Hiring Your First Employee: The Legal Checklist

The offer gets accepted on a Thursday and the start date is the following Monday. Somewhere in those four days, a business that has never had a payroll obligation acquires a federal tax account, at least two state agency registrations, an insurance policy it is legally required to buy, a stack of forms with independent deadlines, and personal liability for money that does not belong to it.

Going from zero employees to one is the largest single step-change in a small business's legal obligations. Nothing else in the life of a small company adds this many separate rules at once. Most owners learn the list in the wrong order — from a notice, occasionally from a penalty.

Educational, not legal advice. Employment rules vary enormously by state, city and industry, and a single hire can be governed by four jurisdictions at once. Your state labor department is the authority on most of what follows, and an hour with an employment lawyer before your first hire is one of the cheapest hours you will ever buy.

The line you don't get to draw¶

Everything in this article turns on one question: is this person an employee?

You do not answer it. The IRS answers it under the common-law control test, the Department of Labor answers it separately under the Fair Labor Standards Act, your state revenue department answers it for withholding, your state unemployment agency answers it for benefits, and your workers' comp carrier answers it at audit. Those tests are related but not identical, and it is entirely possible to be a contractor for one and an employee for another. What none of them do is defer to the label on the invoice or the words in the agreement both parties signed.

Several states — California, Massachusetts and New Jersey among them — apply an ABC test for at least some purposes, which presumes employee status and puts the burden on the business to disprove it. That is a much harder standard than the federal control test, and it is the reason "everyone in my industry uses contractors" is not a defense.

The cost of getting it wrong is not a fine. It is a reclassification, and reclassification is retroactive: back federal and state withholding, both halves of FICA, unpaid FUTA and state unemployment tax, interest, penalties, back overtime and unpaid minimum wage under the FLSA, and — the one that actually closes businesses — a workers' compensation claim from someone you were never insured for.

If the answer is employee, the rest of this page applies. If you genuinely aren't sure, IRS Form SS-8 asks the IRS to determine status in writing. It is slow — months, not weeks — but a written determination is a very different position to be in than a guess.

Before day one: the four things with lead times¶

These four cannot be done on the morning of the start date. Start them two to four weeks out.

1. An EIN¶

You need a federal Employer Identification Number to have employees. A sole proprietor with no employees can operate on a Social Security number; that stops being true the day you hire. It's free, the online application issues the number immediately, and the complete EIN walkthrough covers the process.

One detail that trips up single-member LLCs: a disregarded LLC files and pays employment taxes under its own EIN, not the owner's. If you have been using a personal SSN or a sole-proprietor EIN, the LLC needs its own before payroll starts.

2. State income tax withholding registration¶

Register with your state's revenue or taxation department for a withholding account. You will be assigned an account number and a filing frequency — monthly, quarterly or annually depending on how much you withhold.

A short list of states don't tax wage income at all, Texas, Florida, Washington and Nevada among them, so there is nothing to register. Everywhere else, this is required before the first payroll, because you cannot remit withholding to an account that does not exist. Some states and cities add a local withholding layer on top: Ohio and Pennsylvania municipalities, New York City, and a scattering of others.

3. State unemployment insurance registration¶

This is a separate registration with a separate agency, and it is the one people miss. Withholding is administered by the tax department; unemployment insurance is administered by the labor or workforce agency. Two portals, two account numbers, two filing calendars.

You'll be assigned a new-employer contribution rate, replaced after a few years by an experience rating driven by your own claims history. States that have mandatory paid family and medical leave or state disability programs — a growing list — usually require a third registration, and often an employee payroll deduction to fund it.

4. Workers' compensation coverage¶

Buy it before the first day of work, not after. Thresholds are set by state and genuinely differ: California requires coverage at one employee, Florida at one in construction and four outside it, and Texas doesn't mandate it for most private employers at all. Our guide to business insurance covers what the policy does, how it's rated on payroll, and what happens at the annual audit.

And a payroll method¶

You have three realistic options, and picking one is part of the pre-work because setup takes time. Enrollment in EFTPS — the Electronic Federal Tax Payment System, which is how federal deposits are actually made — involves a PIN sent by mail. Start it early.

Whichever you choose, the employer stays liable. If a payroll provider takes your money and does not remit it, the IRS pursues you, not them. Enroll in EFTPS yourself even when a service handles deposits, and log in periodically to confirm the payments actually landed.

