Hiring your first employee: what you need to do

Bringing on your first employee is a real milestone — and a real increase in administrative responsibility. The IRS, your state, and your new employee each have requirements you're now on the hook for, and the window to get everything set up is tight. Most of it needs to happen before the person starts, not after.

This isn't a quick checklist. It's a walkthrough of what's involved, why each piece matters, and what happens if you skip something.

Before anything else: make sure they're actually an employee

The most common — and most costly — mistake business owners make when bringing someone on is classifying them as an independent contractor when the IRS and your state would consider them an employee. The classification isn't yours to decide based on preference. It's based on the actual working relationship.

The key questions: Do you control how the work is done, not just the result? Do they work exclusively or primarily for you? Do you provide their tools and set their schedule? The more "yes" answers, the more likely the IRS considers them an employee.

Misclassifying an employee as a 1099 contractor can result in back payroll taxes, penalties, and interest — all on you. The IRS has a formal relief program (Section 530) that can help in some cases, but the better path is getting the classification right from the start. If you're not sure, ask before you issue a 1099.

Get an EIN if you don't have one

You need an Employer Identification Number to withhold and pay payroll taxes. If you've been operating as a sole proprietor using your Social Security number, you'll need to get an EIN now — you can't use your SSN for payroll purposes.

Getting an EIN is free and takes about five minutes at IRS.gov. Apply online and you'll have the number immediately. If you already have an EIN for your business, you're set — use that one.

Register for state payroll taxes

Every state that has an income tax also has payroll withholding requirements, and most states have unemployment insurance (SUTA) programs you'll need to register for. In some states, there are also disability insurance or paid leave programs with employer registration requirements.

State registration usually needs to happen before the first payroll. The specifics vary by state — your state's department of revenue or department of labor website is the right starting point. Some states make you wait for an account number before you can run payroll, so don't put this off.

Have your new hire complete the required paperwork

Two forms need to be completed before or on the first day of work:

Form I-9 (Employment Eligibility Verification) — required by federal law. You need to verify that your employee is legally authorized to work in the United States. Your employee fills out Section 1 on or before their first day; you fill out Section 2 within three business days of their start date, after reviewing original identity and work authorization documents in person. You don't send this form anywhere — you keep it on file and make it available for inspection if requested. Penalties for I-9 violations can be significant.

Form W-4 (Employee's Withholding Certificate) — this is what your employee uses to tell you how much federal income tax to withhold from their paychecks. Starting with the 2020 redesign, W-4s no longer use allowances. Your employee fills it out based on their filing status and any additional withholding adjustments. If an employee doesn't give you a W-4, you withhold at the single / no adjustments rate.

Most states also have a state withholding form equivalent to the W-4. Check your state's requirements.

Report the new hire to your state

Federal law requires employers to report newly hired employees to a state agency, typically the state's directory of new hires (administered through the Department of Health and Human Services). The deadline is 20 days from the hire date in most states, though some states have shorter windows.

The information required is basic: employee name, address, Social Security number, date of hire, and your business's EIN and address. Many states allow online reporting, and some payroll providers handle this automatically. Either way, it needs to happen — new hire reporting is tied to the child support enforcement system, and failure to report can result in fines.

Set up payroll

Running payroll for even one employee involves more than writing a check. You need to withhold the right amounts, deposit taxes on the right schedule, and file the right reports. Here's what's involved:

What you withhold from the employee's paycheck: Federal income tax (based on their W-4), state income tax (if applicable), the employee's share of Social Security (6.2% on wages up to $176,100 in 2025), and the employee's share of Medicare (1.45%, plus an additional 0.9% on wages over $200,000).

What you pay as the employer on top of that: Your matching share of Social Security (6.2%) and Medicare (1.45%) — this is payroll tax you owe in addition to the employee's wages. Federal unemployment tax (FUTA) at 6% on the first $7,000 of wages per employee per year, reduced to 0.6% if your state taxes are paid on time. State unemployment tax (SUTA) at a rate that varies by state and by your experience rating as an employer.

When to deposit: The IRS assigns payroll tax deposit schedules — monthly or semi-weekly — based on your total tax liability in a lookback period. New employers are generally on the monthly deposit schedule initially. Deposits are made through the Electronic Federal Tax Payment System (EFTPS), which requires advance enrollment. Set that up early — processing an EFTPS enrollment takes a few business days.

Get workers' compensation insurance

Workers' compensation insurance is required by law in almost every state if you have employees. It covers employees who are injured on the job and protects you from certain lawsuits related to workplace injuries.

Requirements vary by state — some states require it as soon as you have one employee, others have thresholds. Some states have state-run programs; others allow private insurance. Check your state's workers' comp requirements before your new hire's first day — operating without required workers' comp coverage can result in penalties and leaves you personally exposed.

File the right reports on the right schedule

Once you have an employee on payroll, you have ongoing federal and state filing obligations:

Form 941 (quarterly) — Reports total wages paid, federal income tax withheld, and Social Security and Medicare taxes (both employee and employer shares). Due at the end of the month following each quarter: April 30, July 31, October 31, and January 31.

Form 940 (annual) — Reports and reconciles FUTA (federal unemployment) taxes for the year. Due January 31.

Form W-2 (annual) — Reports wages, tips, and tax withholdings for each employee. Must be furnished to employees by January 31 and filed with the Social Security Administration by January 31.

Form W-3 — Transmittal form that accompanies W-2s filed with the SSA. If you file electronically, W-3 data is included automatically.

Your state will have its own quarterly and annual reporting requirements, which vary by state.

Consider using payroll software or a payroll service

Most small business owners with even one employee use payroll software or a payroll service. The reason is simple: the compliance requirements are specific, the deadlines are fixed, and the penalties for missing deposits or filings are not small. A payroll service handles withholding calculations, deposits, and federal and state filings — and if something goes wrong on their end, it's on them.

Common options for small businesses include Gusto, ADP, Paychex, and QuickBooks Payroll. Costs vary, but most are priced per employee per month. The time and error-risk savings are usually worth it.

Want a step-by-step checklist to work through?

The Hiring Your First Employee checklist in the Prism resource library walks through every step in order — from EIN to first payroll deposit — in a format you can print and check off as you go.

Questions about what hiring means for your business specifically?

A Vibe Check is a good starting point. We can look at your structure, your situation, and what hiring actually changes for you on the tax side before you bring someone on. Schedule yours here.

Keep reading

Hiring changes your payroll picture and your entity considerations. These posts are closely related:

• W-2 vs. 1099: what's the difference and why it matters — The classification question in detail: how to tell which one applies and what it costs to get it wrong.
• How to pay yourself from your business — If you're an S corp or C corp owner, you're also on payroll. Here's how owner compensation works.
• Bookkeeping basics: what you need to track — Income, expenses, assets, owner draws, mileage — here's what every small business needs to track, how to organize it, and how long to keep records.

This post is for general informational purposes and doesn't constitute tax or legal advice. Payroll requirements vary by state and your specific situation — work with a tax professional or payroll service to make sure you're set up correctly before running your first payroll.