Hiring your first employee: what you're now on the hook for

You’ve been doing everything yourself, the work has finally outgrown you, and someone is willing to help for pay. The moment that person starts, your legal position changes completely. As a self-employed person you mostly answered to yourself. As an employer you answer to the IRS, the Department of Labor, and your state, all at once, starting on day one.

Here’s the thing most new employers get wrong, and it’s worth putting first: you don’t get to decide whether someone is an employee. A signed independent-contractor agreement, paying by 1099, paying cash, none of it settles the question. The IRS says plainly that if an employer-employee relationship exists, it makes no difference how it is labeled. The Department of Labor says the same thing from the other direction: under federal wage law, workers cannot sign away employee status. If you plan to sidestep everything below by calling your helper a contractor, read the classification section before you do anything else.

Employee or contractor: the question that decides everything

Everything in this article, withholding, payroll tax, minimum wage, I-9 forms, applies to employees and generally not to independent contractors. The IRS is explicit that employers must withhold and pay employment taxes for employees but generally not for contractors. That’s exactly why the temptation to misclassify exists, and why both agencies police it.

Two different tests apply. For federal tax, the IRS uses common-law rules: it looks at the whole relationship across behavioral control, financial control, and the relationship of the parties. The core question is whether you can control what will be done and how it will be done. The right to control is what matters, even if you never exercise it. There’s no magic number of factors and no single deciding one. If you genuinely can’t tell, you can file Form SS-8 and the IRS will make the determination for you.

For wage and hour law, the DOL applies an “economic reality” test instead: is the worker economically dependent on you, or genuinely in business for themself? That means a worker could, in theory, need separate analysis for tax purposes and for wage purposes. These rules are also in flux: the DOL announced in 2025 that it will no longer apply its 2024 classification rule in its own investigations while it reconsiders the regulation, though the rule still matters in private lawsuits.

The cost of getting this wrong is not theoretical. In Tax Court cases cited in IRS training materials, businesses that controlled their workers, provided the facilities and tools, and paid set hourly rates for work central to the business lost, and were held liable for the employment taxes they hadn’t paid. On the wage side, a misclassified employee is owed minimum wage and overtime back pay, and the DOL can supervise payment of back wages, with civil money penalties for repeat or willful violations.

So if your helper works your hours, with your tools, under your direction, doing the thing your business exists to do, treat them as an employee. Here is what that means in practice.

Before their first day: get an EIN

An Employer Identification Number is your business’s tax ID, and you need one once you have employees. The good news: it’s free, you apply directly to the IRS online, and it’s issued in minutes. You can also fax Form SS-4 and get the number back in about four business days if you provide a return fax number.

Three quirks catch people out. First, if you’re forming an LLC, corporation or partnership, register the entity with your state before applying for the EIN, or the application may be delayed. Second, only one EIN is issued per responsible party per day, however you apply. Third, the online application must be finished in one sitting: it can’t be saved and it expires after 15 minutes of inactivity, so gather your details first. The applicant must be the responsible party, with that person’s own SSN or ITIN. If a tax return falls due before the number arrives, IRS Publication 15 says to file on paper and write “Applied for” where the EIN goes. If you haven’t registered the business at all yet, start with our guide to structure, EIN and licences.

Day one: the Form I-9

Every US employer must verify the identity and work eligibility of every person hired, citizen or not, using Form I-9. The timing is strict. The employee completes Section 1 no later than their first day, and you may not ask them to complete it before they’ve accepted the job offer. You complete Section 2, examining their documents, within three business days of the first day of work: hire someone on Monday and Section 2 is due by Thursday. If the job itself lasts fewer than three business days, the documents are due on day one.

The choice of documents belongs to the employee, not you: one document from List A, or one from List B plus one from List C. You can be fined if the form isn’t properly completed. One caution from Publication 15: a valid Social Security number is not proof of work authorization, so don’t treat an SSN card as settling the question on its own. Keep the completed I-9 for three years after the hire date or one year after employment ends, whichever is later.

Within 20 days: new-hire reporting

Federal law requires every employer to report each new hire to the State Directory of New Hires in the state where the employee works: the employee’s name, address, SSN and the date they first performed services for pay, plus your name, address and EIN. The federal deadline is no later than 20 days after hire, and states set the exact mechanics within that ceiling, so check your own state’s new-hire portal for the window that applies to you. The report can be made on the W-4 or an equivalent form. One trap: a rehire counts as a new hire if the person was gone for at least 60 consecutive days, so bringing a former worker back retriggers the report.

