Hiring Your First Employee
Before Hiring
- Get an EIN: You need it for payroll tax filings. Apply at irs.gov.
- Register with your state: State tax agency (for state income tax withholding) and state labor department (for unemployment insurance).
- Get workers' compensation insurance: Required in most states. Cost: ~$0.25-1.00 per $100 of payroll for low-risk jobs. Can buy through private insurers or state fund depending on the state.
- Display workplace posters: Federal and state posters (minimum wage, anti-discrimination, workers comp, OSHA, FMLA, E-Verify). Available free from dol.gov.
- Verify E-Verify: Some states require E-Verify enrollment (Arizona, Mississippi, others). Federal contractors must also use E-Verify.
New Hire Paperwork
- W-4: Employee's withholding certificate.
- I-9: Employment eligibility verification. Must be completed within 3 business days of hire. Retain for 3 years after hire or 1 year after termination (whichever is later).
- State withholding form: Many states have their own W-4 equivalent.
- Direct deposit authorization: Optional but recommended.
- Employee handbook: Not required by law, but strongly recommended to set expectations and document policies.
Payroll Setup
Payroll requires calculating and remitting: federal income tax withholding (using IRS tax tables), FICA (Social Security 6.2% + Medicare 1.45% — match both halves), FUTA (federal unemployment — 6% on first $7k, but most get a 5.4% credit, net 0.6% = $42 max per employee/year), SUI (state unemployment — varies, $40-500 per employee/year), and state income tax (if applicable).
Payroll schedule: Most small businesses pay semi-monthly or bi-weekly. Payroll tax deposits are due either semi-weekly or monthly depending on your total tax liability ($50k threshold).
Payroll Options
- DIY: Process through QuickBooks or ADP Run (cheapest for 1 employee: ~$15-35/month).
- Full-service PEO: Gusto ($40/month + $6/person), ADP TotalSource, TriNet. Handle payroll, taxes, workers comp, HR compliance.
- Bookkeeper: Some CPAs offer payroll processing as part of their services.
Annual Filings
- Form 941 (quarterly): Report wages and payroll taxes.
- Form 940 (annual): FUTA tax return.
- W-2 + W-3 (annual): Provide to employee by Jan 31, file with SSA by Jan 31 (if e-filed, Feb 28/31 for paper).
- State filings: Quarterly wage reports and tax payments to state unemployment agency.
Employee vs Independent Contractor
Know the difference before hiring. If you control what, when, and how the worker performs, they're likely an employee. Misclassification penalties: back taxes, interest, penalties, and potential lawsuits for denied benefits. When in doubt, file Form SS-8 for an IRS determination or consult a labor attorney.