Setting up payroll for the first time is one of the most critical (and compliance-heavy) tasks every startup founder faces. Get it wrong, and you risk IRS penalties, state tax notices, and employee trust issues. Get it right, and you build a foundation for scalable growth.
This guide walks you through everything you need to know to set up payroll for your startup in 2026, including the new federal compliance requirements from the One Big Beautiful Bill Act (OBBBA) that may impact how you manage your payroll.
Four "To Do's" Before Setting Up Payroll
Before you can hire employees and run payroll, complete these foundational steps.
1. Get Your Employer Identification Number (EIN)
All businesses must register with the Internal Revenue Service for an Employer Identification Number before hiring employees. This tax identification number allows federal, state, and local governments to identify your startup on all business tax filings.
If your business is located in the United States, you can apply for an EIN in minutes through the IRS website. International founders may need to apply by phone. The IRS provides instructions for Form SS-4 for this process, or you can read more about how to set up an EIN as an international founder here.
2. Register as an Employer in Your State(s)
Register as an employer in every state where you do business or plan to hire employees. This allows you to pay required income and employment taxes in each jurisdiction.
Some states require out-of-state businesses to first complete foreign qualification, a process that registers your company with the Secretary of State office before you can legally conduct business and hire employees there.
Registration involves applying for an income tax withholding account and unemployment insurance account with the relevant agency in each state. You'll receive state-specific tax identification numbers to use when filing.
For startups planning multi-state operations, this process becomes exponentially more complex. According to compliance research, multi-state operations face 340% higher compliance complexity than single-state businesses.
How Warp helps: Warp automatically opens necessary state accounts on your behalf as soon as you add an employee's work location. You'll never need to navigate state .gov websites for withholding IDs or unemployment insurance numbers again.
3. Create an Employee Handbook
Now is the time to create an employee handbook for your startup. This document outlines the policies, procedures, and guidelines employees must follow and the legal rights workers are entitled to.
Your handbook should include information about company policies including employee benefits, overtime, paid time off, discipline, and termination procedures. If employees must follow a particular process to get set up in your payroll system, include those instructions as well.
For 2026, update your handbook to address:
- State-specific paid family leave programs: Delaware and Minnesota launch new PFML benefits on January 1, 2026; Maine benefits begin May 1, 2026
- Updated minimum wage rates for all states where you have employees
- Any changes to your benefits program reflecting the new FSA limits and SECURE 2.0 requirements
Keep your employee handbook accessible to all employees and provide a copy to each new hire during onboarding.
4. Classify Your Workers Correctly
Accurate worker classification (employee versus independent contractor) is critical for proper tax withholding and benefits compliance.
Misclassification can result in back taxes, penalty fees from the IRS or state tax authorities, and potential legal liability. The IRS provides detailed guidance on classification factors, and you can file Form SS-8 if you're uncertain about a specific worker's status.
2026 classification considerations: The federal DOL rule from January 2024 (the six-factor "totality of circumstances" test) remains legally in effect but is not being actively enforced by the Department of Labor. However, the rule's standards still apply to private litigation, meaning workers can sue under its framework. State rules like California's ABC test may be more restrictive than federal guidelines. Make sure you track each state's specific requirements for any remote workers you employ.
How to Set Up Payroll for Your Startup
Step 1: Choose Your Payroll Frequency and Schedule
Companies must establish a consistent pay cadence. Generally, you can pay employees weekly, biweekly, semimonthly, or monthly. Payday typically lands a few days after each pay period ends, allowing time to calculate hours worked and withholding amounts.
Consider these factors when choosing:
- State requirements: Most states have specific rules about minimum pay frequency. Check requirements in your state and every state where employees reside.
- Cash flow patterns: Review your startup's cash flow to identify optimal timing. Some startups find biweekly processing easier than weekly, while others prefer semimonthly to align with monthly expenses.
- Employee needs: Longer pay periods reduce your administrative workload but can make it harder for employees to manage their bills. Gather feedback and balance operational efficiency with employee financial wellness.
- Calendar anomalies: Employers using biweekly payroll may encounter 27 pay periods in 2026 due to calendar timing, which can affect exempt employee compensation calculations and benefit deductions.
Step 2: Decide How You'll Pay Employees
Direct deposit has become the standard for payroll payments. It saves time and effort for both employers and employees, eliminating bank trips and check processing.
For direct deposit, employees must complete a direct deposit authorization form providing their permission and banking details in writing.
Companies can also pay via check, payroll card, or cash, though these methods are increasingly uncommon due to the administrative overhead involved. Consider your employees' needs and banking access when selecting payment methods.
Step 3: Choose Your Payroll System
The payroll process can become complex quickly, especially with employees in multiple states. Miscalculating payroll and taxes can result in significant IRS penalties:
- Failure-to-file penalty: 5% per month for late filing, capped at 25% (per IRC § 6651(a)(1))
- Failure-to-deposit penalty: 2% to 15% depending on how late your deposits are (1-5 days late: 2%; 6-15 days late: 5%; more than 15 days late: 10%; unpaid after IRS notice: 15%)
Your three main options when choosing the right payroll for you and your company are:
- Manual payroll: The most cost-effective option but carries significant error risk. One wrong input in your spreadsheet affects all calculations for that pay period.
- Payroll software: Platforms like Warp automate calculations, tax filings, and compliance tracking. This option balances cost with accuracy and time savings.
- Outsourcing to an accountant or payroll service provider: Provides hands-off processing but may lack the automation and compliance features purpose-built payroll software offers.