The paperwork, named correctly¶

Form I-9, Employment Eligibility Verification¶

Every employee hired in the United States gets one. It is never filed with the government — you keep it and produce it on request.

• Section 1 is completed by the employee no later than their first day of employment. It may be completed after they accept the offer, but not before.
• Section 2 is completed by you within three business days of the employee's first day of employment. If the job will last fewer than three business days, Section 2 is due by the end of the first day.
• The employee presents one document from List A, or one from List B plus one from List C. The choice is theirs.

That last point carries legal weight. You may not tell an employee which documents to bring, ask for more or different documents than the form requires, or refuse documents that reasonably appear genuine and relate to the person presenting them. Doing so is an unfair documentary practice under the Immigration and Nationality Act, enforced by the Department of Justice, and it applies to employers with as few as four employees. Hand over the Lists of Acceptable Documents and let the employee pick.

Two more mechanics: use the current edition of the form from the USCIS website, since expired editions are not accepted and revisions happen on their own schedule. And E-Verify — the electronic confirmation system — is voluntary under federal law, mandatory in several states and for many federal contractors, and the gateway to the alternative procedure for examining documents remotely rather than in person.

Form W-4, Employee's Withholding Certificate¶

The employee completes it, you keep it, and it does not go to the IRS. If an employee never gives you one, you withhold as if they were single with no adjustments — you do not get to guess, and you do not get to skip withholding.

Most states with an income tax have their own withholding certificate, and it is not the federal form: California uses the DE 4, New York the IT-2104, and so on down the list. A few states accept the federal W-4. Check which applies before the first payroll rather than after, because fixing under-withholding retroactively is an unpleasant conversation with someone who has already spent the money.

New hire reporting¶

Federal law requires every employer to report each newly hired employee to their state's directory of new hires. The report is short — employee name, address, Social Security number and date of hire, plus your business name, address and EIN — and it exists mainly to enforce child support orders and to catch unemployment and workers' comp fraud early.

Federal law sets the outer limit at 20 days from the date of hire, and states are free to require it sooner; several do. Employers reporting electronically may instead file twice monthly, 12 to 16 days apart. Multi-state employers can elect to report all hires to a single state, but only by notifying the Department of Health and Human Services and reporting electronically.

Most payroll providers do this automatically. Confirm that yours does, because the obligation is yours regardless.

And the rest of the day-one stack¶

Direct deposit authorization, emergency contact, benefit enrollment forms if you offer any, and signed acknowledgments for whatever policies you've written. Several states bar making direct deposit a condition of employment, so have a paper-check alternative available even if nobody uses it.

Payroll tax mechanics¶

What comes out of the employee's pay¶

• Federal income tax, calculated from the W-4 using the methods in IRS Publication 15-T
• Social Security, 6.2% of wages up to an annual wage base that changes every year
• Medicare, 1.45% of all wages, with no cap
• Additional Medicare Tax, 0.9% on wages above $200,000 in a calendar year. You must withhold it once the employee crosses $200,000 with you, regardless of their filing status, and there is no employer match on this piece.
• State and any local income tax
• In some states, an employee contribution to disability or paid family leave

What you pay on top¶

This is the part first-time employers underestimate, because none of it appears on the employee's pay stub.

• The employer share of FICA: 6.2% Social Security plus 1.45% Medicare, 7.65% of wages, matched dollar for dollar with what you withheld. This is the same 15.3% that self-employed people pay entirely themselves as self-employment tax — as an employer, you're now on the other half of that arrangement.
• FUTA, federal unemployment tax: 6.0% on the first $7,000 of each employee's annual wages, reduced by a credit of up to 5.4% for paying state unemployment tax on time. At the full credit that's an effective 0.6%, or $42 per employee per year. Employers in states with outstanding federal unemployment loans lose part of that credit and pay more; those are called credit reduction states and they're listed on Schedule A of Form 940.
• State unemployment tax, at your assigned rate on a state-set taxable wage base. The bases vary wildly — some states match the federal $7,000, others are several times that — so a national "average" rate tells you nothing about your bill.
• Workers' compensation premium, rated per $100 of payroll against your class code.
• In some states, an employer contribution to paid leave or disability programs.

Budget roughly 10–15% above gross wages for the mandatory items alone, before benefits, and more in high-rate states or high-hazard class codes.

