Hiring Your First Employee Without Breaking the Law

Hiring your first employee turns a one-person business into an employer — which means a stack of new federal, state, and local rules. Most of them are straightforward once you know they exist; the danger is missing one. This guide walks through the major steps in the order they usually happen.

This is plain-English starter content, not legal advice. Employment law is complex and varies heavily by state — for your specific situation talk to an employment attorney. For broader context, see our Learn hub and business basics.

Step 1: Confirm employee vs. independent contractor

Before you hire anyone, decide whether they are truly an employee or an independent contractor. The distinction is a legal classification, not a label you choose. Misclassifying a worker as a contractor when they are really an employee is one of the most expensive mistakes a small business can make — back taxes, penalties, unpaid overtime, and benefits can stack up quickly.

The IRS and Department of Labor both publish multi-factor tests. The general theme: if you control how and when the work is done, the worker is usually an employee.

Step 2: Get the federal IDs in place

You need:

• An EIN from the IRS — see our EIN guide if you don't have one.
• A state employer account for state income tax withholding (in most states).
• A state unemployment insurance (SUI) account so you can pay unemployment taxes.
• Workers' compensation insurance — required in almost every state the day the first employee starts. Rules vary; check with your state's workers' comp board.

Step 3: Register for unemployment and post required notices

The federal FUTA (Federal Unemployment Tax Act) tax funds part of the unemployment system. As an employer you usually owe FUTA on the first $7,000 of each employee's wages — for example, at the standard rate this works out to a maximum of $42 per employee per year, though credits for state unemployment payments lower the effective rate. State unemployment (SUTA) rates vary widely by state and employer history.

Most workplaces must also display required federal posters covering minimum wage, OSHA, the EEOC, and family/medical leave. The Department of Labor poster page lets you download the federal set free.

Step 4: Verify the right to work — Form I-9 and E-Verify

Within three business days of the new employee's start date, you must complete a Form I-9, the federal employment eligibility verification form, with the employee. You keep the I-9 in your records — you do not file it with the government — and produce it on request from immigration authorities or auditors.

Some employers also use E-Verify, the federal electronic verification system, which compares I-9 information with Social Security Administration and Department of Homeland Security records. E-Verify is required in some states and for some federal contractors; voluntary elsewhere.

The U.S. Citizenship and Immigration Services site is the official I-9 reference.

Step 5: Set up payroll and tax withholding

You'll need to:

• Have the employee complete a federal Form W-4 for income tax withholding
• Have them complete a state withholding form, if applicable
• Set up payroll software or a payroll service
• Withhold federal income tax, Social Security and Medicare (FICA) taxes, and state income tax
• Pay the employer share of FICA, plus FUTA and SUTA
• Deposit federal payroll taxes on the IRS-required schedule (often semi-weekly)
• File quarterly Form 941 with the IRS (or annual 944 for very small employers)
• File annual W-2s through SSA Business Services Online by the federal deadline

The IRS Employer's Tax Guide (Publication 15) is the master reference.

Step 6: Wages, hours, and overtime

Federal wage and hour rules are set by the Fair Labor Standards Act (FLSA), enforced by the Department of Labor. Key points:

• Federal minimum wage is $7.25/hour. Many states and cities set higher rates.
• Most non-exempt employees must receive overtime at 1.5x their regular rate for hours over 40 in a workweek.
• "Salary" alone does not make a worker overtime-exempt — they must also meet the FLSA duties test and minimum salary threshold.
• Tipped workers and youth workers have additional rules.

State rules often go further (daily overtime, meal/rest breaks, paid sick leave). When state and federal rules differ, the rule more favorable to the employee usually applies.

Step 7: Workplace safety and discrimination law

OSHA sets workplace safety rules and requires posting the OSHA "Job Safety and Health" poster. Most employers also fall under the EEOC anti-discrimination laws, which prohibit decisions based on race, color, religion, sex, national origin, age, disability, and genetic information. Different EEOC laws apply at different employer headcounts.

Step 8: Benefits — what you must offer vs. what is optional

Most small employers are not federally required to offer health insurance, retirement plans, or paid vacation. But several benefits are commonly required at the state level — paid sick leave in many states, paid family leave in some — and at certain headcounts federal rules kick in (the Affordable Care Act employer mandate at 50 full-time-equivalent employees, FMLA at 50 employees within 75 miles).

Retirement plans for small businesses are explained at IRS Retirement Plans.

Common first-hire mistakes

• Misclassifying as a contractor. If they look, walk, and work like an employee, they are.
• Skipping workers' comp. Even one employee usually triggers the requirement.
• No Form I-9 on file. Audits look for this first.
• Late payroll tax deposits. The IRS penalty for late deposits compounds quickly.
• Verbal job offers without an offer letter. Put pay, schedule, classification, and at-will status in writing.

A note on the numbers

Minimum wage, overtime thresholds, FUTA rates, ACA thresholds, and state-specific rules change every year. Always check the latest with the Department of Labor, IRS, and your state labor agency before hiring.

Tax laws and SBA programs change every year — always check the latest at IRS.gov, SBA.gov, and your state's Secretary of State website.