To hire a W-2 employee, you need to confirm the worker is legally an employee rather than a contractor, get an Employer Identification Number from the IRS, collect a completed Form W-4 and Form I-9 before the first paycheck, register for state unemployment and workers’ compensation coverage, report the new hire to your state within 20 days, and then withhold, deposit, and report federal and state payroll taxes on the schedules the IRS and your state assign you. Each step below carries its own deadline, and missing them is where new employers most often run into penalties.
Confirm the Worker Is Actually an Employee
Before anything else, make sure the person you’re hiring qualifies as an employee and not an independent contractor. The IRS weighs three categories of evidence: behavioral control (whether you direct what the worker does, when, and how), financial control (who pays for tools, how the worker is paid, whether expenses are reimbursed), and the type of relationship (written contracts, employee benefits, and whether the work is a core part of your business).
If most of those factors point toward your direction and integration into your business, treat the worker as a W-2 employee. Misclassifying an employee as a contractor can leave you liable for unpaid employment taxes, penalties, and interest, and the IRS actively audits for this issue.
Get an Employer Identification Number
You need an EIN before you can withhold taxes, open payroll accounts, or file employment tax returns. Apply by submitting Form SS-4 to the IRS. The agency recommends the online application at IRS.gov/EIN, which returns your number immediately.1Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN) The form asks for your business’s legal name, its structure (sole proprietorship, LLC, corporation, and so on), and the reason you’re applying, such as hiring your first employee. You’ll use this EIN on every payroll deposit, return, and W-2 you file.
Collect a W-4 and an I-9 Before the First Paycheck
Two forms have to be in your hands before your new hire starts working or gets paid.
Form W-4
Every new hire must complete IRS Form W-4, Employee’s Withholding Certificate, before receiving their first paycheck.2Internal Revenue Service. Hiring Employees – Section: Employee’s Withholding It captures the employee’s legal name, Social Security number, and address, along with their filing status and any adjustments for multiple jobs or dependent credits.3Internal Revenue Service. Form W-4 (2026) – Employee’s Withholding Certificate Those entries drive the federal income tax you withhold from each paycheck. Keep employment tax records for at least four years after the tax is due or paid, whichever is later.4Internal Revenue Service. How Long Should I Keep Records
Form I-9
Federal law requires you to verify every new hire’s legal right to work using Form I-9 from U.S. Citizenship and Immigration Services. The employee completes Section 1 no later than their first day of work, entering their name, address, date of birth, and citizenship or immigration status. You complete Section 2 within three business days of the start date by physically examining original documents the employee presents.
Documents come from three lists printed on the form. List A documents (such as a U.S. passport or permanent resident card) prove identity and work authorization together. If the employee doesn’t have a List A document, they combine one List B document proving identity (such as a driver’s license) with one List C document proving work authorization (such as a Social Security card). You confirm the documents reasonably appear genuine and relate to the person presenting them, but you cannot demand specific ones. The employee chooses which acceptable items to show. Paperwork violations start at roughly $280 per form and climb with repeat offenses; knowingly hiring unauthorized workers carries significantly higher penalties and potential criminal exposure for a pattern of violations.
Most private employers are not required to use E-Verify. If your business holds a federal contract with the Federal Acquisition Regulation E-Verify clause, or operates in a state that mandates it, you’ll need to enroll and run new hires through the system in addition to completing Form I-9.5E-Verify. Federal Contractors
Register with Your State and Buy Workers’ Compensation
Federal accounts alone won’t cover you. You also need to register with your state for a State Unemployment Insurance account so your business can fund unemployment benefits for laid-off workers. New-employer rates typically run somewhere between 1% and 4% of taxable wages, but the exact rate, wage base, and calculation vary by state and industry. If your state has an income tax, register for a state withholding account as well.
Workers’ compensation insurance has to be in place before an employee starts work. The policy pays medical expenses and a portion of lost wages when a worker is hurt or gets sick on the job. Most states require coverage even for a single employee, and operating without it can trigger stop-work orders, daily fines, and personal liability for the owner. In some states, willful failure to carry coverage is a criminal offense. Contact your state’s workers’ compensation agency or insurance marketplace for the rates and rules that apply to your industry.
Report the New Hire Within 20 Days
Federal law requires you to report every new employee to a designated state agency within 20 days of their start date.6Administration for Children & Families. New Hire Reporting – Answers to Employer Questions Some states set shorter deadlines, so check yours. The report includes the employee’s name, address, and Social Security number, along with your business name and EIN. The system mainly supports child support enforcement, and most states accept electronic submissions through the labor department or child support agency’s website.
