Hiring Your First Employee? Here’s What You Need to Know

Hiring an employee is a significant milestone for your business. Adding extra help is key to small business growth, allowing you to scale your offerings and attract more clients.

However, hiring your first employee involves many steps, from legal requirements to payroll to finding the perfect candidate. If this is your first hire, it can be intimidating, so following a checklist can help you reduce the time and expenses associated with hiring.

In this comprehensive guide, we’ll walk you through everything you need to know about hiring your first employee—from securing an employer identification number (EIN) to managing payroll efficiently. You’ll also learn how to craft a compelling job description, conduct effective interviews, and comply with state and federal regulations.

When Is the Right Time to Hire Your First Employee?

Hiring your first employee as soon as you open for business can be tempting, but that isn’t always the best choice. Hiring too soon can strain your budget, which is ultimately one of the most common reasons small businesses fail.

You need to be financially stable before hiring an employee. Understanding cash flow and financial stability is key to making this decision confidently. 

In fact, one of the main reasons small businesses fail is due to cash flow problems. Ensuring that your business has enough funds to cover salaries and other expenses is essential before expanding your team. If you haven’t already, create a small business budget to determine whether you can support the long-term costs of hiring an employee.

While finances are the primary consideration, you should also consider whether you have enough work to bring on an employee. It might be time to expand your team if you’re constantly playing catch-up or turning away opportunities. But if you’re light on work, focusing on finding clients could be a better use of your time and money than hiring an employee right now.

Considerations Before Hiring Your First Employee

If you’re financially stable and have the work to support a second person in your business, it’s likely a good time to hire your first employee.

However, there are a few considerations to keep in mind before hiring someone, including:

Ensure You Have Enough Funding

From salaries to taxes and benefits, hiring comes with both direct and indirect costs. To do this, perform a budget analysis to help you understand your financial position better, along with a pro forma analysis to help you project future finances with an additional employee on board.

Stabilize Cash Flow

Healthy cash flow is non-negotiable when hiring your first employee. This will allow you to make payroll on time every pay period without straining your resources. Regularly reviewing your cash flow statements and maintaining a cash reserve can safeguard your ability to pay salaries.

Know Where You Need Help the Most

Before hiring, make sure you understand what, exactly, this employee needs to do to benefit the business. Clearly outline the skills, experience, and tasks required. Clarifying your needs will help you attract the right talent and set clear expectations from day one.

Familiarize Yourself With Legal Requirements

Before hiring, know that you must comply with tax regulations, labor laws, and insurance requirements. This includes obtaining an EIN and understanding wage laws. When in doubt, consult with an employment attorney or human resources expert to learn about employment laws in your area.

How to Hire Your First Employee

Hiring your first employee can feel overwhelming, but breaking it down into manageable steps makes the process smoother. From setting up payroll to ensuring compliance with regulations, follow these steps to avoid costly mistakes and set your new hire up for success.

1. Obtain an Employee Identification Number (EIN)

First, obtain an employer identification number from the IRS if you don’t already have one. An EIN acts like a Social Security number for your small business, allowing you to report taxes, manage payroll, and file business documents both locally and federally. Without an EIN, you won’t be able to hire legally or open a business bank account for payroll.

2. Get Workers’ Comp Insurance

Most states require employers to offer workers’ compensation insurance, which covers medical expenses, lost wages, and rehabilitation costs if an employee is injured on the job. Failing to have this insurance can result in hefty fines, lawsuits, and even the suspension of your business license.

To get workers’ comp insurance, look for reputable insurers in your state. The cost depends on a lot of factors, including how risky your business is. Shop around for quotes from different providers to find a plan that fits your budget.

3. Get State Unemployment Insurance

State unemployment insurance (SUI) is essential when hiring your first employee. This insurance provides temporary financial assistance to workers who lose their jobs through no fault of their own. Nearly all states require employers to register for SUI as soon as they hire their first employee.

To get started, you’ll need to register with your state’s workforce agency or labor department. This process usually involves filling out an application with details about your business, such as your EIN, business structure, and payroll details. Once registered, you’ll receive a personalized tax rate, which determines how much you need to contribute to the state’s unemployment fund each pay period.

4. Create an Employee Handbook

While a handbook isn’t technically required, it’s still a best practice for hiring your first employee. This document serves as a roadmap for your business’s policies, expectations, and culture, helping new hires understand what’s required of them from day one. A comprehensive employee handbook not only sets clear guidelines but also minimizes confusion and potential conflicts by addressing key topics such as workplace behavior, dress code, and time-off policies.

Start by outlining your company’s mission, values, and core policies. Include sections that cover essential details like work hours, compensation, benefits, and the process for requesting leave. Make sure to address compliance topics, such as anti-discrimination policies, which protect your business from legal disputes.

5. Set Up Payroll (Invest in Payroll Software)

Next, set up a system for paying your new employee. While doing this manually is possible, payroll software is the best option for small business owners. Payroll software can automate calculations for taxes, benefits, and deductions, reducing the risk of costly mistakes.

Most platforms also handle tax filings and generate pay stubs for you, making it easier to comply with federal and state requirements. Plus, most payroll systems often include features for direct deposit, time tracking, and even employee self-service portals where your team can access their pay information and tax forms.

6. Create a New Hire Checklist for Yourself

Hiring a new employee requires a lot of paperwork. Missing a requirement could land you in hot water, so create a hiring checklist for yourself. The content of the checklist will vary depending on your needs, but it might include tasks like:

• Gather essential documents
• Arrange training sessions
• Collect employee information
• Provide a copy of the employee handbook
• Set up work equipment
• Schedule important meetings

Having a step-by-step plan lets you focus more on making your new hire feel welcome and spend less time on administrative tasks. As your business grows, you can also refine and expand this checklist.