Deposits¶

Federal employment tax deposits are made electronically through EFTPS on one of two schedules, and you do not choose which one — the IRS assigns it based on a lookback period covering the four quarters ending June 30 of the prior year.

• Monthly depositor (lookback liability of $50,000 or less): deposit by the 15th of the following month.
• Semiweekly depositor (more than $50,000): paydays Wednesday through Friday deposit by the following Wednesday; paydays Saturday through Tuesday deposit by the following Friday.

New employers have no lookback history, so they start as monthly depositors. One override applies to everyone: if you ever accumulate $100,000 or more in employment taxes on any single day, that must be deposited by the next business day, and a monthly depositor becomes semiweekly for the rest of that year and all of the next.

1–5 days late2%

6–15 days late5%

16+ days late10%

Unpaid 10+ days after IRS notice15%

Returns¶

• Form 941, quarterly, due the last day of the month after the quarter ends: April 30, July 31, October 31, January 31. You get an extra ten days if every deposit for the quarter was made on time and in full.
• Form 944, annual, replaces the 941 for very small employers whose total annual employment tax liability is $1,000 or less — but only if the IRS notifies you that you qualify. File 941s until they tell you otherwise.
• Form 940, FUTA, annual, due January 31.
• Form W-2 to each employee and Form W-3 with Copy A of the W-2s to the Social Security Administration — both due January 31. Note the recipient: W-2s go to SSA, not the IRS. If you file ten or more information returns in aggregate across all types, they must be filed electronically.
• State returns: quarterly wage reports to the unemployment agency and withholding returns on your state's schedule. These are the ones DIY payroll most often forgets.

Wage and hour: where "salaried" stops being an answer¶

Minimum wage¶

The federal minimum is $7.25 per hour, unchanged since July 2009. Most states are higher, many cities are higher still, and where they differ the employee is entitled to the highest applicable rate. The Department of Labor maintains a consolidated state table; your city may have its own ordinance on top of that.

Overtime, and the exempt/non-exempt distinction¶

Under the FLSA, non-exempt employees get 1.5x their regular rate for hours over 40 in a workweek. A workweek is a fixed, recurring period of seven consecutive 24-hour days that you designate. You cannot average two weeks together to avoid overtime, and there is no federal daily overtime — but there is state daily overtime, notably California's over-8-in-a-day rule and its double-time provisions.

The "regular rate" is not the base hourly rate. It includes non-discretionary bonuses, shift differentials and commissions, which means paying a production bonus retroactively raises the overtime you already owed for those weeks.

An employee is exempt from overtime only if all three of the following are true:

1. Salary basis — paid a predetermined amount each pay period that doesn't fluctuate with hours or quality of work.
2. Salary level — at or above the regulatory threshold. This figure has been actively litigated: a 2024 increase was vacated nationwide by a federal court in November 2024, returning the floor to the 2019 level of $684 per week ($35,568 a year). Confirm the number in force at the Department of Labor before you rely on it, and check your state, because several set a materially higher floor — California ties it to twice the state minimum wage for full-time work.
3. Duties test — the employee's primary duty fits the executive, administrative, professional, computer or outside sales exemption as those are defined in the regulations.

“Paying a salary is a payment method. Exemption is a legal status. They are not the same decision, and only one of them is yours to make.”

Job titles are irrelevant. Calling someone an Office Manager does not make them administratively exempt; the administrative exemption requires the exercise of discretion and independent judgment on matters of significance, which is a real standard with real case law behind it. Most first hires at a small business — the assistant, the shop help, the junior coordinator — are non-exempt, and misclassifying them costs two years of back overtime plus, in willful cases, liquidated damages equal to the amount owed.

Time records¶

For every non-exempt employee, you must record hours worked each day and total hours each workweek, along with pay rate, gross wages, deductions and pay period dates. Payroll records are kept three years; the underlying time cards and work schedules, two years. This is not optional and it is not satisfied by a salary.

The practical reason to be rigorous about it: in a wage dispute where the employer's records are missing or inadequate, the employee's own reasonable recollection can carry the day. Bad records don't create a tie. They tend to lose.

Federal law does not require meal or rest breaks, though breaks under 20 minutes must be paid if you offer them. Many states do require them, with penalties for missed breaks that are calculated per employee per day and add up quickly. Most states also mandate an itemized wage statement each payday; California specifies nine required items by statute.

