Hiring and Onboarding
Hiring Your First Employee: A Complete Guide for Small Business Owners
Hiring your first employee requires more than posting a job and running payroll. Before day one, small business owners must complete specific legal registrations, set up payroll and workers’ compensation, prepare required policies, and put onboarding structure in place. This guide walks step-by-step through everything you must do before and after your first hire.
What you'll learn
In this guide you'll learn:
- How to decide between employee vs. contractor
- The legal and administrative steps required before day one
- What policies must be in place for your first employee
- What to do during the first 30 and 90 days
- The most common first-time employer mistakes
- Which templates and documents make this easy
What you need before hiring your first employee: two decisions to make first
Employee or independent contractor?
This is the most consequential classification decision you will make. Misclassifying an employee as a contractor is one of the most common and costly mistakes small business owners make. The IRS and Department of Labor take misclassification seriously, and penalties can include back taxes, benefits, and fines.
The core question is how much control you have over the work. If you control when, where, and how the work is done, the person is likely an employee regardless of what your contract says. If the person sets their own hours, uses their own tools, works for multiple clients, and controls their own methods, they may qualify as a contractor. See our full guide to hiring your first employee as a small business owner.
What role are you actually hiring for?
Write a clear job description before you post anything. A good description defines the core responsibilities, the skills genuinely required (not a wish list), the reporting structure, and whether the role is full-time, part-time, or hourly. A clear job description is not just a recruiting tool. It is also a legal document that supports compensation decisions and helps defend against discrimination claims.
Legal requirements before hiring your first employee
This is the non-negotiable list. Every item below applies to virtually every U.S. small business hiring its first W-2 employee.
Before they start
Get your Employer Identification Number (EIN)
Apply through the IRS at irs.gov. It is free, takes about 15 minutes online, and you receive your number immediately. You need this to pay payroll taxes, open a business bank account, and file employment forms.
Before they start
Register with your state
In addition to the federal EIN, most states require employers to register before hiring. This typically involves registering with your state's department of labor for unemployment insurance and your department of revenue for state income tax withholding. Requirements vary by state.
Before they start
Set up payroll
You need a system to withhold and remit federal income tax, Social Security, and Medicare taxes from employee wages, plus pay the employer's matching share. Most small businesses use a payroll service such as Gusto, QuickBooks Payroll, or ADP. Using a payroll service is strongly recommended if this is your first hire.
Before they start
Get workers' compensation insurance
Most states require employers to carry workers' comp insurance as soon as they have any employees. Contact your state's workers' comp authority or your business insurance broker. Failure to carry required coverage can result in significant penalties.
On or before day one
Complete Form I-9
Federal law requires you to verify that every employee is legally authorized to work in the United States. The employee completes Section 1 on or before their first day. You complete Section 2 within three business days of their start date after reviewing identity and work authorization documents in person. Keep I-9 forms on file for three years from hire or one year after separation, whichever is later.
Day one
Form W-4 and state withholding forms
The W-4 tells you how much federal income tax to withhold. Have new hires complete this on their first day. Most states have a parallel state withholding form as well. Keep both in the employee's personnel file.
Within first few days
Report the new hire to your state
Federal law requires employers to report new hires to the state within 20 days of hire, though some states have shorter deadlines. Your payroll provider typically handles this automatically.
Get the full compliance checklist
Our Compliance Essentials Bundle includes a detailed first-employee hiring checklist, required notices and forms, and the core policy documents you need in place before your first employee starts.
Get the Compliance Essentials Bundle Read the Compliance Checklist ArticlePolicies you must have before your first employee starts
Employee handbook
Your handbook sets the ground rules for the employment relationship. At minimum it needs an at-will employment statement, your anti-harassment policy, your PTO and attendance rules, your code of conduct, and your progressive discipline policy. Every employee should receive and sign the handbook on their first day. See our complete guide to employee handbooks for small businesses and our Small Business Employee Handbook template.
Required workplace notices
Federal and state law requires you to post certain notices where employees can see them. These include minimum wage, OSHA, FMLA (if applicable), and anti-discrimination law notices. The Department of Labor's poster advisor tool at dol.gov identifies which posters apply to your business. Most states have additional posting requirements.
Onboarding checklist
A structured onboarding process reduces early turnover significantly. Employees who experience a clear, organized first week are more likely to stay and perform. Our new employee onboarding checklist article covers what to include, and our New Hire Onboarding Checklist template is ready to use directly.
The first 30 days
Compliance paperwork is only part of onboarding. The first 30 days also involve the human work of setting a new employee up for success.
- Day one: Complete I-9 and W-4, distribute and sign handbook, tour the workspace, make introductions, set up equipment and system access
- Week one: Explain the role in detail, set 30/60/90-day expectations, begin any formal training, establish a regular check-in cadence
- 30 days: First formal check-in to discuss how things are going, what is unclear, and any early adjustments needed
- 90 days: End of most standard probationary periods; a good moment for a more formal performance discussion
If a new hire is not meeting expectations within the first 90 days, see our article on what to do when a new hire is not working out.
The most common first-time employer mistake: Treating the employment relationship as informal because you know the person. Whether you hired a friend, a referral, or a stranger, the legal framework of employment applies equally. Verbal agreements about hours, pay, or flexibility are the fastest way to create disputes that written policies would have prevented.
Frequently asked questions
What do I need to do before hiring my first employee?
The core pre-hire checklist: get an EIN from the IRS, register with your state for unemployment and tax withholding, set up payroll through a payroll service, get workers' compensation insurance, and prepare your employee handbook and onboarding documents. Our compliance checklist article walks through each step in detail.
Do I need an employee handbook for one employee?
Yes. A handbook protects you at any size. With one employee, the stakes of an undocumented policy are just as real: one dispute, one complaint, one wrongful termination claim. The handbook documents your policies before problems arise, which is exactly when it matters most.
What taxes do I have to pay as an employer?
As an employer you pay the employer's share of FICA taxes (7.65% of wages, matching the employee's share), federal unemployment tax on the first $7,000 of each employee's wages, and your state's unemployment insurance tax. You also withhold, but do not pay out of your own pocket, federal income tax and the employee's share of FICA. A payroll service handles all of this automatically.
What is the I-9 and what happens if I do not complete it?
Form I-9 verifies that your employee is legally authorized to work in the United States. It is required for every employee regardless of citizenship. Civil penalties for I-9 violations range from a few hundred to several thousand dollars per violation. Section 1 must be completed by the employee on or before their first day; Section 2 must be completed by you within three business days of their start date.
Can I start someone as a contractor and switch them to an employee later?
Yes, but be careful about how and why you are making the classification in the first place. If someone has been working in a way that legally qualifies them as an employee, classifying them as a contractor temporarily does not eliminate the liability. Make the correct classification from the start and change it when circumstances legitimately change.
First-employee resources and templates
This guide is part of our Small Business HR Fundamentals series, which includes employee handbooks, PTO policies, discipline processes, and onboarding tools for small employers.