Before You Run Payroll: How to Set Up Gusto for Your First Employees

Setting up Gusto correctly matters more than most businesses realize. Payroll software is only as good as the information you feed it, and mistakes at setup are what lead to tax notices, payroll corrections, and compliance issues later.

This guide walks through how to set up Gusto properly, what to prepare before you start, and where businesses most often get tripped up.

What Is Gusto?

Gusto is a cloud-based payroll platform designed for small and growing businesses. It helps manage:

• Payroll processing
• Federal and state payroll tax filings
• Direct deposit
• New hire reporting
• Benefits administration (optional)

Gusto works well for businesses structured as a Limited Liability Company, S-Corp, or C Corporation, but it does not replace proper payroll setup, classification decisions, or bookkeeping oversight.

Before You Set Up Gusto: Get This Ready

Don’t start clicking through setup screens until the foundation is in place.

You’ll need:

• Legal business name and entity type
• Federal Employer Identification Number (EIN), also referred to as an Employer Tax ID or federal business ID
• State payroll account numbers (EDD, State Department of Revenue, etc.)
• Business address
• Business bank account for payroll withdrawals
• Owner and employee details

If any of this is missing or incorrect, setup will stall or worse, complete incorrectly.

Important: States require accounts to be created in a specific tax registration order. Registering in the wrong sequence can delay payroll activation.

Step 1: Create Your Gusto Account

Start by entering:

• Business legal name
• Business structure (Limited Liability Company, S-Corp, C Corporation, etc.)
• Primary business address
• Industry

Industry selection matters more than people expect. Gusto uses it to map compliance rules, workers’ comp classifications, and reporting categories such as Standard Occupational Classification (SOC) codes.

Step 2: Add Federal and State Tax Information

This is one of the most important steps in the process.

You’ll be asked for:

• Federal Employer Identification Number (EIN)
• Federal filing details
• State payroll tax account numbers

For California businesses, this includes:

• EDD employer account number
• State income tax withholding setup
• Unemployment insurance and state unemployment insurance registration

Other states vary. For example:

• Washington registration requires setup with both the Employment Security Department and the State Department of Revenue
• Some Washington employers must also file Form WT-7 when establishing withholding
• North Carolina and South Carolina use separate unemployment agencies
• Each state assigns its own Unemployment Insurance Tax Rate based on employer history

If you don’t have state accounts yet, pause here and register first. Guessing leads to rejected filings.

Step 3: Connect Your Business Bank Account

Gusto links to the account used to:

• Pay employees
• Pay payroll taxes, including unemployment tax

Best practices:

• Use a dedicated business bank account
• Never use a personal account
• Maintain a cash buffer before payroll runs

Payroll withdrawals happen quickly. Failed debits can create compliance issues immediately.

Step 4: Add Employees and Independent Contractors

For each employee, you’ll enter:

• Legal name and address
• Social Security Number
• Pay rate and pay schedule
• Start date
• Form W-4 withholding elections
• Form I-9 employment eligibility verification

For independent contractors:

• Payment rate
• Tax classification
• Tracking of non-employee compensation
• Year-end Form 1099 preparation

Misclassifying workers as contractors instead of employees is one of the most common payroll audit triggers.

Step 5: Set Up Pay Schedules

Choose:

• Pay frequency (weekly, biweekly, semimonthly, monthly)
• Payroll run dates
• Direct deposit timing

Once payroll begins, changing schedules can be disruptive, especially across multiple states.

Step 6: Review Owner Pay (Critical for S-Corps)

If you own an S-Corp:

• Owner wages must run through payroll
• Salary must be reasonable
• Distributions must remain separate

Gusto will process payroll and file forms, but it does not determine whether owner pay is compliant. That responsibility stays with the business owner.

Step 7: Configure Time, Breaks, and Labor Rules (If Applicable)

If you use Gusto Time Tracking:

• Set hourly tracking rules
• Configure overtime calculations
• Apply state-specific break policies

In California, this includes tracking:

• Meal and rest breaks
• Break premium pay when breaks are missed

These rules vary by state and must be configured correctly to avoid wage claims.

Step 8: Run a Test Payroll

Before your first live payroll:

• Review gross vs net pay
• Confirm federal and state tax withholdings
• Verify unemployment insurance calculations
• Check employer tax liabilities

Testing prevents retroactive corrections later.

After Setup: What Gusto Handles vs What You Still Own

Gusto typically handles:

• Payroll tax calculations
• Federal and state payroll filings
• Direct deposit processing

You are still responsible for:

• Correct worker classification
• Accurate wage and tax setup
• Reviewing payroll reports
• Reconciling payroll with bookkeeping
• Responding to notices from tax agencies

Payroll software automates tasks, not accountability.

Using Gusto Day-to-Day

Most employers interact with Gusto through:

• The Gusto app for payroll approvals and employee access
• Admin dashboards for reports and filings
• Support resources such as Gusto Editors for guidance and explanations

These tools are helpful, but they don’t replace professional review when issues arise.

Common Gusto Setup Mistakes

These problems show up repeatedly:

• Starting payroll before tax accounts are active
• Registering agencies in the wrong tax registration order
• Paying owners incorrectly
• Mixing employees and contractors
• Ignoring state unemployment insurance setup
• Assuming Gusto fixes historical payroll errors

Payroll mistakes compound quickly.

Final Takeaway

Setting up Gusto is straightforward. Setting it up correctly requires preparation.

Most payroll issues aren’t software failures. They’re setup failures involving tax IDs, registration sequencing, worker classification, unemployment insurance, or wage rules.

If payroll has already been run incorrectly, or your business structure or state footprint has changed, it’s usually far easier to review and fix things early than to wait for a notice to force the issue.