Posters and notices¶

Federal law requires several posters in a place employees can see. All of them are free from the Department of Labor:

• Fair Labor Standards Act (minimum wage)
• OSHA "Job Safety and Health: It's the Law"
• Employee Polygraph Protection Act
• USERRA (military service member rights)
• EEOC "Know Your Rights", once you reach 15 employees
• FMLA, once you reach 50

States add their own: minimum wage, unemployment insurance, workers' comp with your carrier and claim instructions, paid sick leave, discrimination and harassment notices, whistleblower protections. Several states also require individual written notice to the employee at hire — New York's Wage Theft Prevention Act notice and California's Labor Code 2810.5 notice for non-exempt hires are the two you'll hear about most. A poster on the wall does not satisfy those; they are handed to the person and signed.

If your employee is remote, the Department of Labor has addressed electronic posting: where employees work entirely remotely and can readily access the notices electronically, electronic posting can satisfy the requirement. Check your state's position separately, because it may not match.

Policies worth writing for one employee¶

A 40-page handbook for one person is theater. These are not.

• Anti-harassment and anti-discrimination policy, with a complaint route that does not run through the person complained about. With one employee, the default reporting path is "tell the owner," which fails completely when the owner is the problem. Name a designated alternative — an outside HR consultant, an attorney, a co-owner. Several states require a written policy and periodic training regardless of headcount; New York requires both of every employer.
• Timekeeping and off-the-clock work. A written rule that all time worked must be recorded, and that working outside recorded hours is not permitted, is the policy that makes your time records defensible.
• Paid sick leave. Mandated in a growing number of states and cities, frequently from the first employee, with accrual rates and carryover rules set by statute.
• PTO and what happens to it at separation. In California and several other states, accrued vacation is a vested wage that must be paid out at termination and cannot be forfeited under a use-it-or-lose-it rule. Write the policy to match your state, not to match a template you found.
• Expense reimbursement. California Labor Code 2802, Illinois, Massachusetts and others require reimbursement of necessary business expenses — which for a remote worker can include a reasonable share of a personal phone and internet bill.
• Safety. Employers with ten or fewer employees are generally exempt from routine OSHA injury logs, but nobody is exempt from the general duty clause or from severe-incident reporting: a work-related fatality within 8 hours, and an in-patient hospitalization, amputation or loss of an eye within 24 hours.

Federal anti-discrimination statutes have headcount thresholds — Title VII and the ADA at 15 employees, the ADEA at 20 — but those are floors, not permission. The Equal Pay Act and USERRA apply with no minimum, and many state fair employment laws apply from the first employee. Treat the obligations as live on day one, because in most states they are.

The offer letter¶

An offer letter is a short document that does one job badly if you get it wrong.

Include: job title, start date, the person they report to, exempt or non-exempt status stated explicitly, the pay rate and pay frequency, a summary of benefits with a note that they're governed by the actual plan documents, any contingencies (I-9 completion, background check, references), and a clear at-will statement.

Leave out: the word "permanent," anything implying job security or a defined term, guaranteed bonuses, promotion timelines, and vague references to "our culture" that later get read as promises.

At-will means either side can end the relationship at any time, for any lawful reason or none. It is the default in every state except Montana, whose Wrongful Discharge from Employment Act requires good cause for discharge once an employee completes the probationary period. It is not a license to fire for an unlawful reason — discrimination, retaliation and public-policy exceptions all survive at-will — and stating it plainly in the letter is what keeps the letter from being read as a contract.

If you run background checks through a third-party screening company, the Fair Credit Reporting Act imposes its own sequence: a standalone written disclosure, the applicant's authorization, then a pre-adverse action notice with a copy of the report before you act on it. Many states and cities also restrict when you may ask about criminal history at all.

Records and endings¶

Keep three separate files, not one:

1. The personnel file — offer letter, reviews, discipline, pay changes.
2. I-9s, filed separately from everything else. Keeping them apart means you can hand an inspector the I-9 binder without exposing unrelated records, and you must be able to produce them within three business days of a Notice of Inspection.
3. A confidential medical file. The ADA requires medical information — including anything from a fitness-for-duty exam or an accommodation request — to be kept separate and confidential.

Retention runs three years for payroll records, two for time cards and schedules, and the I-9 has its own arithmetic: three years after the date of hire, or one year after employment ends, whichever is later. Someone hired in March 2024 who leaves in January 2026 has an I-9 you keep until March 2027, because three-years-from-hire is the later of the two. For a long-tenured employee it is always one year after separation. Several states require longer than the federal minimums, and many give employees a statutory right to inspect their own personnel file on request within a set number of days.

