What You Need to Know Before You Hire Your First Employee

You've started a small business, and everything's going great. In fact, it's time to hire help. Use this checklist to ensure you follow federal and state regulations as you hire your first employee.

Obtain an Employer Identification Number (EIN)


Apply online or call the Internal Revenue Service (IRS) for an employment identification number (EIN). It's also known as an Employer Tax ID or Form SS-4, and you'll use it when you file taxes and other documents with the IRS and when you report employee information to state agencies.

Prepare a Recordkeeping System for Tax Withholding

As an employer, you are required to withhold taxes from your employee's paychecks. The IRS also requires employers to maintain employment tax records for four years, and you can use the records to prepare financial statements, track expenses and prepare your tax returns. Plan to withhold tax in three specific categories.

  • Federal Income Tax Withholding - Employees must sign a withholding exemption certificate (Form W-4) that you must submit to the IRS.

  • Federal Wage and Tax Statement - File an annual Form W-2 that details the wages you paid employees and the tax you withheld. It's required for every employee to whom you pay salary, wages or other compensation.

  • State Taxes - If your state requires you to withhold state income tax, follow the guidelines for reporting this income tax.

Verify Employee Eligibility

According to federal laws, you have the responsibility to verify that a potential employee is eligible to work in the United States. Be sure your employee fills out Form I-9 within three days of hire, and keep the form on file.

Register with Your State's New Hire Reporting Program

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires you to report your new employee to your state's directory. Complete this step within 20 days of hiring someone.

Purchase Workers' Compensation Insurance

When you were the only employee of your small business, you didn’t' need Workers' Compensation insurance. You will have to purchase a policy for your new employee, though. Purchase it from a commercial carrier or through their state’s Workers' Compensation Insurance program.

Post Any Required Notices

Because of labor laws, you must post certain posters in the workplace. They detail employee rights, responsibilities and safety details.

File Your Taxes


In general, employers with employees who are subject to income tax withholding must file quarterly federal tax returns. Discuss the details with your accountant to ensure you follow the law.
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