How to Hire Your First Employee

Step-by-Step Process

1. 1

   Apply for an Employer Identification Number (EIN)

   Before you can legally pay an employee, you need an EIN from the IRS. This 9-digit number identifies your business for tax filing and reporting purposes. If you already have an EIN for your LLC or corporation, you can use the same number for employment taxes.

   Apply online at IRS.gov during business hours (Monday through Friday, 7 a.m. to 10 p.m. Eastern). You will receive your EIN immediately after completing the online application. If you prefer, you can fax Form SS-4 and typically receive your EIN within 4 business days.

   Keep your EIN confirmation letter in a safe place. You will need this number for payroll setup, tax filings, state registration, and opening a business bank account.

   Free Instant (online) to 4 business days (fax) IRS.gov

   Tips

   • Apply online for an instant EIN rather than mailing Form SS-4, which takes 4 to 6 weeks.
   • If you are a sole proprietor with no prior EIN, you can only get one EIN per day online.
   • Print and save your EIN confirmation letter immediately since the IRS does not email it.

   Common Mistakes

   • Applying outside IRS online hours (7 a.m. to 10 p.m. ET weekdays) and assuming the system is broken.
   • Using your Social Security Number instead of an EIN for payroll, which exposes your personal identity to employees.
2. 2

   Register for State and Local Tax Accounts

   Every state (except those with no income tax) requires you to register for state income tax withholding before you pay your first employee. You also need a state unemployment insurance (SUI) account, which is separate from federal unemployment tax. New employers typically pay a default SUI rate until you build an experience rating, usually 2% to 4% of taxable wages.

   Visit your state's Department of Revenue or Secretary of State website to register. Most states let you register online in 15 to 30 minutes. Some states (like California, New York, and New Jersey) also require separate disability insurance or paid family leave registration.

   Check whether your city or county levies a local payroll tax. Cities like New York, Philadelphia, and San Francisco have additional employer taxes that catch first-time employers off guard.

   Free (registration) plus SUI taxes of 2% to 4% on wages 15 to 30 minutes online; account activation in 1 to 10 business days SBA.gov

   Tips

   • Your payroll provider (Gusto, ADP, etc.) can often register you with the state automatically when you set up payroll.
   • Note your state's SUI wage base, which varies widely (California at $7,000 vs. Oregon at $56,700 in 2026).

   Common Mistakes

   • Forgetting to register for SUI separately from state income tax withholding, which are two different accounts in most states.
   • Missing local payroll taxes in cities with their own employer tax requirements.
3. 3

   Choose and Set Up a Payroll System

   A payroll provider automates tax calculations, withholdings, direct deposits, and quarterly filings. For your first employee, the most popular option is Gusto, which starts at $49 per month plus $6 per employee as of 2026. That means you will pay roughly $55/month for one employee on the Simple plan, which includes single-state payroll, automatic tax filing, and employee onboarding tools.

   Other solid options include OnPay at $40/month + $6/employee (multi-state included), and QuickBooks Payroll if you already use QuickBooks for accounting. If your tax liability will be under $1,000 per year, you may qualify to file annually using IRS Form 944 instead of quarterly Form 941.

   Set up your payroll system at least one week before your first pay date. You will need your EIN, state tax account numbers, bank account details, and your employee's W-4 information.

   $40 to $80/month base + $6 to $12 per employee 1 to 3 hours for initial setup; verify bank account in 2 to 3 business days Gusto

   Tips

   • Gusto and OnPay both include unlimited payroll runs, so you can correct mistakes without extra charges.
   • Connect your payroll software to your <a href="/setup/best-accounting-software">accounting software</a> from day one to avoid reconciliation headaches later.
   • If you only have contractors and are adding your first W-2 employee, you need to upgrade from a contractor-only plan.

   Common Mistakes

   • Running your first payroll without verifying your bank account, which delays direct deposit by 2 to 4 days.
   • Choosing the cheapest plan without checking if your state requires multi-state payroll capabilities (Gusto Simple is single-state only).
4. 4

   Collect Required Tax and Employment Forms from Your New Hire

   On or before your employee's first day of work, they must complete Form W-4 (federal tax withholding) and Section 1 of Form I-9 (employment eligibility verification). You then have 3 business days from the start date to complete Section 2 of the I-9 by examining your employee's identity and work authorization documents in person.

   You cannot tell your employee which specific documents to bring. They choose from the USCIS List of Acceptable Documents. A U.S. passport satisfies both identity and work authorization (List A). Alternatively, a driver's license (List B) plus a Social Security card (List C) works.

   Some states require a state-specific withholding form in addition to the federal W-4. California, for example, requires Form DE 4. Your payroll provider's onboarding flow typically handles these automatically, but verify that your state's form is included.

