Hiring your first employee is a milestone. It’s also a compliance minefield if you don’t know what you’re doing. Miss a form, skip a step, or misclassify someone, and you’re looking at back taxes, penalties, and potential lawsuits before you’ve even gotten the person fully onboarded.
This checklist covers every step in the right order: from the employee vs contractor decision all the way through onboarding. Follow it and you won’t miss anything.
Step 1: Employee vs Independent Contractor
Before you hire anyone, you need to decide: are you hiring an employee or engaging a contractor? This is not just a label you can choose. The IRS and your state have specific criteria that determine the actual classification, and getting it wrong is expensive.
Key Differences
- Control: If you control how, when, and where the work gets done, that person is likely an employee. If they work independently and you only control the result, they may be a contractor.
- Exclusivity: Employees typically work for you full-time. Contractors typically have multiple clients.
- Tools and equipment: If you provide the tools and workspace, that points toward employee status.
- Benefits and taxes: Employees get W-2s and you withhold payroll taxes. Contractors get 1099s and handle their own taxes.
The IRS uses a multi-factor test. When in doubt, consult an employment attorney or CPA before classifying someone. Misclassifying an employee as a contractor can mean owing years of back payroll taxes plus penalties.
For more on 1099s and contractor payments, see our guide to the 1099 form.
Step 2: Get Your EIN
If you don’t have an Employer Identification Number (EIN) yet, get one now. It’s free, it takes 5 minutes on the IRS website, and you legally cannot run payroll without one. Your EIN is your business’s tax ID number, equivalent to a Social Security number for your business.
Go to IRS.gov, search “EIN application,” and apply online. You’ll get your number immediately. If you’re unsure whether you already have one as part of your LLC setup, check your original formation documents. See our LLC formation guide for context on how the EIN fits into your overall business structure.
Step 3: Required Paperwork
Every new employee needs to complete these forms before their first day of work (or on day one at the latest):
Federal Forms
- Form I-9 (Employment Eligibility Verification): Required by federal law. Verifies the employee’s identity and authorization to work in the US. You must review original documents in person. Keep I-9s on file for 3 years after hire or 1 year after termination, whichever is longer.
- Form W-4 (Employee’s Withholding Certificate): Tells you how much federal income tax to withhold from each paycheck. Employees fill this out. Keep it on file; you don’t send it to the IRS.
State Forms
- Most states have their own withholding certificate (similar to the W-4) for state income tax
- Some states require additional new hire paperwork
- All states require you to report new hires to a state new hire registry within a set timeframe (typically 20 days). Check your state’s requirements
Additional Setup
- Set up workers’ compensation insurance before the employee starts work (required in most states)
- Post required labor law posters in your workplace (federal and state). The Department of Labor has a free poster advisor tool at dol.gov
- Obtain an unemployment insurance account number from your state workforce agency
Step 4: Set Up Payroll
You need payroll software. Running payroll manually is a nightmare of tax calculations, withholding schedules, and filing deadlines. Software automates the math and handles tax deposits automatically.
Three solid options:
Gusto
Gusto is the most popular payroll software for small businesses. It handles payroll, federal and state tax filing, direct deposit, new hire reporting, W-2s and 1099s at year-end, and basic HR features. Clean interface, excellent support. Starts around $40/month plus $6/employee/month.
Homebase
Homebase is built for hourly workers and businesses with shift scheduling. Free scheduling and time tracking tools, with payroll as an add-on. If you’re running a restaurant, retail store, or any business with hourly employees and variable schedules, Homebase is worth a close look.
Rippling
Rippling combines payroll, HR, benefits, and IT management in one platform. It’s more powerful and more expensive than Gusto, and better suited for businesses growing toward 20+ employees who want everything in one system. Pricing is custom based on the modules you need.
For most businesses hiring their first 1-5 employees, Gusto is the right starting point. It’s simple, handles compliance automatically, and won’t overwhelm you.
Step 5: Understand Payroll Taxes
When you have employees, you’re responsible for:
- Federal income tax withholding: Based on the employee’s W-4
- Social Security tax: 6.2% withheld from employee, 6.2% paid by employer
- Medicare tax: 1.45% withheld from employee, 1.45% paid by employer
- Federal unemployment tax (FUTA): Paid by employer only, typically 0.6% on first $7,000 of wages per employee per year (after state credit)
- State income tax withholding: Varies by state
- State unemployment tax (SUTA): Varies by state
Good payroll software calculates and deposits all of this automatically. If you’re running payroll manually, you’ll need to make federal tax deposits on a semi-weekly or monthly schedule. Get payroll software. It pays for itself in hours saved and penalties avoided.
Step 6: Onboarding Basics
Once the paperwork is done, you need a plan for actually getting the person productive. A minimal but effective onboarding process includes:
- Day 1 orientation: Walk them through your business, your expectations, how you communicate, and where to find resources
- Written job description: Even if informal, they should know clearly what success looks like in their role
- Access setup: Email, software logins, communication tools, keys, whatever they need to do the job
- 30/60/90 day plan: What do you expect them to accomplish in the first 30, 60, and 90 days? Write it down and share it
- Employee handbook (optional but recommended): Covers your policies on time off, conduct, termination, and other basics. Reduces disputes later
Your Complete Hiring Checklist
- Determine: employee or contractor?
- Get your EIN if you don’t have one
- Get workers’ compensation insurance
- Set up payroll software (Gusto, Homebase, or Rippling)
- Collect Form I-9 and verify documents
- Collect Form W-4
- Collect state withholding form
- Report new hire to your state registry within required timeframe
- Set up state unemployment insurance account
- Post required labor law notices
- Run first payroll
- Complete onboarding plan
This isn’t complicated once you know the steps. The problem is most first-time employers don’t know what they don’t know. Follow this checklist and you’ll have everything covered before day one.