At termination, in roughly this order:

• Final pay on your state's timetable. This is not uniform and the penalties are real — California requires final wages immediately on discharge, or within 72 hours when an employee quits without notice. Most states say the next regular payday. Include any accrued PTO your state treats as a wage.
• Continuation of health coverage. COBRA applies at 20 or more employees; below that, most states have a mini-COBRA that does the same job.
• Any state-required separation notice — several states require a written notice of the separation date, an unemployment benefits pamphlet, or both, handed over at the time.
• Respond to the unemployment claim on time. The state notice carries a short deadline, often around ten days. Failing to respond promptly can cost you the right to contest the claim, and a pattern of late responses can prevent relief from the charges regardless of the merits.
• Recover property and revoke access — keys, laptop, credentials, bank and email — on the last day.
• Write down the reason, contemporaneously. A one-paragraph memo dated the day of the decision is worth more than a perfect memory eighteen months later.

The order to actually do this in¶

1. 1

   Settle whether this is an employee

   Before the offer. If the answer is employee, everything below is on the clock. If you genuinely can't tell, Form SS-8 gets a written determination — start it early, because it takes months.

2. 2

   Get the EIN

   Free, online, issued immediately. Single-member LLCs: it must be the LLC's own EIN, not yours.

3. 3

   Register with the state — twice

   Withholding with the revenue department, unemployment insurance with the labor or workforce agency. Two agencies, two account numbers. Add a third registration if your state runs a paid family leave or disability program, and register in the employee's state if it isn't yours.

4. 4

   Bind workers' comp coverage

   Effective on or before the first day worked. Check your state's threshold rather than assuming it's higher than one employee.

5. 5

   Set up payroll and enroll in EFTPS

   Two weeks before the first payday. Enroll in EFTPS in your own name even if a provider will make the deposits, so you can verify they happened.

6. 6

   Send the offer letter

   Title, start date, exempt/non-exempt, rate stated per pay period, contingencies, at-will language. Get it signed and keep it.

7. 7

   Day one: I-9 Section 1, W-4, state withholding form

   Section 1 by the end of the first day. Your Section 2 within three business days. State withholding certificate, direct deposit authorization, and signed policy acknowledgments the same day, while the person is already doing paperwork.

8. 8

   File the new hire report

   Within your state's deadline, which is 20 days from the date of hire at the outside and often less. Confirm your payroll provider is doing it before you assume they are.

9. 9

   Put the posters up

   Federal and state, free from dol.gov and your state labor department. Hand over any individual at-hire notices your state requires — those are separate from the posters.

10. 10

    Run the first payroll, then verify it landed

    Check the deposit actually posted in EFTPS and that the state accounts show a payment. Then calendar everything: deposit dates, Form 941 quarterly, Form 940 and W-2/W-3 by January 31, state quarterly wage reports, and your workers' comp audit.

Frequently asked questions¶

The first hire is the point where a business stops being a person with customers and becomes an employer, with a set of obligations that no longer bend to how busy you are. Almost all of it is a one-time setup followed by a calendar. The expensive failures are not complicated ones — a missed classification, a deposit spent on rent, a salaried employee who was never exempt — and they're all avoidable in the first two weeks, before anyone has done a day's work.

Do the four registrations, buy the coverage, name the forms correctly, and calendar the deadlines. While you're at it, the rest of the compliance checklist and your local licensing rules are the same species of chore: cheap now, expensive later.

It's just business, with staff.

Sources

1. IRS — Hiring employees
2. IRS — Publication 15 (Circular E), Employer's Tax Guide
3. IRS — Depositing and reporting employment taxes
4. IRS — Independent contractor (self-employed) or employee?
5. IRS — Family help (employing a spouse, child or parent)
6. USCIS — I-9 Central
7. U.S. Department of Labor — Fact Sheet #17A: Exemption for executive, administrative, professional, computer and outside sales employees
8. U.S. Department of Labor — Fact Sheet #21: Recordkeeping requirements under the FLSA
9. U.S. Department of Labor — Workplace posters
10. U.S. Department of Labor — Consolidated state minimum wage table
11. HHS Office of Child Support Services — New hire reporting
12. OSHA — Report a fatality or severe injury
13. U.S. Small Business Administration — Hire and manage employees