How Warp helps: Warp's platform is already configured for 2026 W-2 and 1099 reporting requirements. The system automatically tracks qualified tips and overtime (including the new Box 14b Treasury occupation codes), generates the correct codes, and files all tax forms on your behalf, including quarterly 941s, state unemployment reports, and year-end W-2/1099 filings.
Step 4: Set Up State Tax Compliance
If you have remote employees or operate across state lines, state tax compliance becomes significantly more complex. You'll need to track varying minimum wages across states and localities, different tax withholding rules and brackets, local and city taxes in jurisdictions like NYC, Chicago, and Philadelphia, and paid leave program requirements.
How Warp helps: Warp provides multi-state tax compliance across all 10,000+ tax jurisdictions and automatically updates wage law requirements in all 50 states. When you add an employee in a new state, Warp handles state registration automatically. The platform also administers paid family leave for all active state programs.
Step 5: Collect Required Employee Documentation
When onboarding new hires, collect the required paperwork by their first day of employment.
For employees:
- Form I-9: Verifies employment eligibility in the US
- Form W-4: Determines federal tax withholding amounts
- State withholding forms: Many states have their own income withholding requirements
For independent contractors:
- Form W-9: Required for 1099 reporting at year-end
Request W-9s during contractor onboarding to avoid delays during tax season. Note that the 1099-NEC and 1099-MISC reporting threshold increases from $600 to $2,000 for payments made on or after January 1, 2026 (reported in 2027). However, 1099-K reporting for payment processors operates under different rules: the threshold reverted to $20,000 and 200+ transactions under OBBBA.
Step 6: Configure Benefits and Deductions
Set up any employee benefits you'll offer, including health insurance, retirement plans, and flexible spending accounts.
2026 benefits updates to configure:
- Dependent Care FSA: Update limits to $7,500 for single/joint filers and $3,750 for married filing separately (increased from $5,000 and $2,500 respectively). Note: employers must amend Section 125 cafeteria plan documents to adopt the new maximum.
- HSA eligibility: OBBBA makes the telehealth safe harbor permanent, so plans won't fail HDHP qualification solely because they offer pre-deductible telehealth services. Additionally, bronze and catastrophic ACA marketplace plans are now treated as HSA-compatible.
- Employer childcare credit: Increases from 25% to 40% of qualified childcare expenditures (50% for eligible small businesses). The maximum credit increases to $500,000 per year ($600,000 for small businesses).
- 401(k) and retirement: The 2026 deferral limit is $24,500, with catch-up contributions of $8,000 for employees age 50 and older. Important: under SECURE 2.0, employees earning over $150,000 in FICA wages must make catch-up contributions as Roth (after-tax) only. Pre-tax catch-up is prohibited for high earners starting in 2026.
- Social Security wage base: The taxable wage base increased to $184,500, with maximum employee tax of $11,439 (per IRS Publication 15).
Step 7: Run Your First Payroll
Give yourself extra time for your first payroll run. Input each employee's information (full name, address, Social Security number, compensation details, and withholding information) into your payroll system.
For hourly employees, calculate hours worked (including overtime and PTO) during the pay period, then determine gross wages. Calculate tax withholdings based on each employee's W-4 and applicable state/local requirements.
Verify all calculations before approving payroll for processing. Ensure withholdings are correctly deducted and that net pay amounts are accurate.
Step 8: Process Payroll Consistently and On Time
Late paychecks affect employee morale and can force team members to seek work elsewhere. Make timely payroll runs a priority.
Best practices:
- Allow two to three days minimum to review payroll before processing
- Factor in direct deposit processing time (typically 2-3 business days)
- Set calendar reminders for recurring deadlines
- Build a backup plan for holidays or unexpected situations
Step 9: Maintain Secure Payroll Records
Establish a secure system for storing employment and payroll tax records.
You'll collect sensitive personal information including Social Security numbers and banking details. This data requires secure storage where unauthorized individuals cannot access it.
Federal record retention requirements:
- FLSA and ADEA: Payroll records must be retained for at least three years (per 29 CFR 516.5)
- IRS: Employment tax records must be kept for at least four years after the date the tax becomes due or is paid, whichever is later (per IRS Publication 15)
- COVID-19 exception: Qualified leave wage records require six years of retention; employee retention credit records require seven years
Check each state where you employ workers for additional retention requirements.
Why Startup Founders Choose Warp for Payroll
Managing payroll compliance across multiple jurisdictions overwhelms most startup founders. Warp automates mandatory compliance that existing solutions don't, including state tax registrations, unemployment insurance, annual reports, and ongoing tax notices.
What sets Warp apart:
- Full compliance automation: Warp automatically registers your company in new states when you add employees, files all required tax forms (federal, state, and local), and handles tax notices on your behalf. Warp resolves 80% of tax notices instantly by dealing directly with agencies.
- 2026-ready reporting: The platform already supports new W-2 and 1099 codes for OBBBA compliance, tracks qualified tips and overtime separately, and generates year-end forms with all required fields.
- Multi-state support: Compliance across all 10,000+ tax jurisdictions, automatic minimum wage updates, and PFML administration for all active state programs.
- Contractor and employee management: Pay W-2 employees and 1099 contractors from one unified platform, with proper tax handling for each.
- Dedicated support: US-based compliance experts who understand startup needs and can help navigate complex situations.
Warp estimates the platform saves founders an average of 6 hours per month and approximately $50,000 per company per year in compliance costs by preventing penalties.
Get Started with Warp
You've got a company to build. Let Warp handle the payroll complexity so you can focus on growth.
Request a demo to see how Warp can automate your payroll compliance from day one.
