How to Hire Your First Employee

Calculate the true cost, set up payroll systems, and navigate compliance requirements when hiring your first team member.

  1. Calculate true employment costs. Multiply the salary by 1.25-1.4x to get real cost. Add employer FICA (7.65%), federal unemployment tax (0.6% on first $7,000), state unemployment (varies 0.5-10%), workers' compensation insurance (0.75-2.74% depending on role), and benefits if offered. A $50,000 salary costs $62,500-$70,000 annually.
  2. Set up payroll infrastructure. Get an Employer Identification Number (EIN) if you don't have one. Open a separate payroll account. Choose payroll software that handles tax withholding, filing, and deposits—expect $30-150/month for basic service. Set up state tax accounts in your operating state.
  3. Secure workers' compensation coverage. Most states require workers' comp before the first employee starts. Contact your business insurer or independent agent for quotes. Premium is based on job classification codes—office workers cost less than warehouse staff. Budget 0.75-2.74% of gross payroll depending on risk level.
  4. Draft job description and compensation package. Write specific duties, required skills, and reporting structure. Research local pay ranges using salary survey sites—budget market rate or 10-15% below if you're adding equity or strong benefits. Include healthcare contribution, PTO days, and any performance bonuses in total compensation calculation.
  5. Prepare compliance documentation. Create an employee handbook covering PTO, conduct policies, and termination procedures. Prepare Form I-9 for employment eligibility verification, Form W-4 for tax withholding, and direct deposit authorization. Review state-specific requirements for break policies, overtime rules, and posting requirements.
  6. Plan for ongoing payroll taxes. Federal payroll taxes are due monthly or semi-weekly depending on deposit schedule. State frequency varies. Quarterly Form 941 filings replace simple annual 1040 Schedule C. Annual W-2s and Form 940 (unemployment tax) are due by January 31. Your tax prep complexity just tripled.