Hiring Your First Employee: Legal & Practical

Navigating the Legal and Practical Steps of Your First Hire

Bringing on your first team member is a significant milestone. It also introduces a new layer of legal responsibility and operational complexity. Successfully hiring your first employee requires meticulous attention to compliance and clear processes from day one. This guide provides the actionable steps to ensure you build a solid, lawful foundation for your growing team.

Correctly Classify Your Worker

Your first critical decision is determining the legal status of the person you're bringing on board. Misclassifying an employee as an independent contractor is a common and costly mistake.

• Use the IRS Guidelines: The IRS uses a three-factor test focusing on behavioral control, financial control, and the nature of the relationship. Ask yourself:
  • Behavioral: Do you control what work is done and how it is done?
  • Financial: Do you provide tools, reimburse expenses, and is the worker's opportunity for profit/loss limited?
  • Relationship: Is the work a key part of your business? Is the relationship permanent? Do you provide benefits?
• Default to Caution: If the role involves set hours, uses your equipment, and is integral to daily operations, the individual is almost certainly an employee. When in doubt, consult an employment attorney or accountant. The penalties for misclassification include back taxes, fines, and liability for unpaid benefits.

"The distinction between employee and contractor isn't a matter of preference; it's a legal determination based on specific criteria. Getting it wrong can undermine your business's financial stability."

Secure Essential Registrations and Insurance

Before you run your first payroll, several government registrations and insurance policies must be in place. Treat this as your business's legal onboarding.

1. Obtain an Employer Identification Number (EIN): This is your business's federal tax ID, required for all payroll and employment tax filings. Apply for free on the IRS website using Form SS-4.
2. Register with State Agencies: Contact your state's department of revenue and labor department. You need to register to:
   • Withhold state income tax.
   • Pay state unemployment insurance (SUTA).
3. Purchase Workers' Compensation Insurance: This is legally required in nearly every state once you have even one employee. It provides benefits for work-related injuries or illnesses. Policies are obtained through private insurers or state-run funds.
4. Report Your New Hire: All states mandate that you report new employees to a state directory, typically within 20 days of their start date. This information is used for child support enforcement and unemployment purposes.

Master Wage, Hour, and Tax Compliance

Federal and state laws govern how you pay your employee. Non-compliance can lead to significant penalties.

• Understand the Fair Labor Standards Act (FLSA): This federal law sets the rules for minimum wage, overtime, and recordkeeping. Most businesses are covered.
• Pay the Correct Minimum Wage: You must pay the highest applicable rate—federal, state, or local.
• Classify for Overtime Correctly: Employees are either "exempt" (salaried, not eligible for overtime) or "non-exempt" (hourly, eligible for overtime). Most first hires are non-exempt. Misclassification here is a common source of lawsuits.
  • Non-exempt employees must be paid 1.5 times their regular rate for all hours worked over 40 in a workweek.
• Set Up a Payroll System: This is non-negotiable. Use a reputable payroll service or software (e.g., Gusto, QuickBooks Payroll, ADP Run) to handle:
  • Calculating gross pay and net pay.
  • Withholding federal income tax, Social Security, and Medicare (FICA taxes).
  • Withholding state and local income taxes.
  • Filing quarterly (Form 941) and annual payroll tax returns (Form 940 for FUTA).
  • Issuing annual W-2 forms.

Complete Mandatory Hiring Paperwork

Organize these documents into a new hire packet. Missing a single form can result in legal and financial repercussions.

Before the First Day:

• Offer Letter/Employment Agreement: This practical document sets clear expectations. Include:
  • Job title, duties, and reporting structure.
  • Compensation (hourly rate or salary), pay schedule, and overtime policy.
  • Employment status (typically "at-will").
  • Start date and work schedule.
  • A summary of any offered benefits.

On or Immediately After the First Day:

• Form I-9, Employment Eligibility Verification: You must complete Section 2 of this form by examining the employee's original identity and work authorization documents within three business days of their start date. Keep the completed form on file; do not send it to the government.
• Form W-4, Employee's Withholding Certificate: The employee fills this out to determine the amount of federal income tax to withhold from their paychecks.
• State Withholding Allowance Certificate: Most states have their own version of the W-4. Ensure you have the correct form for your state.
• Direct Deposit and Benefits Enrollment Forms: Collect banking information for payroll and any forms for health insurance or retirement plans you offer.

Establish Foundational Policies and Safety

Even with one employee, documenting your policies protects your business and clarifies expectations.

• Create Core Policies: You don't need a 50-page handbook immediately, but written policies are essential. Draft clear guidelines on:
  • Anti-discrimination and anti-harassment, including a complaint procedure.
  • Work hours, break periods, timekeeping, and remote work rules.
  • Use of company property, email, and internet.
  • Confidentiality and data security.
• Address Workplace Safety: Comply with Occupational Safety and Health Administration (OSHA) requirements. This includes:
  • Providing a workplace free from serious hazards.
  • Posting required OSHA notices in a common area.
  • Keeping records of work-related injuries and illnesses (required for companies with 10+ employees, but good practice for all).

Know When Taxes and Professional Help Apply

• Unemployment Taxes: You are subject to Federal Unemployment Tax Act (FUTA) and state unemployment (SUTA) taxes if you either:
  1. Pay wages of $1,500 or more in any calendar quarter, or
  2. Have at least one employee for 20 or more weeks in a calendar year.
• Seek Professional Guidance: Engage experts early in these scenarios:
  • You are uncertain about employee vs. contractor or exempt vs. non-exempt classification.
  • Your employee works remotely in a different state.
  • You are considering offering equity, complex bonuses, or specialized benefits.

First Employee Onboarding Checklist

Use this list to track your progress from offer letter to first payroll.

• $render`✓` Obtain an Employer Identification Number (EIN) from the IRS.
• $render`✓` Register with your state's revenue and labor departments.
• $render`✓` Secure workers' compensation insurance.
• $render`✓` Set up a payroll system or service.
• $render`✓` Draft and send an offer letter/employment agreement.
• $render`✓` Prepare the new hire packet (I-9, W-4, state W-4, direct deposit).
• $render`✓` Determine FLSA status (exempt/non-exempt) and overtime policy.
• $render`✓` Verify minimum wage requirements for your city, state, and federal level.
• $render`✓` Report the new hire to your state's new hire directory.
• $render`✓` Post required federal and state labor law notices in the workplace.
• $render`✓` Draft and distribute essential company policies.
• $render`✓` Schedule a consultation with an employment attorney or accountant for a compliance review.