You have the mission, the plan, and maybe your first hire ready to start. The one thing standing between you and that first paycheck is paperwork.
Payroll is not the first step in building an organization. It is one of the last, and it depends on a short stack of government records being in place first. If you try to run payroll before those records exist, you will hit a wall. You will have no federal tax ID to file under, no state account to remit to, and no legal employer on record.
We see this often: an organization wants to pay an employee tomorrow, but they haven’t registered with the state yet. This causes delays, stress, and potential penalties.
Here is the order of operations that actually works, whether you are launching a 501c3, a church, or a small business. If you are already formed and holding your EIN, you can skip ahead to step five.
1. Form your legal entity
Payroll runs on a legal employer. Before you can pay anyone, your organization must exist as a recognized entity: an LLC, a corporation, or a nonprofit corporation. This is the foundation everything else sits on.
Establishing your entity:
- Establishes liability protection for the founders.
- Sets your tax treatment with the IRS.
- Creates the document trail that the IRS and your state will ask for later.
The IRS is explicit about the order. You should form your entity with your state before you apply for a federal tax ID. Specifically, tax-exempt organizations should not apply for an EIN until the organization is legally formed. If you skip this sequence, your EIN application can stall.
This is the step where many founders feel overwhelmed. We recommend using a service like MyCorporation to handle the heavy lifting. They have formed more than a million businesses since 1998 and handle nonprofit corporations, C corporations, S corporations, and LLCs in all fifty states.
Form your entity the right way:
LLC, corporation, or nonprofit formation in any state, plus EIN filing, registered agent, and ongoing compliance.
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2. Apply for your federal EIN
Your Employer Identification Number (EIN) is your organization’s federal tax ID. Think of it as the business equivalent of a Social Security number. You need it to:
- Hire employees
- Open a business bank account
- File taxes
- Run payroll
Applying directly with the IRS is free. You should never pay a standalone fee to a site that only resells the free application. However, timing is everything. Your entity must be formed first.
If you prefer to have someone else manage the paperwork, MyCorporation – Apply For a Federal Tax ID (EIN) can file this for you as part of your formation package so the IDs line up correctly.
3. Nonprofits: Secure your 501c3 determination
If you are building a nonprofit, forming the corporation and getting an EIN is not the finish line. You must file for federal tax-exempt recognition with the IRS.
Many states will not finish your employer registrations until they see your 501c3 determination letter. This is a critical piece of the puzzle for two reasons:
- Lead Time: This process can take several months. You should build this into your timeline early.
- FUTA Exemption: Organizations recognized under section 501c3 are generally exempt from Federal Unemployment Tax (FUTA). You do not want to start paying this tax if you are legally exempt.
4. Register as an employer with your state
The EIN covers you at the federal level. Most states require a separate employer registration before you can legally withhold and remit payroll taxes. Usually, this involves two separate accounts:
- State Withholding Account: For employee income tax.
- State Unemployment Account (SUTA): For unemployment insurance.
Some states bundle these into one portal, while others (like Florida or Texas) have no state income tax but still require unemployment registration. If you have employees working in multiple states, you must register in each one.
The Nonprofit SUTA Note
As a 501c3, you have a unique advantage. Most states allow you to elect a reimbursable method for state unemployment instead of paying the standard experience-rated tax. This means you only pay for unemployment claims actually filed by former employees rather than paying a flat percentage of every paycheck. Setting this up correctly from day one can save thousands of dollars over the life of your organization.
5. Run payroll the right way
Once your entity is formed, your EIN is issued, and your state accounts are open, you are ready to pay your team. This is where Giving Payroll steps in.
Standard payroll software often fails mission-driven organizations because it doesn’t understand the nuances of the sector. For example:
- Ministerial Payroll: A minister often receives a W-2 for income tax but is considered self-employed for Social Security and Medicare (the “dual tax status”).
- Housing Allowances: We help set up housing allowances under IRC Section 107.
- Restricted Grants: We provide the reporting necessary to track payroll against specific programs or grant classes.
- Exemptions: We ensure your FUTA and SUTA exemptions are applied correctly so you aren’t paying taxes you don’t owe.
We provide managed payroll services that act as your virtual in-house payroll manager. You get a dedicated account manager you can call directly: no call centers and no endless service tickets.
The setup checklist at a glance
- Form your legal entity (LLC, corporation, or nonprofit corporation).
- Apply for your federal EIN.
- Nonprofits: File for your 501c3 determination.
- Register with your state for withholding and unemployment accounts.
- Set up payroll with a provider that specializes in your sector.
Ready to run payroll?
Steps one through four get you to the starting line. We take it from there with payroll systems built for nonprofits, churches, and small businesses. We handle the automated tax management, tax filing, and time tracking so you can focus on your mission.
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Or call us at 1-877-245-0345
Disclosure: Giving Payroll is an affiliate of MyCorporation. If you use the MyCorporation links in this article to form your organization, we may earn a referral commission at no additional cost to you. We only point you toward services we believe help mission-driven organizations get set up correctly.