Hiring your first employee: a small business checklist

Hiring first employee checklist

A small business hiring its first employee has federal forms and state clocks. The federal forms are the same in every state. The clocks are not. Do not copy one state’s rule onto another state. Follow the list in order.

1. Get an employer identification number from the IRS.
2. See which taxes apply, and open the state accounts.
3. Put workplace injury insurance in place on the state’s clock.
4. Collect Form I-9 and Form W-4, plus the state form if there is one.
5. Pick a payday the state allows, and tell the employee.
6. Report the new hire to the state.
7. Run the paycheck. Withhold, pay the employee, and send the taxes.

Get the federal employer number

The IRS is the Internal Revenue Service, the federal tax agency. An EIN is an Employer Identification Number. It is the nine-digit tax ID the IRS assigns to a business. The IRS says you generally need an EIN to hire employees.

Apply on that IRS page. The IRS says the online tool is free. You never have to pay a fee for an EIN. Finish the application in one sitting. It expires after 15 minutes of inactivity. You can apply for one EIN per responsible party per day. Print the confirmation letter.

The paper form is Form SS-4, Application for Employer Identification Number. The responsible party uses a Social Security number, or an ITIN. An ITIN is an individual taxpayer identification number. That personal number is not the business EIN. 26 U.S.C. § 6109 is the identifying-number statute. State tax accounts usually ask for the EIN. Get it first.

What taxes apply when hiring your first employee

Withholding means money you take out of a paycheck and send to a tax agency. A first employee can start federal tax jobs and state tax jobs. They are not the same payment.

Federal income tax

You hold back federal income tax from the paycheck. Form W-4 is the Employee’s Withholding Certificate. It tells you how much federal income tax to hold back. IRS Topic 753 says you must have the employee complete Form W-4. If the employee does not, withhold as if the employee is single or married filing separately, with nothing filled in on steps 2, 3, or 4. Keep the form at least four years. The form itself is on the About Form W-4 page.

Social Security and Medicare

FICA is the Federal Insurance Contributions Act. It is the law for Social Security tax and Medicare tax. IRS Topic 751 says the Social Security rate is 6.2 percent for the employee and 6.2 percent for you. For 2026, that tax stops after $184,500 of wages for that employee. The Social Security Administration prints that wage base. Medicare is 1.45 percent for the employee and 1.45 percent for you. Medicare has no wage cap. You also withhold an extra 0.9 percent Medicare tax on wages you pay that employee above $200,000 in the year. You do not match that extra 0.9 percent.

Federal unemployment tax

FUTA is the Federal Unemployment Tax Act. It is an employer tax. The employee does not pay it. IRS Topic 759 says the FUTA rate is 6.0 percent on the first $7,000 of wages. If you pay your state unemployment tax in full and on time, you can claim a credit of up to 5.4 percent. The rate after that full credit is 0.6 percent. A credit-reduction state can shrink that credit. Topic 759 explains that case.

You report FUTA on Form 940, the annual federal unemployment tax return. The usual test is $1,500 of wages in a calendar quarter, or one employee for part of a day in 20 different weeks. Household work and farm work use other tests. Read Topic 759 before you skip Form 940. Publication 15 (Circular E) is the employer’s tax guide those topics point to.

State unemployment tax and state withholding

State unemployment tax is the employer tax that funds state unemployment benefits. It is a separate account from FUTA. The state assigns the rate. Use the rate on the state’s notice.

State income-tax withholding exists only in states that tax wages. Texas does not take state income tax from paychecks. Florida does not either. Washington does not either. You still open unemployment tax in those states. California, New York, Ohio, Georgia, and Pennsylvania do tax wages. Each state uses its own registration. Do not use California’s $100 or 15-day clock in another state.

New York can open unemployment, withholding, and wage reporting on one registration. Georgia uses two portals, one for withholding and one for unemployment. Do not treat those starts as the same form.

A city or local tax can be another collector. In Pennsylvania, local earned income tax does not ride the state account. In Ohio, city tax is separate from the state withholding account. The state page names the office.

Buy workplace injury insurance on the state’s clock

Workplace injury insurance is often called workers’ compensation. It pays medical care and part of lost wages when someone is hurt at work. The U.S. Department of Labor runs injury programs for federal workers and a few other groups. It tells a private employer to contact the state board. There is no single national policy for a private shop.

