Hiring a first employee turns the owner into an employer for tax purposes, which triggers a defined set of registrations, payroll withholding duties, and ongoing filings. None of it is optional or retroactive. The work splits into three buckets: setup before the first paycheck, withholding and deposits on every payroll run, and year-end filings with recordkeeping. Getting the setup order right is what keeps the first year clean.
Table of Contents
- What do I need to set up before my first employee's first paycheck?
- Which forms does a new hire need to complete, and what do I do with them?
- How does payroll withholding actually work once the employee is paid?
- Which federal and state unemployment taxes will I owe as an employer?
- What other state and local obligations come with a first hire?
- How long do I have to keep employment tax and payroll records?
- When should I bring in a specialist for multi-state payroll and sales tax?
- Key Takeaways
- References
What do I need to set up before my first employee's first paycheck?
The first setup step is obtaining an employer identification number, or EIN, the federal tax ID for the business. The IRS requires businesses with employees to have an EIN, and the application runs through IRS Form SS-4. According to SPZ Legal, an EIN can be applied for online between 7:00 AM and 10:00 PM Eastern Time and is issued instantly upon completion.
The second step is registering with the state labor department to pay state unemployment compensation taxes. The OCIE Small Business guide notes that this registration is a separate state-level obligation from the federal EIN. Some states also require new-hire reporting at the same time, so checking both requirements in one pass is efficient.
The third step is confirming workers' compensation coverage. Workers' compensation insurance is required in the vast majority of states, though some make a narrow exception for very small employers, according to OCIE Small Business. Requirements vary by state, and thresholds and forms shift year to year, so confirm the current tax year's rules before filing anything.
Which forms does a new hire need to complete, and what do I do with them?
Form I-9, the employment eligibility verification form, must be completed for every hire, including citizens and noncitizens. The IRS states that all U.S. employers must properly complete Form I-9 for every individual they hire. Completed I-9 forms belong in a separate I-9 folder, not in the employee's personnel file, according to OCIE Small Business.
Form W-4, the employee withholding certificate, tells the employer how much federal income tax to withhold from each paycheck. The W-4 is not sent to the IRS but must be retained for at least four years, according to the Gusto hiring framework. If a new employee does not hand in a completed W-4, the employer should withhold tax as if the employee is single, per the IRS.
An employee claiming exempt status must file a new Form W-4 by February 15 of that year to continue being exempt from withholding in the next year. The IRS also cautions that an ITIN, a 9-digit number beginning with 9, is not a substitute for an SSN for employee identification or for work.
How does payroll withholding actually work once the employee is paid?
Employees have federal, state, and local income taxes withheld from their pay, plus the employee's share of Social Security and Medicare. Independent contractors have nothing withheld from their paychecks, which is the core distinction between the two classifications, according to the Gusto hiring framework.
Withholding depends on the W-4 the employee submitted. The first paycheck is not taxed at a special higher rate. It can simply look smaller because a partial pay period and the first withholding both land at once. The IRS confirms that withholding follows the W-4 instructions, not a separate first-check rule.
Set a payroll deposit schedule and treat it as a hard obligation. The deposit mechanics depend on the amounts involved and the deposit schedule the business falls into, and those thresholds should be confirmed for the current tax year. Payroll deposits are not a place to improvise.
Which federal and state unemployment taxes will I owe as an employer?
Employers file IRS Form 940 to report federal unemployment tax for any year in which they paid wages of $1,500 or more in any quarter, or in which an employee worked 20 or more different weeks of the year. That trigger comes from OCIE Small Business.
State unemployment compensation taxes run through the state labor department registration set up before the first paycheck. Rates and wage bases differ by state and change over time. Confirm the current tax year's figures rather than carrying forward last year's numbers, because state unemployment tax schedules are adjusted regularly.
What other state and local obligations come with a first hire?
Report each new employee to the state's new hire reporting agency, generally within a short window after the first day. The SPZ Legal source cites a twenty-day window in the California example. This program is used to locate parents who owe child support, according to OCIE Small Business.
Some states layer on local requirements. Pennsylvania employers report through the state New Hire Reporting Program and use a Residency Certification Form to identify the employee's home and work municipalities, Political Subdivision codes, and the correct local earned income tax rate, according to Canon Capital.
State registration thresholds vary. California, for instance, requires registration with the Employment Development Department once an employer pays wages above $100 to one or more individuals, per SPZ Legal. Because obligations attach to where the employee lives and works, a remote hire can create registration duties in a state where the business has never filed.
How long do I have to keep employment tax and payroll records?
The IRS requires employment tax records to be kept for four years, according to SPZ Legal. That includes payroll records, withholding records, and the W-4 forms employees submit.
Form I-9 retention runs three years after the hire date or one year after termination, whichever is later. The OCIE Small Business guide adds that I-9s must be available for inspection by ICE officials.
W-2 Copy A goes to the Social Security Administration by the last day of February for paper filings or the last day of March for electronic filings, according to SPZ Legal. Those dates shift year to year and should be confirmed for the current tax year.
When should I bring in a specialist for multi-state payroll and sales tax?
A first remote hire can put the business on the map in a new state for payroll registration, and the same growth often pushes sales past economic nexus thresholds in states where the business is not registered to collect sales tax. The two problems tend to arrive together.
Spencer Accounting Group handles multi-state sales tax nexus review, exposure quantification, and voluntary disclosure through its Sales Tax Resolution service. The firm also keeps books and filings current through Bookkeeping and Tax Filing.
Owners who are already behind on filings can get caught up through Back Tax Return Filing, sequenced to reach compliance with the least disruption. This article is general information, not tax advice for a specific situation. A consultation is the right next step to see whether the fit is there.
Key Takeaways
- Hiring a first employee requires an EIN from the IRS via Form SS-4 before the first paycheck.
- State unemployment registration and workers' compensation coverage are separate setup steps that vary by state.
- Form I-9 is required for every hire and belongs in its own folder, not the personnel file.
- A missing W-4 means withholding as if the employee is single.
- Form 940 is triggered by $1,500 in quarterly wages or 20 or more weeks of work in a year.
- Employment tax records must be kept four years; I-9 retention runs three years past hire or one year past termination, whichever is later.
- A remote first hire can create registration obligations in a state where the business has never filed.
References
- Hiring Your First Employee: 13 Things You Must Do — OCIE Small Business
- Hiring Your First Employee? Ten Questions You Need to Answer — SPZ Legal
- Hiring your first employee — Gusto
- Hiring employees — Internal Revenue Service
- Hiring Your First Employee: Tax, Payroll & Tech Guide — Canon Capital