Inherited Business with Employees (1–5): Payroll & Tax Setup

Once you have employees, payroll tax compliance becomes mandatory. You'll need to set up federal and state withholding, potentially workers' compensation, and unemployment insurance.

Payroll tax compliance is non-negotiable. You must file Form 941 quarterly to report federal income tax withholding and FICA taxes, and Form 940 annually for federal unemployment tax (FUTA). Deposits are typically due semi-weekly or monthly depending on the business's lookback period. Late deposits trigger automatic penalties under IRC Section 6656 -- there is no grace period or reasonable cause exception.

Workers' compensation requirements vary by state. Most states require workers' comp insurance even for a single employee. If the prior owner let coverage lapse, you have immediate exposure. Check your state's requirements.

ACA implications are minimal at this size. The Affordable Care Act's employer shared responsibility provision (IRC Section 4980H) applies only to applicable large employers with 50 or more full-time equivalent employees. With 1-5 employees, you are well below that threshold.

The tradeoff: A small team is manageable, but payroll is the area where the IRS is least forgiving. Even one missed deposit creates a penalty, and the trust fund recovery penalty under IRC Section 6672 can make you personally liable.