Hiring your first employee is an exciting milestone in your entrepreneurial journey. It signifies growth and ambition, but it also introduces a whole new level of complexity. It’s not as simple as just adding someone to your team. There are legal, financial, and logistical aspects to consider.
Below are the key steps to take before, during, and after hiring your first employee, plus expert insights to help both you and your first hire be successful.
Jump to:
- Understand the legal requirements.
- Calculate what you can afford.
- Create a job description and start recruiting.
- Set up payroll and HR.
- Avoid common hiring pitfalls.
Step 1: Understand the legal requirements.
Before welcoming your first employee, it’s crucial to meet all legal and regulatory requirements. This foundational step ensures you avoid costly mistakes and comply with employment laws.
Obtaining an Employer Identification Number (EIN)
Every employer must have an Employer Identification Number (EIN) issued by the IRS. This number is essential for reporting taxes and submitting IRS forms. You can easily apply online through the IRS website.
State and Local Tax IDs
Depending on your location, you may also need state and local tax IDs. Check with your state’s tax agency to confirm the requirements.
Employee vs. Independent Contractor Classification
One of the most critical compliance areas is correctly classifying workers as employees or independent contractors. Misclassification can lead to fines, back taxes, and legal issues.
“When in doubt, classify the worker as an employee, not an independent contractor,” advises Charles Krugel, a Chicago-based labor and employment attorney with over 25 years of experience. “No regulatory agency or court will penalize you for classifying as an employee. You’ll be penalized if you incorrectly classify as an independent contractor, assuming you get caught.”
To understand the distinction, consider three factors:
- Behavioral Control: Does the company dictate how the work is performed?
- Financial Control: Are finances like expenses and tools controlled by the company?
- Relationship Type: Are there benefits, contracts, or long-term commitments?
If you’re still unsure, file Form SS8 with the IRS to request a worker status determination.
Tax Withholding
Ensure new employees complete Form W-4 for income tax withholding. Proper documentation sets the foundation for compliant payroll management. Keep in mind: You’ll need to report payroll taxes quarterly (using Form 941) and annually (using Form 940).
Workers’ Compensation Insurance
Workers’ compensation insurance is mandatory in most states. It protects both you and your employees in case of workplace injuries or illnesses, so ensure you’re registered with your state’s workers’ comp program.
“I’ve had to defend employers who either fail to get workers’ comp insurance, or they fail to properly report and document workers’ comp claims,” notes Krugel. “In the past few years, I’ve litigated two workers’ comp retaliatory discharge claims and one failure to have insurance claim. These cases are very expensive and attorneys, like myself, are the only people who come out ahead when these issues arise.”
Step 2: Calculate what you can afford.
Hiring an employee comes with financial commitments beyond just paying a salary. Comprehensive budgeting is essential to ensure you can sustain your new hire’s position.
Determining What You Can Afford
First, evaluate your business’s financial health. Experts recommend not allocating more than 30% of your gross revenue to payroll unless you operate in a labor-intensive industry. Account for additional costs such as recruiting, onboarding, and overhead expenses.
Budgeting for Benefits
While some benefits, like Social Security and Medicare contributions, are mandatory, others, such as health insurance and paid time off, are optional but can make your offer more attractive. On average, additional benefits can increase costs by up to 20% of an employee’s salary.
Structuring Compensation
Create a compensation structure that outlines wages, holiday pay, vacation allowances, and sick leave. Be transparent about these in your offer letter and employee handbook.
Step 3: Create a job description and start recruiting.
Finding the right person for your team starts with defining what you’re looking for.
Writing a Clear Job Description
Your job description should clearly communicate:
- Job title and responsibilities
- Required qualifications or skills
- Compensation and benefits
- Schedule and work expectations
“As a business owner, if you haven’t properly defined the job, then how can you know whether the candidate can perform it well?” Krugel says.
Attracting Top Talent
Promote your job opening on reputable platforms like Indeed, LinkedIn, or ZipRecruiter. Leverage your network and community by posting on social media and asking for referrals. Be sure to highlight what makes your business a great place to work.
Monitoring Applications and Screening Candidates
Keep an organized system to sort resumes, screen applications, and schedule interviews. Look for candidates whose skills align with your business needs and values.
Step 4: Set up payroll and HR.
Handling payroll and essential HR tasks effectively will set your business up for long-term success.
Choosing a Payroll System
Decide whether to manage payroll in-house or use external services. Software like Gusto or ADP can simplify tax deductions, deposits, and employee payments.
Recordkeeping and Compliance
By law, you’re required to keep specific records, including:
- Employee details and tax forms (like W-4s)
- Hours worked and wages paid
- Benefits offered and accrued time-off
Krugel says, “Generally speaking, I figure that at least 50% of all employment-related disputes and litigation start with payroll issues. Even an inadvertent error could cause problems.”
Minimum Wage and Overtime Compliance
Ensure you’re paying at least the minimum wage and properly compensating overtime hours. Familiarize yourself with both federal and state-specific wage laws.
Step 5: Avoid common hiring pitfalls.
It may be tempting to skip steps or take shortcuts in your hiring process, but doing so can lead to costly mistakes.
Beware of Misclassification
Never try to game the system by classifying someone as an independent contractor to avoid tax obligations. The consequences can be severe.
Hiring Friends and Family
Many startups hire friends or family members to fill roles quickly. While this can work, it’s important to set clear boundaries.
“I see a lot of disputes and ruined relationships when small businesses hire friends and family without clear parameters like pay, benefits, schedule, and responsibilities,” Krugel warns. “Solopreneurs like to fly by the seat of their pants, but our regulatory environment doesn’t reward businesses that are careless or difficult when it comes to the treatment of employees.”
Growing and Thriving with Your First Employee
Hiring your first employee marks the beginning of a new chapter for your business. By following these steps, you’re not only ensuring legal compliance but also setting the stage for a strong working relationship.
Done correctly, bringing on your first hire opens opportunities for growth, innovation, and shared success. Take your time, make smart decisions, and when in doubt, consult trusted experts like Charles Krugel or local business advisors.
