Before You Hire Anyone — 6 Legal Requirements
Get an EIN (Employer Identification Number)
Required to file payroll taxes, open a business bank account, and process W-2s. Apply free and instantly at IRS.gov/EIN. You'll receive your EIN immediately online. Even sole proprietors with employees need an EIN — your SSN cannot be used for payroll purposes.
Register as a State Employer
Register with your state's department of revenue or department of taxation to withhold state income taxes. Also register with the state workforce agency for state unemployment insurance (SUI). Most states allow registration online through their business portal. Complete before the first paycheck.
Get Workers' Compensation Insurance
Legally required in nearly every state for businesses with 1+ employees. Penalties for non-compliance range from fines to criminal charges in some states. Purchase through your business insurance agent, your state's assigned risk pool (if private market declines), or your state fund (available in monopolistic states: OH, WA, WY, ND). Cost varies by payroll risk class from under 1% to 20%+ for high-hazard work.
Set Up a Payroll System
Manual payroll processing is error-prone and creates tax exposure. Use payroll software: Gusto ($46/mo + $6/employee), QuickBooks Payroll ($45–125/mo + $6–10/employee), Square Payroll ($35/mo + $6/employee), or OnPay ($40/mo + $6/employee). Payroll software handles tax calculations, deposit scheduling, W-2 generation, and state filing — the time and error savings outweigh the cost on the first paycheck.
Post Required Federal and State Notices
Federal law requires posting: FLSA (minimum wage), FMLA, OSH Act, EPPA, USERRA, EEO, and Title VII notices. Most states have additional requirements. The Department of Labor offers a free poster package at dol.gov/general/topics/posters. Fines for missing posters can reach $1,000–$15,000 per violation depending on which law applies.
Report New Hire to Your State Within 20 Days
Federal law requires employers to report all new hires to the state's new hire reporting agency within 20 days of start date. This feeds the child support enforcement system and is used to detect unemployment insurance fraud. Most payroll software handles this automatically — confirm your system is set up to report.
The True Total Cost of an Employee
Gross wage is only the starting point. The total employer cost of a W-2 employee is typically 25–40% above gross wages. Many first-time employers dramatically underestimate this and are surprised by their first tax deposit.
| Cost Component | Rate / Amount | Annual Cost (on $50K wage) | Notes |
|---|---|---|---|
| Gross annual wage | — | $50,000 | Base pay before any taxes |
| Social Security (employer share) | 6.2% | $3,100 | On wages up to $176,100 (2026) |
| Medicare (employer share) | 1.45% | $725 | No wage cap |
| FUTA (federal unemployment) | 0.6% on first $7K | $42 | After state credit |
| SUI (state unemployment insurance) | ~2.7% on first $7K–$26K | $378–$702 | Varies by state and experience rate |
| Workers' compensation | 1–6% of payroll (by class) | $500–$3,000 | Higher for construction, lower for office |
| Health insurance contribution | Varies — $4,000–$8,000/yr | $0–$8,000 | Not legally required but standard for retention |
| PTO / vacation (10 days) | 10/260 work days = 3.85% | $1,923 | Pay with no productivity in return |
| Recruiting and onboarding (one-time) | — | $2,000–$5,000 | Job posting, time to interview, training |
| Total true annual cost | — | $58,000–$72,000 | 16–44% above gross wage |
1099 Contractor vs. W-2 Employee — The Legal Test
If you pay someone as a 1099 contractor when they legally qualify as a W-2 employee, you owe back taxes on both the employer and employee shares, penalties up to 35% of wages paid, and interest. States like California (AB5), Massachusetts, and New York have even stricter classification rules. When in doubt, consult an employment attorney before classifying anyone as a contractor.
