Hiring Your First Employee: A Legal Checklist

Hiring your first employee triggers a specific, non-optional legal checklist: get an EIN, verify the person's right to work with Form I-9, collect a W-4 and set up payroll-tax withholding, report the hire to your state's new-hire directory, line up workers' compensation coverage, post the required labor-law notices, and figure out which federal employment laws now apply to you. None of this is optional once you're paying wages to someone who isn't you, and several steps have hard deadlines. Here's the checklist in the order most first-time employers hit it.

1. Get an Employer Identification Number (EIN)

If you don't already have one, you need an EIN from the IRS before you can run payroll, file employment tax returns, or open a business bank account for payroll. Applying online at irs.gov is free and typically issues the number immediately. Be wary of any site that charges a fee to "get" you an EIN — the IRS never charges for this.

2. Verify work eligibility with Form I-9

Federal law requires every employer to complete Form I-9 for every new employee, citizens and non-citizens alike. The form is published and administered by U.S. Citizenship and Immigration Services (uscis.gov); workplace enforcement is handled by the Department of Homeland Security. The employee fills out Section 1 no later than their first day of work. You, the employer, must examine the employee's identity and work-authorization documents and complete Section 2 within three business days of the hire date (for a job lasting less than three days, complete Section 2 by the first day of work). There's no grace period for missing that window — late or incomplete I-9s are treated as compliance violations even if the worker is fully authorized.

You must keep the completed I-9 on file for as long as the person works for you, and after they leave, for a further retention period set by federal rule — don't destroy it the day someone quits. Some employers also use E-Verify, an online system that cross-checks I-9 information against federal databases (and lets participating employers use an authorized remote document-examination procedure instead of examining documents in person). E-Verify is mandatory for many federal contractors and in a number of states, and voluntary elsewhere — check whether your state requires it before you assume it's optional.

Do not skip this to save time. Knowingly hiring someone not authorized to work in the U.S., or failing to complete I-9s properly, carries real penalties — and it's separate from whether the worker is an employee or an independent contractor, which is its own legal test, not a label you get to choose.

3. Collect a W-4 and set up payroll-tax withholding

Every new employee completes Form W-4 so you know how much federal income tax to withhold from each paycheck. From there you're responsible for:

• Withholding the employee's share of Social Security and Medicare tax (FICA) from wages
• Paying the employer's matching share of FICA
• Paying federal unemployment tax (FUTA)
• Depositing withheld and employer taxes with the IRS on a schedule (monthly or semiweekly, determined by your prior filings) — usually through the Electronic Federal Tax Payment System (EFTPS)
• Filing periodic employment tax returns (commonly Form 941 quarterly, plus an annual FUTA return on Form 940)
• Withholding state income tax and paying state unemployment insurance tax, per your state tax agency's rules

The IRS's Employer's Tax Guide (Publication 15, also called Circular E) at irs.gov lays out the current withholding tables, tax rates, and deposit rules — those figures change periodically, so confirm the current-year numbers there rather than relying on last year's amounts. Money you withhold from an employee's paycheck is trust-fund money that belongs to the government, not working capital for the business — mishandling it can create personal liability for the owner (the Trust Fund Recovery Penalty) even if the business is an LLC or corporation.

4. Report the hire to your state's new-hire directory

Federal law requires every employer to report every new hire to a state new-hire reporting directory, primarily so child-support agencies can locate parents who owe support. The federal floor is that the report is due no later than 20 days after the hire date, but many states set a shorter deadline — some require reporting within a matter of days. Report through your own state's new-hire reporting program; the federal Office of Child Support Services within the Administration for Children and Families (acf.gov) maintains a directory of each state's new-hire reporting program and contact information. Confirm your state's actual deadline and reporting method rather than assuming the 20-day federal floor applies to you.