Do this on the state’s clock. In some states that clock is before the first day of work. In California, coverage is due before the employee starts. In Texas, coverage is optional for most private employers. In Florida, most shops must have it at four employees, and construction at one. In Ohio, ordinary shops buy the policy from the state bureau. In Washington, ordinary shops buy it from the state fund. A payroll login is not that policy.

Collect Form I-9 and the withholding forms

Form I-9 is Employment Eligibility Verification. It shows the person may work in the United States. USCIS is U.S. Citizenship and Immigration Services. USCIS says every employer completes Form I-9 for each person hired to work in the United States. That includes citizens.

8 CFR § 274a.2 sets the clock. The employee completes Section 1 at the time of hire. You examine the documents and complete Section 2 within three business days of the hire. If the job lasts fewer than three business days, finish Section 2 when the person starts. Do not send Form I-9 to USCIS. Keep it for three years after the date of hire, or one year after the job ends, whichever is later.

Form I-9 is not Form W-4. Form W-4 is only for federal income tax. A state that taxes wages may want its own form. New York collects Form IT-2104. Ohio collects Form IT 4. Georgia collects Form G-4. Pennsylvania has employees complete a Residency Certification Form for local tax. Do not hand one state’s form to a hire in another state.

Pick a payday the state allows

A pay schedule is how often you pay. Weekly means every week. Biweekly means every two weeks. Semimonthly means twice a month. Monthly means once a month.

The FLSA is the Fair Labor Standards Act, the federal wage-and-hour law. It sets a minimum wage and overtime pay. It does not pick your payday. Your state does. The U.S. Department of Labor payday chart was last revised January 1, 2023. The Labor Department says to confirm the rule with the state labor office. The chart is a map. It is not a substitute for that office.

On that chart, California’s ordinary rule is pay at least twice a month. New York marks a weekly payday for manual workers. Texas marks at least twice a month for workers covered by federal overtime, and at least once a month for workers who are exempt. Florida’s row says no payday regulation is listed. Do not copy California’s twice-a-month line onto Florida. Do not copy New York’s weekly line onto Texas. Tell the employee the payday before the first check. The first check still has to land inside the state’s maximum gap.

Report the new hire to the state

A new-hire report is the notice you send when someone starts work. Child support offices use it to find a paycheck. 42 U.S.C. § 653a is the federal statute. Send the report to the State Directory of New Hires in the state where the employee works.

The report includes the employee’s name, address, and Social Security number, the date services for pay were first performed, and your name, address, and EIN. A Social Security number is the nine-digit number the Social Security Administration assigns to a person. It is not your EIN.

The federal deadline is 20 days after the hire. A state may set a shorter clock. The Administration for Children and Families says to use the clock of the state you report to. Georgia uses 10 days. California uses 20 days for its new-hire report. Do not assume 20 days in every state.

A rehire after a break of at least 60 days in a row is a new report. Employers who send the report electronically make two transmissions a month when a second one is needed, not less than 12 days and not more than 16 days apart. A copy of Form W-4 can be the report. The new-hire report is not the quarterly wage report.

How does payroll work for a small business

Payroll is the repeating job after the accounts exist. Each payday starts with gross pay. Gross pay is the wages the person earned before taxes.

You withhold the employee’s federal income tax, Social Security, and Medicare. You also withhold state income tax if that state taxes wages. What is left is net pay. Net pay is the amount on the paycheck.

You still owe the employer share. That share is your Social Security, your Medicare, FUTA, and state unemployment tax. Those amounts stay off the employee’s check, except where a state also takes an employee unemployment share. Do not assume that share. Read the state page.

Pay the employee on the payday you set. Send the withheld taxes and the employer taxes to the IRS and the state on their calendars. Form 941 is the quarterly federal return for income tax withheld and for Social Security and Medicare. Form 940 is the annual FUTA return. At year end you give the employee Form W-2, the wage and tax statement, and you file it with the Social Security Administration. Topic 752 prints that year’s due date.

Payroll software can do that arithmetic. On some plans it files a return the company names on its own help page. It does not apply for your EIN. It does not examine the Form I-9 documents. It does not buy the injury policy. The methodology page explains the three grades. The directory shows those grades by state.

Related guide: Independent contractor vs employee is the label check before this list. This list is for an employee.

Related guide: Employer payroll taxes percentage is the employer share you add after the accounts on this list are open.