Hiring Your First Employee: Legal Requirements and Practical Steps

Why This Is a Bigger Deal Than You Think

Hiring your first employee is the single biggest legal and financial shift your business will go through after formation. You go from being a solo operator to being an employer, and with that comes a stack of federal, state, and local obligations that don't care whether you knew about them or not.

This guide walks you through every step so you don't get blindsided.

Step 1: Get Your EIN

If you don't already have an Employer Identification Number, you need one before you can hire anyone. You can apply for free at IRS.gov -- it takes about five minutes online and you get the number immediately.

Do not pay a third-party service to get your EIN. It's free directly from the IRS.

Step 2: Register With Your State

Every state has its own requirements for employers. At minimum, you'll need to:

• Register with your state's department of labor
• Set up a state tax withholding account
• Register for unemployment insurance (more on this in our workers' comp guide)
• Check whether your state requires disability insurance or paid family leave

Some states require registration within days of your first hire. Don't wait.

Step 3: Verify Work Eligibility

Federal law requires you to verify every employee's identity and work authorization using Form I-9. This must be completed within three business days of the employee's start date.

You'll also want to check whether your state requires E-Verify. Some states mandate it for all employers, others only for government contractors or businesses above a certain size.

Step 4: Set Up Payroll and Tax Withholding

Before your employee's first day, you need:

• Form W-4 from the employee (federal tax withholding elections)
• A payroll system or payroll provider to calculate and remit taxes
• The ability to deposit federal taxes (EFTPS enrollment)
• State withholding forms if your state requires them

You are responsible for withholding federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from every paycheck. You also pay the employer portion of Social Security and Medicare -- another 7.65%.

Step 5: Report the New Hire

Federal law requires you to report every new hire to your state's new hire reporting agency within 20 days (some states require it sooner). This is how the government tracks child support obligations and prevents fraud.

Step 6: Get Workers' Compensation Insurance

Nearly every state requires workers' comp coverage as soon as you have one employee. A few states (like Texas) make it optional, but carrying it is almost always the smart move. We cover this in detail in our workers' comp guide.

Step 7: Display Required Posters

The Department of Labor requires you to display certain workplace posters where employees can see them. These cover minimum wage, OSHA rights, FMLA (if applicable), and anti-discrimination laws. You can download them free from DOL.gov.

If you have a remote employee, check DOL guidance on electronic posting.

Step 8: Classify Correctly

This is where many small business owners get into trouble. There is a massive legal difference between an employee and an independent contractor. The IRS, DOL, and your state all have tests for this, and they don't always agree.

The general rule: if you control how the work gets done (not just what gets done), that person is probably an employee. Misclassification can result in back taxes, penalties, and lawsuits.

Step 9: Understand Your Obligations

Once you have an employee, you're subject to:

• FLSA: Minimum wage and overtime rules
• OSHA: Workplace safety requirements
• Anti-discrimination laws: Title VII applies at 15+ employees, but many state laws kick in at 1 employee
• ACA: If you grow to 50+ full-time equivalent employees, you'll have health insurance obligations

What Most Owners Get Wrong

The biggest mistake is treating this like a paperwork exercise. Hiring your first employee changes your risk profile, your tax obligations, and your legal exposure. Get a payroll provider set up before day one. Talk to an employment attorney if you have any doubt about classification. And keep records -- the IRS and DOL both love documentation.

Your First-Hire Checklist

• [ ] Obtain EIN from IRS
• [ ] Register with state labor and tax agencies
• [ ] Set up payroll and tax withholding
• [ ] Have employee complete W-4 and I-9
• [ ] Report new hire to state agency
• [ ] Obtain workers' compensation insurance
• [ ] Post required workplace notices
• [ ] Verify correct worker classification
• [ ] Establish a personnel file system