Hiring employees for a small business means completing a specific sequence of federal and state steps before the new person’s first shift: get an Employer Identification Number, register with your state, decide whether the worker is truly an employee, put workers’ compensation in place, collect a completed Form I-9 and Form W-4, report the hire to your state, and set up payroll to withhold and deposit taxes on the right schedule. Skip any of these and the penalties can quickly outrun what you’re paying in wages. Most of it is straightforward once you know the order.
Register With the IRS and Your State
Apply for an Employer Identification Number (EIN) from the IRS using Form SS-4. This nine-digit number identifies your business on every federal tax filing and is generally required before you can run payroll or open a business bank account.1Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN) The online application on the IRS website issues the number immediately; paper and fax applications take weeks.
Once you have the EIN, register with your state’s tax or labor department. Every state assigns its own employer account number for unemployment insurance contributions and, where applicable, state income tax withholding. Some states require registration within days of hiring your first worker. The state account ties your business to the State Unemployment Tax Act (SUTA) fund, which pays temporary benefits to workers who lose their jobs through no fault of their own.
Decide Whether the Person Is an Employee or a Contractor
Before anyone starts, determine whether the worker is an employee or an independent contractor. This isn’t a choice made for convenience. The IRS looks at the actual working relationship, and getting it wrong is expensive. Employees trigger withholding, unemployment taxes, workers’ compensation coverage, and benefit obligations that contractors don’t.
The IRS weighs three categories:2Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor
- Behavioral control: whether you direct what work gets done and how the person does it. Setting hours, dictating methods, and providing training all point to employment.
- Financial control: whether you reimburse expenses, provide tools, and pay a regular wage. Contractors typically supply their own equipment and risk profit or loss on each job.
- Relationship of the parties: whether there is a written contract, benefits such as insurance or paid leave, and whether the work is core to your business.
If you’re genuinely unsure, you or the worker can file IRS Form SS-8 for an official determination.3Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Misclassifying an employee as a contractor means you’ll owe the unpaid FICA taxes, federal income tax withholding, and potentially penalties on top. The worker also misses out on unemployment insurance and workers’ compensation, which can leave you personally exposed if they’re injured on the job.
Line Up Workers’ Comp and State Disability
Most states require workers’ compensation insurance before your first employee starts work. Workers’ comp covers medical costs and lost wages when an employee is hurt or becomes ill because of the job. Premiums are calculated on total payroll and the risk level of the work. Going without coverage can bring stop-work orders, daily fines, and personal liability for the full cost of any workplace injury.
Some states also require employers to participate in state disability insurance programs that provide short-term income replacement for workers who can’t work due to non-job-related illness or injury. These programs operate separately from workers’ comp and are funded through small payroll deductions, employer contributions, or both. Check with your state labor or tax department to see whether your state runs such a program.
Have the New Hire Complete I-9 and W-4
Form I-9 for Work Authorization
Every person you hire must complete Form I-9 to verify legal authorization to work in the United States.4U.S. Citizenship and Immigration Services. I-9, Employment Eligibility Verification The employee fills out Section 1 on or before their first day. You then examine original identity and work-authorization documents. A U.S. passport alone satisfies both requirements, or the employee can present a combination such as a driver’s license plus a Social Security card. You can’t demand specific documents; the employee chooses from the approved list.5U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification
Keep each completed I-9 for three years after the hire date or one year after employment ends, whichever is later.4U.S. Citizenship and Immigration Services. I-9, Employment Eligibility Verification Civil penalties for I-9 paperwork violations currently range from $288 to $2,861 per form, so missing or sloppy forms add up fast.6U.S. Citizenship and Immigration Services. Penalties for Prohibited Practices
Form W-4 for Federal Withholding
Each new employee also completes IRS Form W-4, which tells you how much federal income tax to withhold. The form captures filing status, dependent credits, other income, and any extra withholding the employee requests.7Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate If an employee doesn’t turn one in, you’re required to withhold as if they filed single with no adjustments. You’ll also need the employee’s Social Security number so tax deposits credit to the right account.8Social Security Administration. Foreign Workers and Social Security Numbers Many states require a separate state withholding form that works similarly to the W-4; you can get those through your state’s department of revenue.
