Hiring Your First Employee: A Practical Employer Checklist

Decide this first, since everything else follows from it. In general, a person who works on your schedule, with your tools, under your direction, in a role central to your business is more likely an employee, while someone who runs their own business, sets their own methods and serves several clients is more likely a contractor. Agencies and states apply different tests, and labeling someone a contractor doesn't make them one.

If you're unsure, ask a CPA or employment attorney before you hire. Misclassification can lead to back taxes and penalties. If you decide on employment, determine whether the role is exempt or non-exempt from overtime under federal and state rules, because that affects how you track time and pay.

Complete these before the person's first day:

• Get a federal employer identification number if you don't have one.
• Register with your state tax agency for withholding and with the state unemployment insurance agency, and check for any local registrations.
• Arrange workers' compensation insurance, which most states require for employees.
• Choose a payroll method, either a payroll provider, a PEO or your own process, since paying employees involves tax deposits and filings.
• Open or confirm a business bank account for payroll funding.
• Check whether you must post labor law notices at your workplace or for remote staff, and get the current versions.
• Write an offer letter stating the role, pay, pay frequency and start date, with wording reviewed by an attorney.

Ask your CPA about the deposit and filing schedule you'll be assigned, so payroll taxes don't slip.

On or before the first day, collect the following:

1. Federal Form W-4 for income tax withholding, and the state equivalent if your state has one.
2. Form I-9 to verify identity and work authorization. The employee completes their section by the first day of work, and you complete yours within three business days of the start date, examining original documents.
3. Direct deposit authorization, if you'll pay that way.
4. Emergency contact information and any required acknowledgments.

Then report the new hire to your state's new hire reporting program, which most states require within a set period after hire. Check your state's deadline and reporting method, or have your payroll provider do it. Keep I-9s and tax forms in a secure file separate from general personnel records.

Have equipment and accounts ready, as described in the laptop provisioning checklist, and use the 30-day onboarding checklist for the first month. Then confirm payroll details before the first pay date:

1. Check the employee's pay rate, withholding and deposit details in the payroll system.
2. Run a test or preview, if your system offers it, and review gross-to-net.
3. Confirm the first pay date and explain the pay schedule to the employee.
4. Verify the payroll tax deposits scheduled after the run.
5. Provide the employee with a pay statement and where to find future ones.

A first paycheck that arrives on time and correct builds more trust than any welcome kit. Also decide how you'll track time off, expenses and performance conversations from the start, and write the basics down so they're consistent for the next hire.

Look for these before day one:

• Forgetting workers' compensation until an injury occurs.
• Registering in the employer's home state but not the employee's state, if they differ.
• Using contractor paperwork for a person who works like an employee.
• Not completing I-9 on time or keeping incomplete forms.
• Setting up payroll after the first pay date, and then catching up on taxes.
• Not writing down policies, so the first dispute becomes a precedent.

For an overall check of how your business runs before adding people, see the operations audit checklist. If you're weighing PEO or payroll software for your first hire, see PEO cost per employee and the payroll provider comparison.