   Free Day 1 of employment (W-4 and I-9 Section 1); within 3 business days (I-9 Section 2) uscis.gov

   Tips

   • Use your payroll platform's digital onboarding to collect W-4 and direct deposit info before day one.
   • Store I-9 forms separately from personnel files, as ICE can request them with as few as 3 business days' notice.
   • If your employee works less than 3 business days, both sections of Form I-9 must be completed on their first day.

   Common Mistakes

   • Failing to complete the I-9 within 3 business days, which can result in penalties of $281 to $2,789 per form for a first offense.
   • Telling the employee which documents to present for I-9 verification, which violates anti-discrimination rules.
5. 5

   Get Workers' Compensation Insurance

   Nearly every state requires workers' compensation insurance as soon as you have one employee (Texas is the notable exception). You can purchase a policy through a private insurer, your state's fund, or through your payroll provider's integrated option. Gusto offers pay-as-you-go workers' comp through AP Intego, which adjusts premiums based on actual payroll.

   For a low-risk office employee earning $50,000 per year, expect to pay roughly $30 to $60 per month. High-risk industries like construction can run $200+ per month per employee. Insureon's small business customers pay a median of $54 per month for workers' comp across all industries.

   Get your policy in place before your employee's first day. Operating without workers' comp when it is required can result in fines of $1,000+ per day in some states and personal liability for any workplace injury.

   $30 to $200+ per month per employee (varies by industry and state) Same-day coverage available from most online providers insureon.com

   Tips

   • Pay-as-you-go plans through Gusto or your payroll provider eliminate large upfront deposits.
   • Ensure each employee's job role is classified with the correct NCCI class code to avoid overpaying premiums.
   • Ask about claim-free discounts, which can lower your rate by 10% or more in some states.

   Common Mistakes

   • Waiting until after an injury to purchase coverage, which means you are personally liable for all medical and lost-wage expenses.
   • Misclassifying employees under a lower-risk code to save on premiums, which can trigger audit penalties and back-premiums.
6. 6

   Report the New Hire to Your State

   Federal law requires you to report every new hire to your state's Directory of New Hires within 20 calendar days of their start date. Some states are stricter: Alabama requires reporting within 7 days, Georgia within 10 days, and Iowa within 15 days. Check your specific state's deadline.

   You must report the employee's name, address, Social Security Number, and date of hire, along with your company name, address, and FEIN. Most states accept a copy of the employee's W-4 form as the report. Many states offer free online portals for electronic submission.

   This reporting requirement exists primarily to help enforce child support orders and prevent benefits fraud. Your payroll provider may handle this automatically, but confirm that it does before assuming you are covered.

   Free Within 7 to 20 days of hire date (varies by state) acf.gov

   Tips

   • Check whether your payroll provider files new-hire reports automatically; Gusto and ADP do this in most states.
   • If you operate in multiple states, you can register as a multi-state employer with HHS and report all hires to one state.

   Common Mistakes

   • Assuming new-hire reporting is the same as quarterly wage reporting (it is not; they are separate requirements).
   • Missing the state-specific deadline because you assumed the federal 20-day window applies everywhere.
7. 7

   Run Your First Payroll and Understand Tax Deposits

   When you run your first payroll, you will withhold federal income tax (based on the employee's W-4), Social Security tax at 6.2% (employee share), and Medicare tax at 1.45% (employee share). You match both the Social Security and Medicare amounts, so your total employer payroll tax burden is 7.65% of gross wages. For 2026, the Social Security wage base is $184,500.

   You also owe FUTA tax (Federal Unemployment Tax) at an effective rate of 0.6% on the first $7,000 of each employee's wages, which works out to a maximum of $42 per employee per year in most states. California employers pay a higher effective FUTA rate due to credit reductions.

   How often you deposit these taxes depends on your liability. New employers typically deposit monthly (by the 15th of the following month). If your annual employment tax liability is under $1,000, you may qualify to file Form 944 annually instead of Form 941 quarterly. Set up EFTPS (Electronic Federal Tax Payment System) to make your deposits.

   7.65% of gross wages (employer share of FICA) plus 0.6% FUTA on first $7,000 Monthly deposits due by the 15th; Form 941 due quarterly eftps.gov

   Tips

   • Your payroll provider calculates and deposits all employment taxes automatically, but verify the first few filings yourself.
   • Set calendar reminders for Form 941 quarterly deadlines (April 30, July 31, October 31, January 31).
   • Register for EFTPS even if your payroll provider handles deposits, so you have a backup payment method.

   Common Mistakes

   • Missing a tax deposit deadline, which triggers IRS penalties of 2% to 15% of the unpaid amount depending on how late you are.
   • Failing to match the employee's FICA contributions, which means you owe the IRS both shares plus penalties.