Report the New Hire to Your State
Federal law requires every employer to report new and re-hired employees to a state agency, usually the child support enforcement office. The requirement traces to the Personal Responsibility and Work Opportunity Reconciliation Act and exists mainly to locate parents who owe child support and to detect fraudulent benefit claims. The federal deadline is 20 days from the employee’s start date, though some states set a shorter window.9Administration for Children & Families. New Hire Reporting – Answers to Employer Questions
Most states accept reports through an online portal, with mail and fax also available in many places. The report includes the employee’s name, address, Social Security number, and your federal EIN. If you have employees in multiple states and file electronically, you can register as a multistate employer and report all new hires to a single designated state.10U.S. Department of Health and Human Services. Multistate Employer Registration Form for New Hire Reporting
Set Up Payroll and Deposit Taxes
FICA
Every paycheck requires you to withhold Federal Insurance Contributions Act (FICA) taxes for Social Security and Medicare. For 2026, the Social Security tax rate is 6.2% on wages up to $184,500, and the Medicare tax rate is 1.45% with no wage cap. You pay a matching amount, so the total FICA cost is 15.3% split evenly between employer and employee. Once an employee earns more than $200,000 in a calendar year, you must withhold an additional 0.9% Medicare tax from their wages, but you do not match that portion.11Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide
FUTA
The Federal Unemployment Tax Act imposes a separate employer-only tax of 6.0% on the first $7,000 of wages paid to each employee per year.12Office of the Law Revision Counsel. 26 U.S. Code 3301 – Rate of Tax Most employers receive a credit of up to 5.4% for paying state unemployment taxes on time, cutting the effective FUTA rate to 0.6%.13Internal Revenue Service. FUTA Credit Reduction If your state has outstanding federal unemployment loans, that credit shrinks and your effective rate rises. The IRS publishes a list of credit reduction states each year.
Deposit Schedules
How often you deposit withheld income tax and FICA depends on the size of your payroll. If your total tax liability during the IRS lookback period was $50,000 or less, deposits are monthly. Above $50,000, you switch to a semiweekly schedule. Any single-day accumulation of $100,000 or more in taxes triggers a next-business-day deposit regardless of your regular schedule.11Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide New employers with no lookback history generally start on a monthly schedule. Late deposits carry escalating penalties, so getting the cadence right matters from the first paycheck.
Pay at Least the Minimum Wage and Overtime
The federal minimum wage is $7.25 per hour and has been since 2009.14U.S. Department of Labor. State Minimum Wage Laws Most states set a higher minimum, and you owe whichever is greater. Many states adjust their rate annually for inflation, so check your state labor department’s current figure.
For non-exempt employees who work more than 40 hours in a workweek, the Fair Labor Standards Act requires overtime pay at one and a half times the regular rate.15U.S. Department of Labor. Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the Fair Labor Standards Act To be exempt from overtime, an employee generally must earn at least $684 per week on a salary basis ($35,568 per year) and perform executive, administrative, or professional duties. A 2024 rule would have raised that threshold, but a federal court struck it down, so the $684 figure remains in effect for 2026.16U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption from Minimum Wage and Overtime Protections Under the FLSA Some states impose their own, higher salary thresholds for exempt employees.
Safety and Required Posters
The Occupational Safety and Health Act requires every employer to provide a workplace free from recognized hazards that could cause serious harm or death. That general duty applies regardless of industry or headcount. If you have ten or fewer employees, you’re partially exempt from OSHA’s injury and illness recordkeeping requirements, but you must still report any work-related fatality, hospitalization, amputation, or loss of an eye.17Occupational Safety and Health Administration. Partial Exemption for Employers With 10 or Fewer Employees
Federal law also requires you to display certain labor notices where employees can see them. Nearly every employer needs at least the Fair Labor Standards Act poster on minimum wage and overtime, the OSHA “Job Safety and Health” poster, the Employee Polygraph Protection Act notice, and the USERRA poster for military reemployment rights.18U.S. Department of Labor. Workplace Posters Employers covered by the Family and Medical Leave Act (generally 50 or more employees) also need that poster. All federal posters are free to download from the Department of Labor, and most states publish their own required posters through their labor department.
Keep the Right Records
Different agencies have different retention rules, and the IRS is the most demanding. Keep all employment tax records, including deposit receipts, filed returns, W-4s, and supporting documentation, for at least four years after filing the return for the quarter in question.19Internal Revenue Service. Employment Tax Recordkeeping That four-year window is longer than most other retention rules, so building around it covers most overlaps.
Under the Fair Labor Standards Act, payroll records showing hours worked, wages paid, and deductions must be kept for at least three years. Supplementary records like time cards and work schedules carry a two-year retention requirement.20eCFR. 29 CFR Part 516 – Records to Be Kept by Employers The EEOC requires you to keep general personnel records for one year from the date of creation, or one year after termination for involuntarily separated employees. If a discrimination charge is filed, you must retain related records until the matter is fully resolved.21U.S. Equal Employment Opportunity Commission. Recordkeeping Requirements All of these documents contain sensitive personal information, so store them securely, limit access, and have a plan for disposing of records once the retention period expires.
Watch the 50-Employee Line and State Retirement Rules
If your business grows to an average of 50 or more full-time employees (including full-time equivalents) during the prior calendar year, you become an applicable large employer under the Affordable Care Act and must offer affordable health coverage to full-time workers or face a tax penalty.22Internal Revenue Service. Employer Shared Responsibility Provisions Most small businesses stay below this threshold, but it’s worth tracking your headcount as you grow. Crossing 50 also triggers FMLA coverage and other federal obligations.
Separately, a growing number of states now require employers to either offer a retirement savings plan or automatically enroll employees in a state-facilitated program. Thresholds vary, with some states covering employers with a single employee and others starting at five or more. If your state has such a mandate, you’ll typically need to register and begin payroll deductions within a set timeframe after becoming covered. Your state labor or treasury department website is where to check.