Withhold, Match, and Deposit Federal Payroll Taxes
Once an employee is on the books, you become responsible for withholding three federal taxes from each paycheck and, in two cases, paying a matching share.
Federal Income Tax
You withhold federal income tax based on the employee’s W-4 entries and your pay frequency. IRS Publication 15 (Circular E) contains the tables for the calculation.
Social Security and Medicare (FICA)
You withhold 6.2% of wages for Social Security and pay a matching 6.2% yourself. For 2026, Social Security tax applies only to the first $184,500 of wages per employee; once earnings pass that threshold, both the withholding and the match stop for the year.7Social Security Administration. Contribution and Benefit Base Medicare is 1.45% withheld and 1.45% matched, with no wage cap, for a combined employer share of 7.65% of covered wages.8Internal Revenue Service. Instructions for Form 941 (Rev. March 2026) Once an employee’s wages pass $200,000 in a calendar year, you also withhold an Additional Medicare Tax of 0.9% from their pay, with no employer match.9Internal Revenue Service. Topic No. 560, Additional Medicare Tax
Federal Unemployment Tax (FUTA)
FUTA is an employer-only tax. Nothing comes out of the employee’s pay. The rate is 6.0% on the first $7,000 you pay each employee per year, but if you also pay into your state unemployment fund (nearly all employers do), you get a credit of up to 5.4%, dropping the effective rate to 0.6%, or a maximum of $42 per employee per year.10Internal Revenue Service. Publication 15-A (2026), Employer’s Supplemental Tax Guide11Internal Revenue Service. Topic No. 759, Form 940 – FUTA Tax Return Filing and Deposit Requirements
Deposit Schedule
The IRS assigns you a monthly or semiweekly deposit schedule based on a lookback period running from July 1 through June 30 of the prior year. If your reported liability during the lookback was $50,000 or less, you’re a monthly depositor and each month’s taxes are due by the 15th of the following month. Above $50,000, you’re semiweekly, with shorter deposit windows tied to your paydays.12Internal Revenue Service. Notice 931 – Deposit Requirements for Employment Taxes New employers with no lookback history generally start on the monthly schedule. All deposits must be made electronically, through EFTPS, Direct Pay for businesses, or your business tax account on IRS.gov.13Internal Revenue Service. Depositing and Reporting Employment Taxes Late deposits carry escalating penalties that top out at 15% of the unpaid amount once the IRS issues a demand notice.14Internal Revenue Service. Failure to Deposit Penalty
File the Required Returns
Most employers file Form 941 each quarter to report wages paid, federal income tax withheld, and both shares of Social Security and Medicare. Returns are due April 30, July 31, October 31, and January 31 for the preceding quarter.8Internal Revenue Service. Instructions for Form 941 (Rev. March 2026) Very small employers whose total annual liability for these taxes is $1,000 or less may file Form 944 once a year instead.15Internal Revenue Service. About Form 944, Employer’s Annual Federal Tax Return
Form 940 reports your FUTA liability once a year. For the 2025 tax year it’s due February 2, 2026, or February 10 if you deposited all FUTA tax on time.16Internal Revenue Service. Instructions for Form 940 (2025) At year end, you give each employee a Form W-2 showing wages and taxes withheld. Copies of every W-2, along with a transmittal Form W-3, go to the Social Security Administration by February 1, 2027 for the 2026 tax year.17Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
Pay the Employee Legally
The Fair Labor Standards Act sets the federal minimum wage at $7.25 per hour.18U.S. Department of Labor. State Minimum Wage Laws Many states and cities set higher minimums, and you pay whichever is greater. Non-exempt employees also get at least one and a half times their regular rate for hours worked beyond 40 in a workweek.
Some executive, administrative, and professional employees are exempt from overtime if they pass a duties test and earn above a minimum salary. After a federal court vacated the Department of Labor’s 2024 update, the agency is enforcing the 2019 threshold of $684 per week, or $35,568 per year.19U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption An employee earning less than that, or one who doesn’t meet the duties test, is owed overtime regardless of job title.
Federal law doesn’t require pay stubs, but most states do. Where stubs are mandated, common required items include gross wages, itemized deductions, net pay, hours worked, and the pay rate. Check your state labor department’s requirements before running your first payroll.