5. Get workers' compensation coverage

In most states, having even one employee triggers a legal requirement to carry workers' compensation insurance, which pays for medical care and lost wages if an employee is hurt on the job — and in exchange generally limits the employee's ability to sue you directly for the injury. Exactly when the requirement kicks in, what counts as an "employee" for this purpose, and whether narrow exceptions exist (for very small employers, certain industries, or working owners) varies by state. Contact your state's workers' compensation board or state insurance department to confirm your obligation and get coverage before your first employee starts work, not after an injury happens. Once coverage is in place, the rules for how an injured employee actually files a claim are a separate topic — see observed.org's workers' compensation coverage for that side of it.

6. Post the required labor-law notices

The U.S. Department of Labor requires most employers to display certain federal posters where employees can see them — covering minimum wage and overtime rights, workplace safety, and other protections, with additional posters required once you're large enough to be covered by laws like the FMLA. The DOL's poster advisor tool at dol.gov tells you which federal posters apply to a business your size. Your state and sometimes your city layer on their own required notices (state minimum wage, workers' comp, unemployment insurance, and others) — check with your state labor department, because federal posting alone usually isn't enough to be in compliance.

7. Know which federal employment laws apply at your headcount

Several major federal employment laws don't apply to every employer — they phase in as your employee count grows. As a durable rule of thumb (confirm current coverage rules at eeoc.gov and dol.gov, since exact counting methods can be technical):

• Title VII (race, color, religion, sex, and national-origin discrimination) and the Americans with Disabilities Act generally apply once you have 15 or more employees
• The Age Discrimination in Employment Act generally applies once you have 20 or more employees
• The Family and Medical Leave Act generally applies once you have 50 or more employees within 75 miles of a worksite

By contrast, some federal protections apply from your very first hire regardless of headcount — most notably the Fair Labor Standards Act's minimum wage and overtime rules for most employers engaged in interstate commerce, and basic workplace safety obligations under OSHA. Don't assume a small headcount means no federal exposure; it means fewer of the largest anti-discrimination statutes apply, not that none do. observed.org's employment section covers what these laws require in day-to-day practice and what an employee can do if you get them wrong; this page is about knowing your obligations exist.

What to do — the checklist in order

1. Apply for an EIN at irs.gov if you don't have one (free, usually instant online).
2. Have the new employee complete Form I-9 Section 1 on or before day one; you complete Section 2 within three business days of the hire date, after checking their documents.
3. Have them complete a federal W-4 (and state withholding form, if your state has one) before the first paycheck.
4. Set up payroll withholding and deposits for federal income tax, FICA, and FUTA; register with your state tax agency for state withholding and unemployment insurance.
5. Report the hire to your state's new-hire directory — confirm the exact deadline for your state, don't assume 20 days.
6. Secure workers' compensation coverage through your state's process before the employee's first day.
7. Post the required federal and state labor-law notices where employees can see them.
8. Note your current employee count and which federal anti-discrimination laws now apply to you; revisit this each time you cross a hiring milestone.

A word on independent contractors

None of this checklist applies to a genuine independent contractor — but whether someone qualifies as a contractor is a legal test based on the real working relationship (how much control you exercise, whose tools and schedule are used, whether the work is central to your business, and similar factors), not a title you assign or a contract you both sign. The exact standard can differ by context — the IRS uses a common-law control test, the Department of Labor uses an economic-reality test under the FLSA, and some states apply a stricter ABC test — so a worker can even count as an employee under one rule and not another. Calling an employee a "contractor" to skip payroll taxes and this checklist is misclassification, and it can leave you owing back payroll taxes, penalties, and unpaid wages once discovered. If you're unsure which category a worker falls into, that's a good question for a CPA or employment attorney before you make the call.

This is general information, not legal, tax, or financial advice, and it does not create an attorney-client or accountant-client relationship. Rules, thresholds, and deadlines vary by state and change over time — confirm current requirements with the IRS, U.S. Department of Labor, USCIS, your state labor and tax agencies, and a qualified attorney or accountant before you rely on them. Free help is available from the SBA, SCORE, and your state's Small Business Development Center.