Most of this is administrative and one-off. The ongoing part — payroll tax deposits and filings — is what people underestimate, because the penalties for late deposits are proportionate to how late they are and accrue quickly.
Before the first day
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Get an EIN
Free from the IRS and usually issued immediately online. Required to report employment taxes even if you are a sole proprietor who previously used a Social Security number.
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Register with your state
Typically two separate registrations: state income tax withholding with the revenue department, and state unemployment insurance with the labour or workforce agency. Both usually need to be in place before the first payroll run.
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Arrange workers compensation
Required in almost every state, commonly from the first employee, though thresholds and exemptions vary. It is bought from a private insurer or a state fund depending on the state. Operating without required cover carries some of the steepest penalties in this area.
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Report the new hire
States run new hire reporting directories, generally with a deadline of around twenty days from the start date. This is separate from your tax registrations.
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Set up payroll
Whether you use a provider or run it yourself, decide before the first pay period. Retrofitting records after a few manual payments is more work than starting properly.
Paperwork for the employee
| Form | Purpose | Timing |
|---|---|---|
| Form I-9 | Verifies identity and work authorisation | Section 1 by the first day of work; employer review of documents within three business days |
| Form W-4 | Federal income tax withholding | Before the first payroll |
| State withholding certificate | State income tax withholding, where the state has one | Before the first payroll |
| Direct deposit authorisation | Payment details | Before the first payroll |
Store I-9s apart from personnel files, ideally in their own binder or folder. If they are ever inspected, you want to hand over only the I-9s — not each employee's entire file. Retention runs for three years after hire or one year after termination, whichever is later.
Employee or contractor
This is not a matter of preference or of what the worker agrees to. Classification turns on the degree of control and independence in the relationship, assessed across behavioural control, financial control and the nature of the relationship. States apply their own tests too, and some are considerably stricter than the federal one.
Misclassification exposure includes back payroll taxes, interest, penalties and potentially unpaid overtime. If the answer is genuinely unclear, it is worth professional advice before the first payment rather than after a review.
Ongoing obligations
- Withhold and deposit federal income tax, Social Security and Medicare, plus the employer share, on the schedule the IRS assigns you.
- File quarterly — Form 941 federally for most employers, plus state equivalents.
- Pay unemployment tax — federal (FUTA, reported annually on Form 940) and state.
- Issue W-2s after year end, and file copies with the Social Security Administration.
- Keep records — payroll records for at least three years, and records used to compute pay for at least two, under federal wage and hour rules. State requirements can be longer.
Wage, hour and leave rules
Federal minimum wage and overtime come from the Fair Labor Standards Act, but many states and some cities set a higher minimum or stricter overtime rules, and where they conflict the more generous provision applies to the employee. Several states and localities also mandate paid sick leave, which federal law does not.
Classifying someone as salaried does not by itself make them exempt from overtime. Exemption depends on meeting both a salary threshold and a duties test — the duties test is where most misclassifications occur.
Required postings
Employers must display certain notices where staff can see them, including federal minimum wage, workplace safety, and equal employment opportunity notices, plus state-specific ones. For a remote workforce, the obligation generally still applies and is usually satisfied electronically. The Department of Labor publishes the federal posters free — there is no need to buy them.
Questions owners ask
Can I pay my first employee as a contractor to keep it simple?
Not if the role is genuinely an employee role. Classification follows the facts of the working relationship, not the label on the agreement, and getting it wrong is one of the more expensive errors available to a new employer.
Do I need workers compensation for one part-time person?
In most states yes, though a minority set an employee-count threshold and some exempt particular categories. Check your state specifically — this is one of the least uniform requirements in employment law.
What if I hire someone in another state?
You generally need to register for withholding and unemployment insurance in that state, and to follow its wage, leave and posting rules. Remote hires across state lines add registrations rather than avoiding them.