Hiring Your First Employee: A Step-by-Step Guide
The paperwork, registrations, and payroll setup that turn a job offer into a compliant first hire.
You have more work than you can handle alone, and you have found the right person. That is a milestone worth celebrating. It also means you are about to become an employer, which comes with a short list of legal and tax steps that are easy to handle once and painful to fix later.
The good news: none of these steps is hard on its own. The trick is doing them in the right order, ideally before the person's first day. This guide walks through each one so nothing slips.
Employee or contractor first
Before you start, confirm the role is truly an employee position. If you are unsure, read Employee or Contractor? Getting Classification Right. The rest of this guide assumes you are hiring a W-2 employee.
Get registered
Before the first day
- 1
Get an Employer Identification Number (EIN)
An EIN is your business's federal tax ID. If you already have one for your LLC or corporation, you will use the same number for payroll. If not, you can apply online with the IRS for free.
- 2
Register with your state
Most states require a withholding account (if your state has an income tax) and an unemployment insurance account. Some cities and counties have local payroll taxes too. Your state's labor or revenue department website lists what applies.
- 3
Buy workers' compensation coverage
Nearly every state requires workers' compensation insurance once you have employees. It pays medical bills and lost wages if someone is hurt on the job. Rules and exemptions vary by state, so check before the first shift.
- 4
Choose how you will run payroll
A payroll service calculates withholding, files the forms, and makes tax deposits for you. For most first-time employers, the monthly fee is well worth avoiding penalties.
Paperwork on day one
New-hire forms
- 1
Form I-9
The Form I-9 verifies identity and permission to work in the US. The employee completes their section by the first day of work, and you review their documents and complete yours within three business days. Keep it on file; do not send it to the government.
- 2
E-Verify, where required
E-Verify is an online federal system that checks I-9 information. It is voluntary for most private employers, but several states require some or all employers to use it. Check your state's rules.
- 3
Form W-4
The employee fills out a W-4 so you know how much federal income tax to withhold. Many states have their own withholding form as well.
- 4
Report the new hire
Federal law requires you to report each new hire to your state's new-hire registry, generally within 20 days of the start date. Some states set a shorter deadline. Payroll services often handle this for you.
Running payroll the right way
Each payday, you withhold the employee's share of Social Security, Medicare, and income taxes, then add your own employer share of Social Security and Medicare. Those amounts are deposited with the IRS on a set schedule (monthly or semiweekly for most small employers) and reported quarterly.
Trust fund taxes are not your money
Withheld taxes are called trust fund taxes because you hold them in trust for your employee and the government. If they go unpaid, the IRS can hold owners personally responsible, even for an LLC or corporation. Never borrow from them to cover a slow week.
You will also pay federal and state unemployment taxes and file annual forms, including a W-2 for each employee by the end of January. To see what one hire really costs once these taxes and other extras are added, read The True Cost of an Employee.
Posters, policies, and records
Federal and state laws require you to display certain notices where employees can see them, covering topics like minimum wage, workplace safety, and anti-discrimination rights. The US Department of Labor and your state labor department offer them free. If your team works remotely, electronic posting is often acceptable.
Keep a personnel file for each employee with their offer letter, W-4, and pay records, and keep I-9s in a separate file. Payroll and tax records generally need to be kept for several years, so set up a simple system now.
Owner story
Marisol paid her first helper in cash for two months before her accountant flagged it. Catching up meant registering late with the state, filing back payroll returns, and paying a small penalty. With her second hire she set up a payroll service a week before the start date, and the whole process took an afternoon.
Illustrative composite, not a real customer.
First-hire checklist
0/11 doneWords to know
- EIN
- A nine-digit federal tax ID number the IRS assigns to a business.
- Form I-9
- A federal form that verifies an employee's identity and authorization to work in the US.
- Trust fund taxes
- Taxes withheld from employee pay that an employer holds and must deposit with the government.
- Workers' compensation
- Insurance that covers medical costs and lost wages for job-related injuries.
Finished reading?
Track your progress through Stage 5: Employ.
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