How to Hire Your First Employee: The Steps, Forms and Deadlines

The steps, in order

1. Get an EIN for the business that will pay the wages. A sole proprietor needs one once there is an employee. A single-member LLC needs its own, under the LLC's name, even if it has used the owner's SSN until now (see EIN for a single-member LLC). A partnership or corporation usually has one already.
2. Register with your state. Most states give employers a withholding account and an unemployment insurance account, and both applications ask for the EIN. The account names and agencies for each state are in state employer ID numbers.
3. Decide whether the worker is an employee. If you control what the person does and how, they are usually an employee, not a contractor. See the section below.
4. Complete Form I-9. The employee fills in Section 1 by the first day of work. You examine their documents and complete Section 2 within 3 business days.
5. Collect Form W-4 and your state's withholding certificate if it has one, before the first paycheck.
6. Report the new hire to your state's new hire registry within 20 days, or sooner if your state says so.
7. Arrange workers' compensation coverage under your state's rules, and put up the required posters.
8. Run payroll: withhold, deposit the taxes electronically, file Form 941 every quarter, and send W-2s by January 31.

Step 1: the EIN comes first

The IRS lists three reasons a business must have an EIN, and the first is having employees. Publication 15, the IRS employer's tax guide, puts it plainly: if you are required to report employment taxes or give tax statements to employees, you need an EIN. It also says not to use an SSN in place of an EIN.

The EIN is the number on everything that follows: the state withholding and unemployment registrations, the new hire report, every federal tax deposit, Form 941, Form 940 and each employee's W-2. Get it before you register with the state, because the state applications ask for it.

One more reason to apply early: when a new employer indicates a federal tax obligation on the EIN application, the IRS pre-enrolls it in EFTPS, the free system for federal tax deposits. The EIN package explains how to activate the enrollment, and the PIN arrives in a separate mailing.

If you already have an EIN from before, check that it belongs to the business that will be the employer. A sole proprietor's EIN does not carry over to an LLC or corporation formed later. The rules are in do I need a new EIN.

Step 2: register for state payroll taxes

Federal payroll runs on the EIN alone. States add their own accounts, usually one for state income tax withholding (in states that have an income tax) and one for state unemployment insurance. Each comes with its own account number, which goes on your state returns and is separate from the EIN. See state employer ID numbers by state and the difference between the two kinds of number in state tax ID number.

Step 3: employee or independent contractor?

The IRS looks at the whole relationship, grouped under three headings:

• Behavioral: do you control, or have the right to control, what the worker does and how they do it?
• Financial: do you control the business side of the job, such as how they are paid, whether expenses are reimbursed and who provides tools and supplies?
• Type of relationship: is there a written contract or employee-type benefits, will the work continue, and is it a key part of your business?

No single factor decides it. For an employee you withhold income tax and the employee share of Social Security and Medicare, pay the employer share, and pay unemployment tax. For a contractor you generally withhold nothing. If you cannot tell, Form SS-8 asks the IRS to decide.

Step 4: Form I-9 and E-Verify

Every U.S. employer completes Form I-9 for every person it hires, citizens included. The employee completes Section 1 no later than the first day of work. You examine the documents they choose to show and complete Section 2 within 3 business days of the first day of work for pay: for a Monday start, by Thursday. You keep the form yourself rather than filing it, for 3 years after the date of hire or 1 year after the job ends, whichever is later.

E-Verify checks the I-9 information against government records. It is required for most companies with federal contracts and, according to E-Verify, by over 20 states for certain employers. Otherwise it is voluntary. If you use it, run it after the I-9 is complete and use it for every new hire at that worksite, not just some.

Step 5: Form W-4 and the state withholding form

Ask each new employee for a signed Form W-4 when they start, and make it effective with the first wage payment. Without one, the IRS says to withhold as if the employee is single. A W-4 stays in effect until the employee gives you a new one. An employee who claims exemption must give you a new W-4 by February 15 each year to keep it. You can fill one in with our fillable W-4. Most states with an income tax have their own certificate as well.

You also need each employee's name and Social Security number exactly as they appear, for the W-2. Do not accept an ITIN in place of an SSN: an ITIN holder is not eligible for U.S. employment.

Step 6: report the new hire

Every state has a new hire registry, and federal law requires the report no later than 20 days after the date of hire. A state may set a shorter time, and its deadline is the one you follow. The report has seven federal items: your name, address and EIN, and the employee's name, address, SSN and date of hire. Many states accept a copy of the W-4 with your employer information added.

Step 7: workers' compensation and posters

Workers' compensation is set by each state, so check yours before the first day of work. The rules differ widely. Texas, for example, lets most private employers choose whether to carry it, but an employer without it must report that to the state.

Some federal labor laws require posters at the workplace. Which ones apply depends on the law and the size of the business; the Department of Labor's Workplace Posters page lists them, and your state labor department lists the state ones.

Step 8: payroll taxes, deposits and returns

Federal tax deposits must be made electronically, through EFTPS, your IRS business tax account or Direct Pay for businesses. A new Form 941 filer is a monthly depositor for its first calendar year: taxes on wages paid in a month are due by the 15th of the next month.

If you deposited all the tax on time, the IRS gives 10 more calendar days to file Form 941 and Form 940. A small employer with $1,000 or less a year in employment taxes may file Form 944 once a year instead of Form 941, but only after the IRS notifies it in writing. You can prepare a quarterly return with our fillable Form 941.

Keep the records

Keep all employment tax records for at least four years after you file the fourth-quarter return for the year. That includes your EIN, the amounts and dates of every wage payment, each employee's name, address, SSN and dates of employment, their W-4s, the dates and amounts of your deposits with the EFTPS acknowledgment numbers, and copies of the returns you filed.

Hiring help at home is a different case

A nanny, caregiver or housekeeper who works in your home is a household employee, and the rules for that are not the business rules above. You still need an EIN, but you report the taxes with your own return. See EIN for a household employer.

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