Hiring Your First Employee: The Tax and Compliance Checklist

TLDR

Before day one you need an EIN, a state withholding account, a state unemployment account, and workers compensation coverage. On day one you collect a Form W-4 and start Form I-9, which has a hard three business day deadline for your part. Within 20 days you file a new hire report with the state. After that it is a rhythm: deposit withheld tax on schedule, file Form 941 quarterly, file Form 940 annually, and get W-2s out by January 31. Nearly all of the ongoing work should be handled by a payroll provider, and the money it costs is small next to the penalties it avoids.

There is no gentle version of this step. One day you are a business with contractors and a bank account. The next you are a withholding agent for the federal government.

The good news is that the list is finite, and most of it is one-time setup.

#First: are you sure this is an employee

Worth thirty seconds, because getting it wrong is expensive in both directions.

If you control what gets done and how it gets done, set the hours, provide the tools, and the person works only for you, you have an employee. Calling them a contractor and issuing a 1099 does not change that.

Misclassification exposure includes the back withholding, both halves of Social Security and Medicare, penalties, and often a state claim as well. The full test is in contractor versus employee classification.

The reverse mistake also exists. Putting a genuine contractor on payroll costs you employer tax you did not owe.

#Before day one

Get an EIN if you do not have one. Free, from IRS.gov, usually same day. A sole proprietor who has been using a Social Security number needs one now.

Register for state withholding. Every state with an income tax requires an employer account before you withhold. A handful of states, Texas among them, have no personal income tax and therefore no state withholding registration. That does not exempt you from the next one.

Register for state unemployment insurance. This is separate from withholding and it applies in every state, including states with no income tax. Texas employers register with the Texas Workforce Commission. You will be assigned a rate, and new employers typically start at a standard entry rate.

Get workers compensation coverage. Rules vary a lot by state and by industry. Some states require it from the first employee, some have thresholds, and Texas is unusual in that private coverage is largely elective. Elective does not mean advisable. Going without it means an injury becomes a direct claim against the business.

Pick a payroll provider before you need one. Setting up payroll while someone is waiting to be paid is how mistakes happen. Do it a week early and run a test.

Write down the offer. Rate, pay frequency, exempt or non-exempt status, and start date. Non-exempt means overtime rules apply, and misclassifying someone as exempt is its own separate problem from the contractor question.

#Day one paperwork

The two forms every new employee completes
	Form W-4	Form I-9
Purpose	Tells you how much federal tax to withhold	Verifies the person can legally work in the US
Who fills it out	The employee	Employee section 1, employer section 2
Deadline	Before the first paycheck	Employee on day one, employer within 3 business days
Where it goes	Your files, not the IRS	Your files, never the government
If it is missing	Withhold at the default single rate	Penalties per form, and they add up

Neither form gets mailed anywhere. You keep both. That surprises people who expect to file them.

Two details that cause most of the I-9 problems: you must see the original documents, and you may not tell the employee which documents to bring. Handing them the list and letting them choose is the rule. Directing the choice is a discrimination issue.

Also collect a state withholding form if your state has one, direct deposit authorization, and emergency contact information.

#What comes out of every paycheck

Withheld from the employee:

Federal income tax, based on their W-4
Social Security at 6.2%, up to the annual wage base ($184,500 for 2026)
Medicare at 1.45%, with no wage cap
An additional Medicare surtax of 0.9% on wages above the statutory threshold, employee-paid only
State and local income tax where applicable

Paid by you on top of the wage:

Social Security at 6.2%, matching
Medicare at 1.45%, matching
Federal unemployment tax at 6.0% on the first $7,000 of each employee’s wages, reduced by a credit of up to 5.4% for state unemployment paid on time, which brings most employers to an effective 0.6%
State unemployment tax at your assigned rate

The practical planning number: an employee costs meaningfully more than their wage. Employer payroll tax alone is roughly 7.65% of wages up to the cap, before unemployment, workers compensation, and benefits. Budget the loaded cost, not the salary.

#The ongoing rhythm

Deposits. Withheld tax plus your matching share gets deposited on a schedule, not whenever you get to it.

Your schedule is monthly or semiweekly, determined by a lookback at your reported tax over a prior four-quarter period. Above roughly $50,000 in that window puts you on semiweekly.
New employers start as monthly depositors, because the lookback is zero.
One override: if you ever accumulate $100,000 or more of liability on a single day, it is due the next business day. Rare for a first hire, but it exists.
Deposits go through EFTPS.

Form 941, quarterly. Reports wages, withholding, and your share. Due the last day of the month after each quarter ends.

Form 940, annually. Federal unemployment. Due January 31.

W-2s, annually. To employees and to the Social Security Administration by January 31. That deadline is firm and the penalties are per form.

State filings. Unemployment wage reports quarterly, and withholding returns on your state’s schedule.

#What to hand off and what to keep

Hand off the mechanics. A payroll provider handles the calculation, the deposits, the 941, the 940, the W-2s, and usually the new hire report. It costs a small monthly fee and removes the entire category of “I forgot the deposit.”

Keep three things yourself:

Confirm the filings actually happened. Providers are reliable and not infallible, and the liability stays with you. Check the notices.
Reconcile payroll to your books monthly. Gross wages, employer tax, and net pay should tie to what left the bank. A payroll liability account that never clears is the early warning sign of a real problem, and it shows up in a monthly close long before it shows up in a letter.
Keep the documents. W-4s, I-9s, and pay records have retention requirements, and I-9s in particular have their own rules about how long to keep them after someone leaves.

This is where the bookkeeping side and the tax side stop being separate jobs. When we run bookkeeping for an owner with payroll, tying out the payroll liability accounts every month is a standing step, precisely because it is the thing that catches a deposit problem while it is still small.

#Common questions

Can I pay my first employee as a contractor to keep it simple? Not if the facts say employee. The simplicity is temporary and the correction is not.

Do I need payroll if the only employee is me? If you run an S-corp, yes, you owe yourself reasonable compensation on a W-2. A single-member LLC taxed as a sole proprietorship does not put the owner on payroll at all.

What if I hire someone in another state? You generally register for withholding and unemployment in the state where the employee works, not where you are. Remote hires create real multi-state obligations, covered in multi-state nexus.

Do I need workers comp for one employee? It depends on the state and the industry. Texas makes private coverage largely elective, which is not the same as making it a good idea.

What about hiring my kids? There are genuine advantages, and there are also real requirements about actual work, reasonable wages, and documentation. It is worth doing properly rather than casually.

When do I need an employee handbook? Not required at one employee in most cases, but a short written policy on pay periods, time off, and expectations prevents a surprising number of disputes.

#The short version

Before day one: EIN, state withholding, state unemployment, workers comp, payroll provider. Day one: W-4 and I-9, with your I-9 section done within three business days. Within 20 days: the state new hire report.

Then it is a rhythm. Deposit on schedule, 941 quarterly, 940 and W-2s by January 31.

If you are about to make a first hire and want the setup checked before payday rather than after, that is a short conversation and a much cheaper one than fixing it in the first quarter.