Your first hire is one of the biggest steps a small business takes. It frees your time to grow, but it also brings legal and tax responsibilities. Work through this checklist before your new employee’s first day.
1. Decide: employee or contractor?
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This isn’t a matter of preference. The IRS looks at the real relationship: behavioral control (do you direct how the work is done?), financial control (who provides tools, sets pay, bears the risk?), and the relationship itself (is it ongoing, and is the work central to your business?). If you control when, where and how someone works, they are probably an employee. Misclassifying employees as contractors can lead to back taxes, penalties and claims under state law. When in doubt, ask an accountant.
2. Set up your employer accounts
- EIN. You need a federal Employer Identification Number, free from the IRS.
- State payroll tax accounts. Register with your state for income tax withholding (if your state has income tax) and unemployment insurance.
- Workers’ compensation insurance. Required for employees in almost every state.
3. Collect the right paperwork
- Form W-4, so you know how much federal income tax to withhold.
- Form I-9, to verify identity and eligibility to work in the US. The employee completes their section by the first day of work, and you must review their documents within three business days. Some states also require employers to use E-Verify.
- New-hire report. Report every new employee to your state’s new-hire registry, generally within 20 days of hire; some states require it sooner.
- Your state’s own withholding form, if it has one.
4. Run payroll correctly
Each payday, withhold federal income tax and the employee’s share of Social Security and Medicare, and pay your own matching share. You’ll also owe federal and state unemployment taxes. Deposit these taxes on schedule and file quarterly payroll returns. At year end, give each employee a Form W-2 by January 31.
Payroll software or a payroll service handles most of this automatically and is well worth the cost for a first hire.
5. Know the pay rules
Pay at least the federal, state or local minimum wage, whichever is highest, and pay overtime as the law requires. Many states and cities set minimum wages well above the federal $7.25. Display the required federal and state workplace posters.
6. Set your new hire up to succeed
Write a short job description and a list of what "good" looks like in the first 30, 60 and 90 days. Create simple written checklists for the main tasks; they become your training manual as you grow. Schedule a weekly check-in for the first two months.
Before you hire, check the numbers
A new employee costs more than their wage: payroll taxes, workers’ compensation and any benefits add to it. Use the break-even calculator to see how much extra revenue you need to cover the cost.
This guide is general information, not legal or tax advice. Employment rules vary by state.
More on running and growing your business: Grow.
Sources
- IRS, Hiring employees
- IRS, Independent contractor or employee?
- US Small Business Administration, Hire and manage employees
Last reviewed October 17, 2026. Startup costs are estimates; check local prices, licensing and tax rules before you commit money.
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