Payroll taxes: withholding, depositing, filing

As an employer you must withhold income tax, Social Security and Medicare taxes from each paycheck, pay a matching employer share of Social Security and Medicare, and pay federal unemployment tax on top. You report the withheld amounts quarterly on Form 941, due April 30, July 31, October 31 and January 31, with 10 extra calendar days to file if you deposited everything on time.

Depositing is where new employers trip up, because your deposit schedule has nothing to do with how often you run payroll. It’s set by a lookback period, the four quarters from July 1 of the second preceding year through June 30 of the prior year. As a brand-new employer your lookback taxes count as zero, which makes you a monthly depositor in your first year unless the $100,000 rule bites.

Deposits must be made electronically, through your business tax account, Direct Pay for businesses, or EFTPS, and to count as on time you generally need to schedule the payment by 8 p.m. Eastern the day before it’s due.

Federal unemployment tax (FUTA) is separate and comes entirely out of your pocket; the IRS instructs employers not to collect or deduct it from wages. The headline rate is 6.0% on the first $7,000 of each employee’s wages, but a credit of up to 5.4% for state unemployment taxes paid usually brings the net rate to 0.6%. You only have to deposit FUTA once you owe more than $500 in a quarter, by the last day of the month after the quarter ends. If your state hasn’t repaid its federal unemployment loans, it may be a credit reduction state and you’ll owe more.

Your state’s layer: workers’ comp and unemployment insurance

Workers’ compensation for private employers is a state-run system, and the rules, benefits and thresholds vary state by state, so you need to check your own state’s requirements before your employee starts. State unemployment tax is similar: most employers pay both FUTA and a state unemployment tax, and the state’s wage base may differ from the federal $7,000. Paying your state unemployment tax in full and on time is precisely what earns you that 5.4% FUTA credit, so the two systems are linked even though you register for them separately. If working out your state’s requirements feels overwhelming, there is free, in-person help available.

Wages: the federal floor and overtime

The federal minimum wage is $7.25 per hour, in effect since July 24, 2009. Where your state sets a higher minimum, the employee gets the higher of the two. Covered nonexempt employees must also get overtime at one and a half times their regular rate for hours over 40 in a workweek, a fixed, recurring 168-hour period you define. There is no federal daily overtime and no federal premium for weekend or holiday work as such; it’s purely about hours over 40. Deductions for things like uniforms, cash register shortages or tools are illegal to the extent they push pay below the minimum wage or eat into required overtime. Narrow exemptions exist for bona fide executive, administrative, professional and outside sales employees, but for a typical first hire doing hourly work, assume the rules apply.

Record-keeping: what to keep and for how long

Federal wage law requires specific records for each nonexempt worker: full name and SSN, address, birth date if under 19, occupation, when the workweek starts, hours worked each day and totals each week, pay basis and hourly rate, straight-time and overtime earnings, additions and deductions, total wages each pay period, and the payment date. No particular form is required, but the records must be accurate and open to Wage and Hour Division inspection. You must also display the official FLSA poster.

None of this requires an accountant, but it does require a system from the first paycheck onwards, because the deadlines start the day your employee does. And if you’re still on benefits while the business grows, read up on how self-employment income interacts with them before payroll complicates the picture.

Frequently asked questions

Can I just put my first worker on a 1099 to keep things simple? Only if they genuinely are a contractor under the tests above. The paperwork you use doesn’t decide it: the IRS looks at the real relationship regardless of the label, and under federal wage law a worker can’t waive employee status even voluntarily. If the facts say employee, a 1099 just means you’re an employer who skipped withholding, and you can be held liable for the unpaid employment taxes plus back wages.

When do I actually have to send the withheld tax to the IRS? As a new employer you’re almost certainly a monthly depositor, so taxes withheld in one month are due by the 15th of the next, paid electronically. If your total employment taxes for a quarter are under $2,500, you can simply pay with the quarterly Form 941 instead of making deposits.

My state’s minimum wage is higher than $7.25. Which do I pay? The higher one. Where both federal and state minimum wage laws apply, the employee is entitled to whichever is greater.

Do I owe extra pay for weekends or holidays? Not under federal law. Overtime is triggered only by working more than 40 hours in the workweek, at one and a half times the regular rate. Weekend or holiday work carries no federal premium on its own, though your state may add rules of its own.

How long do I have to keep all this paperwork? Payroll records for at least three years, the underlying time cards and wage-computation records for at least two, and each Form I-9 for three years from hire or one year after the person leaves, whichever is later. No specific format is required, but the records must be accurate and available for inspection.