Before you pay anyone as an employee, you need a few accounts and registrations in place. Skipping steps here creates problems that are expensive to fix later.

Start with your federal Employer Identification Number (EIN) if you don’t already have one. You can get this from the IRS website in about ten minutes. Then register with the California Employment Development Department (EDD). This gives you a state employer account number, which you need for withholding state income tax, paying into State Disability Insurance (SDI), and covering your Employment Training Tax and Unemployment Insurance obligations. California requires this registration within 15 days of paying wages over $100 in a calendar quarter.

You also need workers’ compensation insurance before your first employee starts. California requires it with no exceptions, even if you only have one employee. Shop around because rates vary significantly based on your trade classification codes. A roofer pays a much higher rate than an office worker, and getting the right class codes matters for accurate premiums.

Classify your workers correctly from the start. This is where a lot of contractors get into trouble, especially in California. The state uses the ABC test under AB5, and it’s strict. Just because someone brings their own tools or works on different job sites doesn’t automatically make them an independent contractor. If you control when, where, and how the work gets done, that person is likely an employee. Misclassifying workers leads to back taxes, penalties, and potential lawsuits. When in doubt, talk to a CPA who works with construction businesses before making that call.

Pick a payroll system that handles California’s requirements. Gusto and QuickBooks Payroll are both popular with small contractors. They calculate federal and state withholdings, file your quarterly returns (Form 941 federally and DE 9/DE 9C for California), and generate W-2s at year end. Most can also handle direct deposit and new hire reporting, which California requires within 20 days of the employee’s start date.

Set a consistent pay schedule. California allows weekly, biweekly, semimonthly, or monthly pay periods, but the rules on when wages must be paid are specific. Most contractors go with weekly or biweekly since that’s what field workers expect. Make sure your system is set up to calculate overtime correctly. California has daily overtime rules in addition to the federal weekly threshold, meaning anything over 8 hours in a single day triggers overtime pay.

Once payroll is running, stay on top of the filings. Payroll taxes need to be deposited on schedule, quarterly reports filed on time, and year-end forms issued by January 31. Missing deadlines triggers penalties that add up fast.

If the setup feels like a lot to handle on your own, payroll system setup and training can get everything configured correctly from the beginning and show you how to run it going forward. Getting it right at the start is much cheaper than cleaning up mistakes after the EDD sends you a letter.