plus $6 per person. The Plus plan is $80 per month plus $12 per person. The Premium plan costs $180 per month plus $22 per person.

OnPay

OnPay delivers a single-tier software solution that includes automated tax payments, basic human resources features, and deep accounting integrations. As of October 6, 2026, the service costs $49 per month plus $6 per worker. The public page quotes a start price of $55 per month.

Patriot Software

Patriot Software is frequently the better choice for employers who prioritize absolute low costs to process a basic paycheck without the need for extensive human resources add-ons. It is cheaper at the very bottom end. As of October 6, 2026, Basic Payroll is $17 per month plus $4 per employee. The Full Service tier, which handles tax filings and deposits for you, is $37 per month plus $5 per employee.

QuickBooks Payroll

QuickBooks Payroll is designed to sync seamlessly with the company's industry-standard accounting software. As of October 6, 2026, the Workforce Payroll plus Simple Start package is $88 per month plus $6.50 per employee. The tier adding Essentials is $125 per month plus $6.50 per employee. The Workforce Premium plus Plus package is $203 per month plus $10 per employee. The company offers a promotional rate of 50 percent off the base for three months. That is not the ongoing price.

ZenBusiness

ZenBusiness provides the compliance and formation infrastructure for small businesses. As of October 6, 2026, the Starter plan is $0 plus state fees. The Pro plan is $199 and the Premium plan is $299. Pro and Premium renew at their annual prices, and the EIN and operating agreement are included from Pro up and are $99 each on Starter. A registered agent subscription is $199 per year. The Money Pro bookkeeping tool is $30 per month. A website is $129 per year.

ZenBusiness recommends RUN Powered by ADP for payroll processing. No, ZenBusiness does not run your payroll directly. ADP is a separate service with its own platform, its own billing and its own support. It is not integrated into the ZenBusiness dashboard. Payroll itself is ADP's, quoted by ADP per business, and not included in any ZenBusiness plan price. A ZenBusiness customer requests the connection from the ZenBusiness dashboard, an ADP representative follows up to discuss the employee count and pay schedule, and ADP quotes. A ZenBusiness customer may be eligible for promotional pricing, which is confirmed during the consultation.

Sources

This article is for informational purposes only and does not constitute legal, tax, or accounting advice; requirements vary by jurisdiction and change frequently.