How to hire your first employee: every federal and state step, in order

Hiring your first employee is a milestone, and it changes what kind of business you run. Until now, you paid yourself and maybe some contractors. From the first employee's start date, you're an employer, with registrations, tax deposits, forms and deadlines that don't go away.

None of it is hard, but it comes in a particular order, and some of it has to be done before the person's first day. This guide takes you through it from the decision to hire to the first payroll run, with the federal rules and the state steps that apply almost everywhere.

Are you ready to hire?

Before the paperwork, check two things.

Can you afford the full cost? An employee costs more than their salary. Budget for payroll taxes, unemployment insurance, workers' compensation, payroll software and any benefits, and for the time it takes them to become productive.

Should this person be an employee at all? If the work is a defined project for someone who runs their own business and has other clients, a contractor may fit better. If you'll direct how, when and where they work, on an ongoing basis, they're probably an employee in the eyes of the IRS and your state. Our guide to 1099 vs W-2 workers explains the tests and the cost of getting it wrong.

Before the first day

1. Get an EIN

You need an employer identification number to run payroll. If your business already has one, you're set. If you're a sole proprietor who has been using your Social Security number, apply for one now. It's free from the IRS. Our guide to getting an EIN walks through it.

2. Register with your state

Most states require two registrations before you pay an employee:

• State income tax withholding, with the state's tax or revenue department, in states that have an income tax.
• State unemployment insurance, with the state's labor or workforce agency. You'll receive a rate, which for new employers is usually a set new-employer rate.

If the employee will work in a different state from your business, you register in the state where they work. Remote hires in other states are common and catch many first-time employers out.

3. Arrange workers' compensation

Most states require employers to carry workers' compensation insurance, which covers medical costs and lost wages if an employee is hurt at work. Rules vary by state, number of employees and industry, and a few states run the insurance themselves. Buy it before the employee starts.

4. Set up payroll

You can run payroll by hand, but almost no small business should. A payroll provider calculates withholding, pays the employee, deposits the taxes, and files the quarterly and annual returns. Gusto's Simple plan, for example, costs $49 a month plus $6 per person and includes unlimited payroll runs and tax filings. Our comparison of Gusto, ADP and Rippling covers the main options.

Decide your pay schedule, such as every two weeks or twice a month, and check your state's rules, since some states limit how infrequently you can pay.

5. Write the offer

Put the offer in writing: the job title, start date, pay and pay schedule, whether the role is exempt or non-exempt from overtime, hours, benefits, and that employment is at will if that applies in your state. A clear offer letter prevents most early misunderstandings.

6. Prepare your workplace obligations

Federal and state laws require employers to display certain notices, often called labor law posters, about minimum wage, safety and employee rights. For remote employees, electronic posting is common. Check your state's list as well as the federal one.

On the first day

Form W-4

Ask the new employee to complete Form W-4 when they start. It tells you how much federal income tax to withhold. Many states have their own withholding form as well. Payroll software usually collects these online.

Form I-9

Every US employer must complete Form I-9 for every person it hires, to verify their identity and authorization to work in the US.

• The employee completes Section 1 by their first day of work for pay.
• You, or someone acting for you, must examine their documents and complete Section 2 within 3 business days of that first day. If they start on a Monday, Section 2 is due by Thursday.

Keep the completed I-9s on file, separately from personnel records, and don't send them to the government unless asked. Some states require some or all employers to use E-Verify, the online system that checks I-9 information, so check whether yours does.

Benefits enrollment and policies

If you offer health insurance, retirement contributions or paid time off, give the employee the enrollment details and your written policies on the first day.

Within 20 days: report the new hire

Federal law requires every employer to report each new or rehired employee to the state where they work within 20 days of hire. The report goes to the State Directory of New Hires and includes seven items: the employee's name, address, Social Security number and date of hire, and the employer's name, address and EIN. Some states require it sooner or ask for more information. Most payroll providers file this report for you, but confirm that yours does.

Payroll taxes: what you withhold and what you pay

Every payday involves two kinds of tax.

What you withhold from the employee's pay:

• Federal income tax, based on their W-4.
• State and local income tax, where it applies.
• The employee's share of Social Security, 6.2% of wages up to $184,500 in 2026, and Medicare, 1.45% of all wages, plus an additional 0.9% Medicare tax on wages over $200,000.

What you pay as the employer, on top of wages:

• Your matching share of Social Security (6.2%) and Medicare (1.45%).
• Federal unemployment tax, 6% of the first $7,000 of each employee's wages, reduced to 0.6% in most cases by the credit for state unemployment tax, so usually $42 a year per employee.
• State unemployment tax, at your state's rate.

You deposit these taxes on a schedule set by the IRS and your state, and file Form 941 quarterly and Form 940 annually. Our guide to payroll taxes for small businesses works through a full paycheck.

The true cost of your first hire

Take a $50,000 salary. On top of it, you'll pay:

• Employer Social Security and Medicare: 7.65%, or $3,825.
• Federal unemployment tax: about $42.
• State unemployment tax: depends on your state and rate.
• Workers' compensation: depends on your state and the type of work.
• Payroll software: around $660 a year on Gusto's Simple plan for one employee.
• Benefits: whatever you choose to offer, such as health insurance.

Before benefits, state taxes and insurance, that's already about $4,500 a year above the salary. With health insurance, the total cost of a $50,000 employee can easily exceed $60,000.

Exempt or non-exempt?

Decide before you make the offer whether the role is exempt from overtime. A non-exempt employee must be paid overtime, generally time and a half, for hours over 40 in a week under federal law, and some states set stricter daily or weekly rules. A role is exempt only if it meets both a salary test and a duties test, typically for executive, administrative or professional work. Getting this wrong is one of the most common wage claims against small employers, so check the federal and state rules before you set the salary.

Deadlines that keep coming

Becoming an employer adds a recurring calendar:

• Every payday: run payroll and withhold taxes.
• Monthly or semiweekly: deposit federal payroll taxes, depending on your deposit schedule.
• Quarterly: file Form 941 and your state's payroll returns.
• By January 31: give each employee a Form W-2, file it with the Social Security Administration, and file Form 940.

A payroll provider handles most of this automatically, which is the main reason to use one.

Mistakes first-time employers make

• Paying an employee as a contractor to avoid payroll taxes, which risks back taxes and penalties.
• Missing the I-9 deadline, or not completing one at all.
• Registering in the wrong state for a remote employee.
• Forgetting workers' compensation, which can mean fines and personal liability for injuries.
• Spending the withheld taxes. Withheld income tax and the employee's share of Social Security and Medicare belong to the government. Owners can be held personally liable if they aren't paid.

The checklist

1. Confirm the role is an employee, not a contractor.
2. Get an EIN.
3. Register for state withholding and unemployment insurance.
4. Arrange workers' compensation insurance.
5. Choose a payroll provider and pay schedule.
6. Send a written offer.
7. Collect the W-4 on day one, and complete the I-9 within 3 business days.
8. Report the new hire within 20 days.
9. Run payroll, deposit taxes and file returns on schedule.

Hiring abroad instead? The rules are different, and our guide to employer of record or contractor covers that case.