Indicators of W-2 Employee
- You control how the work is done
- You set the work schedule and location
- You provide tools, equipment, or workspace
- Worker cannot subcontract the work
- Long-term, ongoing relationship
- Worker works only for you (exclusive)
- You provide benefits or reimburse expenses
Indicators of 1099 Contractor
- Worker controls how the work is done
- Worker sets their own hours and location
- Worker uses their own tools and equipment
- Worker can subcontract or hire helpers
- Defined project or engagement — not permanent
- Worker has multiple clients
- Worker bears financial risk of their business
Where and How to Post the Job
- Indeed (free post + paid boost): Highest volume for hourly, trade, and local jobs. Organic posts receive limited visibility — even a small sponsored budget ($5–15/day) dramatically increases applications.
- LinkedIn (free + Premium): Best for professional, management, and white-collar roles. Free basic listings; LinkedIn Premium for analytics and direct outreach.
- ZipRecruiter ($299–$599/month): Distributes to 100+ job boards simultaneously. Good for volume hiring.
- Your state workforce agency website: Free. Required to post for some H-1B, PERM, and Trade Act situations. Also receives high local traffic from job seekers using unemployment resources.
- Craigslist ($10–75 per post): Still effective for trade, labor, and local hourly positions in many markets.
- Referral programs: Offer current employees (or even professional contacts) a referral bonus ($200–$500 for hourly, $500–$2,500 for professional). Referred hires statistically have higher retention rates.
New Hire Paperwork — Federal Requirements
- Form I-9 (Employment Eligibility Verification): Must be completed by Day 1. You must physically inspect documents (not accept copies). Keep I-9s for 3 years after hire date or 1 year after termination, whichever is later. Fine per violation: $272–$2,701 for first offense.
- Form W-4 (Federal Income Tax Withholding): Employee completes before first paycheck. The 2020 revised W-4 eliminated withholding allowances — employees claim adjustments based on their individual situation. Keep W-4s — they don't expire.
- State income tax withholding form: Most states have their own equivalent of the W-4 (e.g., Ohio IT 4, California DE 4). Check your state's department of revenue.
- Direct deposit authorization: Saves processing time and reduces check fraud. Collect voided check or bank account information. Some states restrict mandatory direct deposit — California prohibits requiring it.
- Offer letter: Not federally required, but essential. Document: position title, start date, compensation (hourly or salary), full-time or part-time status, at-will language, and any specific conditions of employment. Have the employee sign and return before start date.
New Hire Onboarding Checklist
Before Day 1
Day 1
First 30 Days
60–90 Days
Frequently Asked Questions
- What do I need to do before I hire my first employee?
- Before your first hire: (1) Obtain an EIN from IRS.gov/EIN — free, instant. (2) Register as an employer with your state tax agency for state income tax withholding and state unemployment insurance (SUI). (3) Obtain workers' compensation insurance — legally required in nearly every state for businesses with one or more employees. (4) Set up a payroll system (Gusto, QuickBooks Payroll, Square Payroll, OnPay) or engage a payroll service. (5) Open a separate payroll bank account to simplify trust fund tax deposits. (6) Post required federal and state labor law posters in your workplace.
- What is the true total cost of an employee?
- The true cost is approximately 25–40% above gross wages. Example for a $50,000/year employee: gross wage $50,000 + employer FICA (7.65%) $3,825 + FUTA ($42) + SUI (~$540) + workers' comp ($500–$3,000 by industry) + health insurance contribution ($0–$8,000 if offered) + PTO reserve ($1,923 for 10 days) + one-time recruiting and onboarding ($2,000–$5,000) = total $58,000–$72,000/year. Budget for the full cost before making a hiring decision, not just the wage.
- Can I pay someone as a 1099 contractor to avoid payroll taxes?
- Only if the worker genuinely qualifies as an independent contractor under IRS behavioral control, financial control, and type-of-relationship tests. If you control how the work is done, set their hours, provide equipment, and maintain an ongoing exclusive relationship — the worker is almost certainly a W-2 employee regardless of what your contract says. Misclassification exposes you to back taxes on both employer and employee shares, penalties up to 35% of wages, and interest. States like California (AB5), Massachusetts, and New York have additional stricter rules. Consult an employment attorney before classifying anyone as a contractor if there is any doubt.