There is a point in many small businesses where the owner becomes the bottleneck. Orders pile up, admin eats the evenings, and turning work away starts to cost more than help would. Deciding to hire first employee help is the easy part. Doing it legally takes a handful of registrations, two federal forms from the new worker, and a payroll routine you then repeat every pay period. None of it is hard, but the order matters, and a few steps have hard deadlines. Here is the full process, from job offer to first paycheck.
Table of Contents
Step 1: Decide employee or contractor, and get your EIN sorted
Before anything else, be honest about the role. If you set the person’s hours, tell them how to do the work, and they work mainly for you, the IRS treats them as an employee — calling them a contractor on paper does not change that, and misclassification brings back taxes and penalties. A genuine contractor runs their own business, controls how the work gets done, and usually serves other clients.
Employees are paid through payroll under your EIN (employer identification number). If you formed your LLC as a single member and never needed one beyond banking, check you actually have an EIN before the start date — you cannot run payroll or file employment taxes without it. Applying on the IRS website is free and takes minutes, the same number you may already have from when you started your LLC.
Step 2: Register with your state and arrange workers’ comp
Most states require two registrations before or soon after the first hire:
- State unemployment insurance account. You register with your state’s workforce or labour agency and pay state unemployment tax on wages, at a rate the state sets for new employers until you build a track record.
- State withholding account. In states with an income tax, you need an account number so you can send in the state tax withheld from pay.
You also need workers’ compensation insurance in almost every state once you have even one employee — Texas is the well-known exception for most private employers. Workers comp pays medical costs and lost wages if someone is hurt on the job, and going without it where it is required can mean fines plus personal liability for the claim. Premiums depend heavily on the work: a desk role might cost around 0.3% of wages, while roofing can run past 15%. Sort the policy before the first day, not after the first paycheck.
Step 3: Collect the new hire paperwork
Two federal forms are non-negotiable, and both have timing rules:
- Form W-4 — the employee fills this in so you know how much federal income tax to withhold. Get it before the first payroll run. If they never hand one in, you withhold as if they were single with no adjustments.
- Form I-9 — this verifies the person is allowed to work in the US. The employee completes their section on or before day one, shows you original documents (a passport, or a driver’s licence plus a Social Security card, are common combinations), and you examine them and complete your section within three business days of the start date. Keep the form on file for three years after hiring or one year after they leave, whichever is later.
Many states add their own withholding form on top of the W-4. Then comes the step owners most often miss: new hire reporting. Federal law requires you to report every new hire to your state’s Directory of New Hires within 20 days of their start date — a few states give you less time. It is a short report (names, addresses, Social Security number, start date, your EIN) used mainly to enforce child support orders, and it takes minutes online.
Step 4: Set up payroll and understand payroll taxes
Every paycheck, you withhold the employee’s share of taxes and add your own employer share on top. On top of the wage itself, budget for:
- Social Security and Medicare (FICA): 7.65% from the employee’s pay and a matching 7.65% from you. Social Security takes 6.2% up to the annual wage base ($184,500 in 2026); Medicare takes 1.45% with no cap.
- Federal unemployment tax (FUTA): 6% on the first $7,000 of each employee’s yearly wages. Pay your state unemployment tax on time and you can claim a credit of up to 5.4%, bringing the real cost down to 0.6% — $42 per employee per year.
- State unemployment tax: your state rate on a state wage base, paid to the state.
A worked example: a $40,000 salary costs you roughly $3,060 in employer FICA, about $42 in net FUTA, plus state unemployment tax and the workers comp premium. Expect the true cost of an employee to run 8–12% above the headline salary before any benefits. Our guide to LLC taxes shows where these costs land on your business return.
You then deposit the withheld taxes with the IRS on a monthly or semi-weekly schedule, file Form 941 every quarter to report wages and payroll taxes, file Form 940 once a year for FUTA, and send the employee a W-2 by January 31. Missed deposits attract penalties quickly, which is why most one-employee businesses pay $40–$80 a month for a payroll service that calculates, deposits and files automatically. It is the same payroll discipline that matters if you later put yourself on salary through an S corp election on Form 2553.
Step 5: Cover the ongoing basics
A few smaller duties round out the hire:
- Payday rules: federal law does not set pay frequency, but most states do — weekly, biweekly or semimonthly are typical. Overtime is 1.5 times the regular rate for hours over 40 in a week for most roles.
- Posters and records: display the required federal and state workplace posters, keep payroll records for at least three years, and store I-9s separately from personnel files.
- Final pay and files: know your state’s deadline for the last paycheck if the person leaves.
One mindset shift helps everything else: as an employer you are now holding other people’s tax money in trust. Keep payroll funds in your business account, never borrow against them, and keep your own pay separate — the rules in our guide on how to pay yourself from an LLC still apply, and the LLC vs S corp comparison explains how owner pay changes once payroll exists. The SBA’s guide to hiring and managing employees is a good bookmark for the state-level extras.
Frequently asked questions
Can my LLC hire an employee if I am the only member?
Yes. A single-member LLC can hire W-2 employees like any other business. You need an EIN, payroll registrations with your state, and workers comp where your state requires it.
What does it really cost to hire first employee help on a $40,000 salary?
Budget roughly $3,100–$4,800 on top of the salary: about $3,060 in employer FICA, $42 in net FUTA, plus state unemployment tax and a workers comp premium that depends on the job’s risk level.
What happens if I miss the 20-day new hire report?
States can fine employers for late or missing reports, and the amounts vary. File as soon as you notice — the report takes minutes online and late is far better than never.
Do I have to use a payroll service for one employee?
No, you can run payroll by hand and file Forms 941 and 940 yourself. Most owners still pay for a service because one missed deposit penalty usually costs more than a year of software.
Disclaimer: this article is general information for US small business owners, not legal, tax or HR advice. State rules on unemployment tax, workers comp and paydays vary — confirm your state’s requirements before your first hire starts.
