How Do I Hire My First Employee? Step-By-Step Legal and Tax Requirements

Growing your small business is an exciting milestone, but hiring your first employee can be daunting. Beyond knowing whether you’re financially ready, you must also follow specific state and federal laws to hire legally. This guide walks you through the key questions to ask yourself and outlines the legal steps you need to take.

Determine Your Employment Needs

Small businesses walk a fine line in their first years. They often need employees to make a profit, but can’t afford to hire workers until they do. The Society for Human Resource Management (SHRM) offers online resources to help small business owners hire their first employees.

Here are a few things to consider:

• Are you turning down work that a potential employee could do? Remember, you’ll pay someone to be at your workplace daily. If you don’t have enough extra work for a full-time employee, consider a part-time worker or outsourcing some overflow to an independent contractor.
• Are you spending nights and weekends on office tasks? Taxes, invoicing, accounts receivable- these important tasks take time. If you spend all your business hours with customers or in the field, you have to spend your off-hours on paperwork. If you find you have no free time, you need help.
• Is your output beginning to suffer? If you have less time for manufacturing because you’re spending all your time with customers or can’t talk to customers because you’re busy making up orders, it’s time to get help. Having someone else to handle certain tasks can free you up for more important responsibilities.
• Do you need skills you don’t have? As a small business owner, you won’t have the luxury of reviewing lots of applicants and hoping you find the right one. Review your job description so you can find the right candidate quickly.

These are just a few things to consider when adding to your workforce.

Find Qualified Candidates

Avoid desperation hiring, a downfall of many startups. Take time to craft your job ad, even if you’re only looking for part-time sales help. Create a job title and description that accurately describes what you want.

Tell job seekers what you expect in a one-person office or business during the interview process. You’re creating a new role and will need as much input from them as they will from you. Your first hire should have experience working with startup businesses or solo practitioners. You should be able to learn from them as well.

Some of the best candidates may come through referrals from other business people. Networking through social media or business organizations is a good way to find qualified candidates with the skills and experience you need. Asking your friends and colleagues for resumes can find better candidates than combing through job boards.

Legal Checklist: 8 Steps To Hiring Your First Employee

The U.S. Department of Labor requires businesses to pay their employees and file state and federal taxes as required by law. You can make job offers before completing all employment paperwork, but you must meet the applicable deadlines for required forms and filings after hiring. Here are some of the required tasks:

• Obtain an Employer Identification Number (EIN): You use your Employer Tax ID to report employee withholding taxes and other information to the IRS. You can obtain an EIN at the IRS website or by calling (800) 829-4933.
• Obtain state or local tax identification numbers: A few states, such as Nevada, don’t have a state income tax. If your state has a state income tax, you need a tax ID number for payroll purposes. You can get this information at your state’s Small Business Administration website.
• Set up payroll and tax withholding systems: The federal government requires you to keep employment tax records for at least four years. When you hire someone, they must complete Form W-4 with their Social Security Number. You’re responsible for withholding the required amounts from each check for federal income tax, Social Security, and Medicare. Every year, you’ll need to file a Form W-2 reporting how much you paid them and how much you withheld for federal and state taxes.
• Verify the employee’s eligibility to work in the United States: You must have the employee complete the Employment Eligibility Verification Form, or Form I-9, no later than their first day of work. As the employer, you must complete Section 2 within three days of hiring. You must also keep a copy of the form for three years from the date of hire or one year after the date employment ends, whichever is later. The I-9 has an instruction sheet explaining what documents are acceptable proof of identity.
• Register the new employee with the state’s reporting system: You must complete new hire reporting within 20 days of hiring. Each state’s labor department is different, so you should check with your state employment office or labor board for clarification.
• Apply for necessary accounts: Depending on your state, you may need to provide disability, unemployment tax, or workers’ compensation insurance. In every state but Texas, state laws require workers’ compensation for businesses with even one employee. State labor laws may differ about disability or unemployment insurance. California, Hawaii, New Jersey, New York, and Rhode Island require business owners to purchase disability insurance for their workers.
• Post required legal notices: State and federal laws require the posting of legal rights notifications, even if you have only one worker. You can obtain these notices at your state labor relations board website.
• Set up systems to report payroll taxes: You must report and pay taxes quarterly and annually. This includes Medicare and Social Security withholding, even if your state doesn’t have an income tax.

This can prove to be overwhelming. If you’re uncertain or running into issues, consider speaking with an employment law attorney for guidance.

Other New Hire Considerations

Before hiring your first employee, keep a few more things in mind. You want someone you can work with effectively. Your first hire won’t be a C-suite executive, but you can still attract top talent in your niche. Be realistic about a few things, such as:

• Employee benefits, like health insurance, may be a few years down the road. Be honest and mention this upfront. Consider other perks, like flex time or remote work.
• Background checks and drug screening are legal, but handle them carefully. Federal law doesn’t require a conditional offer before applicant drug testing, but state or local laws may impose limits. When an employer obtains a consumer report for employment purposes, the Fair Credit Reporting Act generally requires a clear standalone disclosure and the applicant’s written authorization. You can’t ask interview questions about current substance abuse issues, and some states may not allow questions about prior criminal convictions. Always check your state and local laws for compliance requirements during the hiring process.
• Have new-hire paperwork and an employment contract (if not already signed) ready for your new employee to complete on their first day of work. Unlike a big company, you won’t have an HR team to assemble a hiring packet.

Although you won’t have an onboarding process for your first employee, take notes about what you do, what works, and what doesn’t. When you need more workers, create consistent job postings and develop onboarding systems. An employee handbook with company policies also helps your workforce.

Learn More About the Hiring Process From an Attorney

Hiring your first employee is a major step. Navigating the web of federal, state, and local employment laws can be overwhelming. Paperwork or compliance mistakes can lead to costly fines and legal trouble down the road. An experienced employment law attorney can ensure you’ve checked all the right boxes, giving you peace of mind to focus on growing your business. The best way to ensure compliance with employment laws is to speak with a skilled employment law attorney near you.