Hiring Your First Employee: A Checklist for Small Business Owners

Hiring your first employee is a major milestone. It means your business is growing and you can’t do everything yourself anymore. It also comes with new legal and tax responsibilities. Getting the details right from the start helps you avoid penalties and build a positive working relationship with your new team member.

Employee or independent contractor?

Before hiring, make sure you understand whether the worker will be an employee or an independent contractor. The two are treated very differently for taxes and labor laws. Employers must withhold taxes from employees’ wages, pay employer payroll taxes and follow wage and hour laws, while independent contractors handle their own taxes.

Classification depends on the actual working relationship, not just what you call it. Generally, if you control what work is done and how it’s done, the worker may be an employee. Factors include who sets the schedule, who provides tools and equipment, whether the worker can work for others and whether the work is a core part of your business.

Misclassifying employees as contractors can lead to back taxes, penalties and legal problems. The IRS and the U.S. Department of Labor have guidance on worker classification, and some states have stricter tests.

Get an EIN

If you don’t already have one, get an Employer Identification Number from the IRS. You’ll need it for payroll tax filings and other employment-related documents. You can apply for free online at irs.gov.

Verify eligibility to work

Every new employee must complete Form I-9, Employment Eligibility Verification, which verifies their identity and eligibility to work in the United States. Employees complete their section by their first day of work, and employers must examine the employee’s documents and complete their section within three business days of the start date. Keep completed I-9 forms on file for the required retention period; many employers store them separately from personnel files.

Some employers also use E-Verify, an online system that compares I-9 information with government records. It’s voluntary for many employers but required in some states and for certain federal contractors.

Tax withholding forms

Have the employee complete Form W-4, which tells you how much federal income tax to withhold from their pay. Many states have their own withholding forms as well.

Report the new hire

Employers are required to report new hires to their state’s new hire registry, generally within a set time after the hire date. States use this information primarily to help enforce child support orders.

Set up payroll

Set up a system to pay your employee and handle payroll taxes. You’ll need to withhold federal income tax, Social Security and Medicare taxes, and any state and local income taxes from the employee’s wages. You’ll also pay the employer share of Social Security and Medicare taxes and federal unemployment tax. Payroll taxes must be deposited with the IRS on a set schedule, and you’ll file quarterly and annual payroll tax returns. At year-end, you’ll provide each employee with a Form W-2.

Register for state taxes and insurance

Register with your state for unemployment insurance taxes, which fund benefits for workers who lose their jobs. Most states also require businesses to carry workers’ compensation insurance once they have employees, though rules vary by state and sometimes depend on the number of employees.

Know the labor laws

Federal and state laws set rules on minimum wage, overtime, breaks, recordkeeping and more. The federal Fair Labor Standards Act sets the federal minimum wage and generally requires overtime pay at one and a half times the regular rate for nonexempt employees who work more than 40 hours in a workweek. Many states and cities have higher minimum wages than the federal minimum, and some have additional requirements, such as paid sick leave or meal breaks.

Anti-discrimination laws generally prohibit discrimination in hiring and employment based on protected characteristics, though some federal laws apply only to employers above certain sizes. Check your state labor department’s website for state-specific rules.

Create clear expectations

Write a clear job description outlining responsibilities, schedule, pay and expectations. Consider creating a simple employee handbook covering policies such as hours, time off, conduct and pay schedules. Clear expectations from the start help prevent misunderstandings.

Plan an onboarding process to help your new employee get up to speed, including training, introductions and the tools they need to succeed.

Keep good records

Employers must keep payroll records, including hours worked and wages paid, for required periods. Good recordkeeping helps you comply with laws and resolve any questions that arise.

Make it easier

Many small businesses use a payroll service to handle withholding, tax filings and deposits. Payroll services can save time, reduce costly errors and help you stay on top of deadlines. Some also handle new hire reporting, workers’ compensation and benefits administration.

Get free help

The SBA’s website has a guide to hiring employees, and Small Business Development Centers can walk you through the process at no cost. An accountant or employment attorney can also help you navigate more complex questions. Taking the time to set things up correctly lets you focus on what matters most: building a great team and growing your business.