How To Hire Your First Employee In 10 Steps

Hiring your first employee is a big step, but it also comes with new payroll, tax, and compliance responsibilities.

Before you add someone to your team, you’ll need to handle key federal, state, and local requirements, from getting the right employer tax accounts to setting up payroll and collecting new hire paperwork.

This guide walks through how to hire your first employee, what forms you’ll need, and how to stay compliant as a new employer.

How To Hire Your First Employee

Hiring your first employee takes more than posting a job and choosing a candidate. You’ll also need to understand your federal, state, and local employer requirements, collect the right new hire forms, set up payroll tax withholding, and prepare to pay your employee correctly.

The steps below walk through how to hire your first employee, from writing the job description to setting up payroll and onboarding your new hire.

Step 1: Determine Whether To Hire A 1099 Contractor Or W-2 Employee

Before hiring your first worker, determine whether the role should be classified as a W-2 employee or an independent contractor. This affects payroll taxes, benefits, reporting requirements, and your legal responsibilities.

The key difference is control. Employees typically work under the employer’s direction, while independent contractors generally control how they complete the work and may serve multiple clients.

A contractor may be a good fit for short-term or project-based work. A W-2 employee may be better if you need ongoing help, set hours, training, or closer supervision.

Step 2: Get Your Employer Identification Number

If you’re hiring employees, you’ll need an Employer Identification Number, or EIN. An EIN is a federal tax ID used by the IRS to identify your business for tax reporting and payroll purposes.

You can apply for an EIN through the IRS online, by fax, or by mail. International applicants can also apply by phone. Depending on where your business operates, you may also need to register for a state employer tax ID or state payroll tax account.

Step 3: Register With Your State’s Labor Department

Before running payroll, you may need to register with your state’s labor department or workforce agency. This allows your business to report wages and pay state unemployment insurance taxes.

Requirements vary by state, so check your state’s employer registration rules to confirm which accounts you need before hiring or paying your first employee.

Step 4: Obtain Workers’ Compensation & Disability Insurance

Before hiring your first employee, check your state’s workers’ compensation requirements. Most states require employers to carry workers’ compensation insurance, though coverage rules vary by state, industry, and number of employees. Texas generally does not require most private employers to carry workers’ comp, but there are exceptions.

Workers’ compensation helps cover employee injuries or illnesses that happen on the job. Depending on your state, you may be able to buy coverage through a private insurer, a state fund, or qualify to self-insure.

Some states also require short-term disability insurance for non-work-related illnesses or injuries. These programs currently apply in California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico, with rules and funding requirements varying by location.

Step 5: Create A Benefits Package

A benefits package can help your business attract and retain employees, especially in competitive hiring markets. Common employee benefits include health insurance, paid time off, parental leave, retirement plans, and wellness benefits.

Not every small business can offer a large benefits package right away, so start with benefits that fit your budget and matter most to your employees. You should also review any federal, state, or local requirements that may apply as your team grows.

Step 6: Decide On A Hiring Budget

Before hiring, make sure you understand the full cost of adding an employee. Your hiring budget should include more than wages or salary; it should also account for payroll taxes, required insurance, benefits, equipment, software, and any hiring or onboarding costs.

Common costs to include in your hiring budget are:

• Wages or salary
• Bonuses or commissions
• Employer payroll taxes
• Workers’ compensation insurance
• Employee benefits
• Equipment, hardware, or software
• Background checks or employment screening
• Training and onboarding costs

Your hiring budget can also help shape your ongoing payroll budget, which covers the recurring cost of paying and supporting your employees.

Need help freeing up room in your budget? Check out our cash flow management tips.

Step 7: Draft Your New Hire Materials

Prepare your new hire materials before you bring on your first employee. This may include an employee handbook, onboarding checklist, job description, offer letter, payroll forms, benefits information, and workplace policies.

An employee handbook isn’t always legally required, but it can help set expectations around pay periods, time off, sick leave, conduct, benefits, and company policies. Just make sure any handbook or template you use is reviewed for your state and local requirements.

HR software can also help by providing templates for offer letters, handbooks, onboarding forms, job posts, and required training materials.

Step 8: Write & Publish Your Job Description

A strong job description helps attract candidates who understand the role, requirements, schedule, pay range, and expectations before applying.

Include the job title, key responsibilities, required qualifications, work location, schedule, compensation, benefits, and instructions for applying. Keep the language clear and specific so candidates can quickly decide whether the role is a good fit.

Once your job description is ready, publish it on the recruiting channels that make the most sense for the role, such as online job boards, your company website, social media, or industry-specific hiring sites. Track where your strongest applicants come from so you know which channels are worth using again.

Step 9: Choose The Right Hire

Once you’ve reviewed applications, start interviewing your top candidates. Use the interview process to evaluate each candidate’s skills, experience, availability, and fit for the role.

You may also need to verify information by contacting references or running a background check. If you use background checks, make sure you follow applicable federal, state, and local rules, including getting any required consent from the candidate.

After choosing your top candidate, send a formal offer letter with key details such as pay, start date, job title, schedule, responsibilities, benefits, and any conditions of employment. Once the candidate accepts, you can move into onboarding and payroll setup.

Step 10: Onboard Your New Employee

Once your candidate accepts the offer, start the onboarding process. This includes collecting required forms, reporting the new hire, setting up payroll, and sharing any company policies or training materials.

Common onboarding requirements include:

• New hire reporting: Employers generally must report new and rehired employees to the state within 20 days of hire, though some states have shorter deadlines.
• Form W-4: Employees complete Form W-4 so the employer can withhold the correct federal income tax from their pay.
• Form I-9: Employees must complete Section 1 by their first day of employment, and employers must complete Section 2 within three business days.
• State withholding forms: Some states also require employees to complete state tax withholding forms.

Keep required forms and payroll records on file. You may also use onboarding to share your employee handbook, benefits information, workplace policies, direct deposit form, training materials, and any required agreements.

How Much Does It Cost To Hire Your First Employee?

The cost of hiring your first employee depends on the role, location, pay, benefits, insurance requirements, and onboarding expenses. As a general rule, employers should budget for more than the employee’s wages or salary alone.

To estimate your total cost, add up both one-time hiring expenses and recurring payroll costs. This will give you a more realistic budget before you make your first hire.

The Bottom Line On Hiring Your First Employee

Hiring your first employee means taking on new payroll, tax, insurance, and compliance responsibilities. Before your employee starts work, make sure you’ve registered for the required employer accounts, collected new hire forms, reported the hire to your state, and set up a payroll process.

You can run payroll manually, but payroll software is usually the easier option for new employers. It can help calculate wages, withhold payroll taxes, pay employees, file payroll taxes, and maintain payroll records.