7. Post a Detailed Job Description

Now that you’ve laid the groundwork for hiring, it’s time to write and post a job description to attract candidates. Start by outlining the position’s essential duties, including daily tasks and long-term goals. Be specific about the skills, experience, and education required, and avoid vague phrases like “must be a team player.”

Instead, detail the technical skills needed, such as proficiency in certain software, or soft skills like communication and problem-solving. Include information about compensation, benefits, work hours, and whether the position is remote or in-office. Always offer information about your company, mission, or products—something that piques applicants’ interest and persuades them to work for you. Once you’ve written the description, post it on job boards like Glassdoor, Indeed, Monster, or LinkedIn.

8. Interview Candidates

Start by reviewing each candidate’s resume and shortlisting candidates for an interview. During the interview, ask open-ended questions that prompt candidates to share specific examples of their skills and experiences. Candidate skill assessments are also helpful for understanding their proficiency in more technical areas.

9. Complete a Background Check on Your Top Candidate(s)

Before finalizing a job offer, always conduct a background check on your top candidate. While it’s an additional step, it ensures your new hire has a clean, reliable record and protects your small business from potential risks.

To start, inform candidates that you’ll conduct a background check and obtain their written consent, as required by the Fair Credit Reporting Act (FCRA). Choose a reputable background check service that complies with federal and state regulations to ensure the process is thorough and legally compliant. Most checks take a few days to complete and typically cover criminal records and credit history.

10. Hire the Ideal Employee

After reviewing resumes, conducting interviews, and completing background checks, it’s time to make an offer and hire the ideal employee for your small business. Start by preparing a formal job offer letter with key details such as salary, benefits, work schedule, and start date. Clearly outline the expectations for the role based on the job description you posted earlier, and make sure to mention any important policies from the employee handbook.

Most employers send these letters via email. The employee should reply in writing that they accept the offer. Don’t proceed with the next step until you have their acceptance in writing.

11. Have Your Employee Fill Out a W-4 Form

The W-4 form, also known as the Employee’s Withholding Certificate, determines how much federal income tax you should withhold from their paycheck based on filing status, dependents, and other factors. Properly managing tax withholdings not only ensures compliance with IRS regulations but also helps your employee avoid making inaccurate payments.

To get started, provide your new hire with the most current W-4 form, either from the IRS website or through your payroll software. Once you have the form, enter the information into your payroll system, which will automatically deduct the right amount of taxes from each paycheck.

12. Fill Out an I-9 Form

Every employer needs to have an Employment Eligibility Verification form, also known as Form I-9. This form verifies your employee’s identity and that they’re authorized to work in the US. Legally, you must submit this form within three business days of the employee’s start date.

13. Report the New Hire to Your State’s New Hire Reporting Agency

The PRWORA Act (Personal Responsibility and Work Opportunity Act) requires you to report new hires to your state’s new hire reporting agency within 20 days of their start date. To report a new hire, you’ll need to gather essential information such as their name, address, Social Security number, and the date they started working.

14. Set Up a Unique Tax Document File for Each New Employee

Getting organized will make it much easier to manage hiring paperwork, both now and when you hire for future roles. Create a unique tax document file to centralize all employee tax documents, payroll-related paperwork, and other essential information. Use a secure, cloud-based system to make this information readily available while keeping it safe.

15. Don’t Forget to File IRS Form 940 Annually

Form 940 is part of the Federal Unemployment Tax Act (FUTA), which funds unemployment compensation. Even if you’ve set up state unemployment insurance, the federal government requires a separate contribution through the FUTA tax, making Form 940 a mandatory annual filing for most employers.

IRS Form 940 is typically due by January 31 each year and covers the previous calendar year. The tax rate for FUTA is generally 6% on the first $7,000 of each employee’s wages. Fortunately, most employers qualify for a tax credit of up to 5.4% if they also pay state unemployment insurance, effectively reducing the rate to 0.6%.

What to Do After Hiring an Employee

Hiring your first employee is a significant milestone for your small business, but the work doesn’t stop once they accept the offer. You’ll also need to:

Onboard the new employee: Start by sending a welcome email that outlines the first day’s schedule, key contacts, and any documents they need to review. Make sure to provide a copy of the employee handbook and give them access to essential tools and resources.

• Offer training: Develop a training schedule that covers both job-specific skills and general company policies. Clearly outline their role, responsibilities, and performance metrics so they know what you expect from them.
• Gather feedback: Frequent check-ins during the first few weeks will help you address questions and concerns promptly. Use this time to gather feedback, provide guidance, and ensure that your new hire is settling in well. Since this is your first employee, regular check-ins give you the opportunity to identify better ways of managing your growing business.
• Maintain financial stability: Running a small business can be challenging. Proper cash flow management ensures your financial resources stay in good shape to cover this employee’s salary.

In-Summary: Hiring Your First Employee

Hiring your first employee is an exciting moment for a small business owner. While additional team members support small business growth, business owners must be prepared to shoulder the cost of hiring a new employee.

Beyond the paperwork, don’t underestimate the importance of a thorough interview process and skill assessments to find the right fit. Once you’ve made the hire, completing compliance tasks—like filing IRS Form 940 and reporting new hires to your state—ensure that you’re abiding by regulations.

While hiring your first employee may seem daunting, it’s a big milestone that signals business growth. Follow the tips in this guide to build a solid foundation for your growing team and gain confidence in your ability to lead your business to success.