What You Need to Know About Payroll & Compliance.

Hiring Your First Employee? What You Need to Know About Payroll & Compliance

Hiring your first employee is a major milestone; it means your business is growing beyond what you can handle on your own. However, in a highly regulated state like California, it also means you are now a “tax collector” and a “compliance officer.”

Moving from a solopreneur to an employer involves more than just picking a salary. Here is your step-by-step guide to navigating the payroll and compliance maze.

1. Get Your Paperwork in Order (The Entities)

Before you cut the first check, you need to register with the government as an employer.

EIN (Employer Identification Number): Think of this as a Social Security number for your business. You apply for this via the IRS.

State Registration: In California, you must register with the Employment Development Department (EDD) to get your State Employer Account Number. This is used to track state payroll taxes and unemployment insurance.

2. Employee vs. Independent Contractor (AB5)

California has some of the strictest laws in the country regarding worker classification. Under the ABC Test, you must assume a worker is an employee unless they meet specific criteria regarding their independence and the nature of their work.

Employee (W-2): You control their schedule, tools, and how they work. You withhold taxes.

Contractor (1099): They run their own independent business and provide services to you. You do not withhold taxes.

Warning: Misclassifying an employee as a contractor to save on taxes can result in massive penalties and back taxes.

3. The Pillars of Payroll Tax

When you pay an employee $25/hour, it actually costs you more. You are responsible for withholding the employee’s portion of taxes and paying your own employer-side taxes.

FICA: Social Security and Medicare (split between you and the employee).

FUTA/SUTA: Federal and State Unemployment taxes (paid by the employer).

Withholding: Federal and State income tax (taken out of the employee’s check).

4. Mandatory Insurance and Postings

Compliance isn’t just about money; it’s about protection and transparency.

Workers’ Compensation: In California, you are required to have Workers’ Comp insurance the moment you hire your first employee—even if they are part-time.

Labor Law Posters: You are legally required to display federal and state labor law posters in a conspicuous place where employees can see them (or provide digital versions for remote workers).

Wage Theft Prevention Act: You must provide new employees with written notice containing specific information about their pay rates, paydays, and your business details.

5. Setting a Pay Schedule and Record Keeping

You must establish a regular payday (e.g., bi-weekly or semi-monthly).

Paystubs: You must provide a detailed paystub that shows gross wages, total hours worked, all deductions, and the date range covered.

Record Retention: Keep payroll records, including timecards and tax filings, for at least four years.

6. Avoid the “Manual Entry” Trap

Many first-time employers try to calculate payroll using a spreadsheet. This is the fastest way to trigger an audit. Payroll software (like QuickBooks Online or Gusto) automates calculations, tax filings, and direct deposits.

Take the Stress Out of Your First Hire with Zumifi

Hiring should be a time of celebration, not a time of tax-induced panic. At Zumifi, we specialize in helping small businesses transition from solopreneurs to employers.

We set up your Cloud Payroll system, ensure your state and federal registrations are accurate, and manage the ongoing filings so you never miss a deadline. We handle the compliance “boring stuff” so you can focus on training your new team member.

Ready to grow your team the right way? 👉 Book a consultation with Zumifi and let’s get your payroll running like clockwork.

FAQ: Payroll in San Francisco

What is the minimum wage in San Francisco for 2026?

San Francisco’s minimum wage is adjusted annually. It is consistently higher than the California state minimum. Always check the current San Francisco Office of Labor Standards Enforcement (OLSE) rate before setting a salary.

What is the San Francisco Health Care Security Ordinance (HCSO)?

If you grow beyond a certain number of employees (usually 20+), you may be required to spend a specific amount per employee per hour on healthcare. Even as a small employer, it’s vital to track hours correctly now so you are prepared for this requirement as you scale.

How often do I need to file payroll tax reports?

Federal reports (Form 941) are generally filed quarterly, while tax deposits are made monthly or semi-weekly, depending on your tax liability. State requirements in California vary, but often follow a similar cadence.

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