How to hire your first employee.
Hiring your first W-2 employee triggers a bundle of federal and state employer registrations, workers compensation insurance, unemployment insurance, payroll tax setup, and employment paperwork. Miss any one and the penalties compound quickly. This guide walks through the 9-step setup, common mistakes, and our partner payroll services.
Step by step.
Employee (W-2): you control how, when, where work happens. Contractor (1099): worker is independent, sets own hours and methods, uses own tools, has multiple clients. Misclassification is a top audit target.
EIN (if not already). Apply for federal employer identification number (typically same as your EIN for tax purposes).
State Department of Revenue: withholding tax account. State Department of Labor: unemployment insurance account. Some states: separate paid family leave or disability insurance accounts.
Required in every state except Texas (where optional). Coverage levels and exemptions vary by state. Get a quote from partner brokers; bind before first day of work.
Gusto, Rippling, OnPay, ADP, or Justworks. Each handles federal + state withholding, direct deposit, W-2 generation, and quarterly filings. Pricing $40-100/mo per business + per-employee fees.
Compensation, benefits, schedule, at-will language, IP assignment, confidentiality, non-disclosure. Our templates cover most situations.
Form I-9 (work authorization), Form W-4 (tax withholding), state withholding form, direct deposit form, benefits enrollment if applicable.
Most states require minimum pay frequency (weekly, biweekly, or semi-monthly). Confirm your state requirement. Set first payday in payroll system.
Form 941 quarterly (federal withholding + FICA). State withholding quarterly. State UI quarterly. Form 940 annually (FUTA). W-2s by January 31.
What to avoid.
IRS, state DOLs, and class action plaintiffs audit this. Penalties: back wages, back taxes, interest, often 100%+ of the original obligation.
In states where required (49 of 50), uninsured employers face fines per employee per day plus liability for any injury claim.
Federal EIN does not cover state. Each state needs its own withholding, UI, and sometimes other registrations.
Running payroll manually with spreadsheets misses withholding rates, quarterly filings, and W-2 deadlines. Payroll services are $40-100/mo; the math always favors using one.
Verbal offers create ambiguity on IP ownership, confidentiality, at-will status. Always have a written offer letter or employment agreement.