Hiring your first employee is a major milestone. It means your business has grown beyond what one person can handle, and that is a good problem to have. But the process is far more involved than posting a job and picking someone you like. There are legal obligations, tax registrations, compliance requirements, and operational setup steps that you have to get right before that first paycheck goes out.

This checklist walks you through everything you need to do to hire your first employee the right way, so you can avoid fines, lawsuits, and headaches down the road.

Step 1: Get an Employer Identification Number (EIN)

Before you can pay anyone, you need an EIN from the IRS. This is your business’s tax ID number and it is required for payroll, W-2 forms, and federal tax filings. If you already have an EIN for your LLC or corporation, you are good. If not, apply for free at IRS.gov and you will have your number within minutes.

Step 2: Register with Your State for Payroll Taxes

Every state has its own payroll tax system. You will likely need to register with your state’s department of revenue (for income tax withholding) and your state’s unemployment insurance agency (for state unemployment tax, or SUTA). Some states also have separate disability insurance programs. Search “[your state] employer payroll tax registration” and complete this step before your first payday.

Skipping this step is one of the most common mistakes new employers make, and it can result in back taxes plus penalties that dwarf the original obligation.

Step 3: Set Up Your Payroll System

Running payroll manually is a recipe for errors. A payroll platform automates withholding, deposits, and tax filings so you do not miss a deadline. Options like Gusto, Rippling, and ADP handle federal and state payroll taxes automatically and file forms like 941, 940, and W-2 on your behalf. Many also handle onboarding paperwork electronically.

If you want a full comparison of the top HR and payroll platforms, check out our breakdown of Best HR Software: Gusto vs BambooHR vs Rippling vs Deel. If you prefer to outsource the entire HR function, a Professional Employer Organization (PEO) can handle payroll, benefits, and compliance for a monthly fee.

Step 4: Have Your New Hire Complete Required Federal Forms

Two federal forms are mandatory for every new employee:

• Form W-4 (Employee’s Withholding Certificate): Tells you how much federal income tax to withhold from each paycheck. Your employee fills this out based on their filing status and any allowances or additional withholding they want to apply.
• Form I-9 (Employment Eligibility Verification): Verifies that your employee is legally authorized to work in the United States. You must physically inspect their documentation (passport, driver’s license plus Social Security card, etc.) and keep the I-9 on file for at least three years.

Do not skip the I-9 verification. Federal audits happen, and fines for I-9 violations start at over $200 per form.

Step 5: Report Your New Hire to the State

Federal law requires you to report every new hire to your state’s New Hire Reporting agency within 20 days of their start date (some states require it sooner). This information is used for child support enforcement and unemployment fraud prevention. Most states have an online portal where this takes about two minutes. Search “[your state] new hire reporting” to find the right site.

Step 6: Get Workers’ Compensation Insurance

Almost every state requires employers to carry workers’ compensation insurance the moment they hire their first employee. This coverage pays for medical expenses and lost wages if an employee is injured on the job. Rates vary by industry (a software company pays very different premiums than a construction firm), but operating without it exposes you to massive liability plus state fines.

You can purchase workers’ comp through a commercial insurer or, in some states, through a state fund. Your payroll provider may be able to bundle it as well.

Step 7: Post Required Workplace Notices

Federal and state law require employers to post specific labor law notices where employees can see them. These typically include notices about minimum wage, OSHA workplace safety rights, FMLA (if you have 50+ employees), and state-specific requirements. The U.S. Department of Labor offers free downloadable posters. Even if your employee works remotely, you generally need to provide electronic access to these notices.

Step 8: Classify Your Worker Correctly

One of the most expensive mistakes a new employer can make is misclassifying an employee as an independent contractor to avoid payroll taxes and benefits. The IRS uses a behavioral control, financial control, and relationship-type test to determine proper classification. If you control when, where, and how the work is done, they are almost certainly an employee. Misclassification can result in back taxes, penalties, and interest going back years.

If you are unsure, the IRS Form SS-8 lets you request a determination, though it can take months. A business attorney can often give you a faster, more practical answer.

Step 9: Write an Offer Letter and Set Up Basic Policies

A written offer letter protects both you and your new hire by documenting the agreed compensation, title, start date, and at-will employment status (if applicable in your state). It does not need to be a formal employment contract, but it should clearly spell out the basics.

You should also establish basic workplace policies before day one. At minimum, create written policies on:

• Attendance and time-off requests
• Confidentiality and non-disclosure expectations
• Anti-harassment and workplace conduct standards
• Use of company equipment, email, and systems

Even a simple one-page policy document that your employee signs is far better than verbal agreements that become he-said-she-said disputes later.

Step 10: Understand Your Ongoing Payroll Tax Obligations

Once you are on payroll, you have regular filing and deposit obligations. As an employer, you pay:

• Federal payroll taxes (FICA): You match the 7.65% your employee pays for Social Security and Medicare
• Federal unemployment tax (FUTA): 6% on the first $7,000 of each employee’s wages (reduced by state credits)
• State unemployment tax (SUTA): Rate varies by state and your claims history

Most small businesses with payroll under $50,000/year deposit taxes monthly; larger payrolls require semi-weekly deposits. Your payroll software will track all of this automatically, but it is worth understanding what you owe so nothing surprises you.

If you are building the financial foundation to support your first hire, understanding your credit and funding options helps too. See our guide on How to Build Business Credit from Scratch to make sure your business finances are set up to handle the increased overhead.

The Bottom Line

Hiring your first employee is one of the biggest operational leaps you will make as a business owner. The paperwork feels overwhelming at first, but it is mostly a one-time setup. Once your payroll system is running, your compliance stack is in place, and your onboarding process is documented, bringing on the next hire is dramatically easier.

The businesses that get into trouble are the ones who skip steps to move fast. Take the extra few days to do it right and you will never have to worry about an IRS audit or a state labor board inquiry derailing what you built.

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