Tax withholding, pay frequency, workers' comp, contractor vs. employee — the essentials before you bring anyone on.
Hiring your first employee is a milestone. It's also the moment your administrative obligations get significantly more complex. Here's what you need to have in place before you run your first payroll.
You need an EIN from the IRS before you can hire employees. It's free and takes about 10 minutes to get at IRS.gov. Think of it as your business's social security number — it's what you use to file payroll taxes.
This is the classification decision that gets small businesses in the most trouble. An employee works set hours, uses your tools, and follows your direction. An independent contractor sets their own hours, uses their own tools, and controls how the work gets done. Misclassifying an employee as a contractor to avoid payroll taxes is illegal and the penalties are steep. If you're not sure, the IRS has a worker classification test on their website.
When you pay an employee $1,000, the cost to you is more than $1,000. You're responsible for withholding federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from their pay — and matching the Social Security and Medicare contributions yourself. Plus state income tax and unemployment tax depending on your state. A payroll tool handles all of this automatically.
Most states have minimum pay frequency requirements — weekly, biweekly, or semi-monthly. Check your state's rules before deciding on a pay schedule.
Required in almost every state the moment you have employees. Not optional. Get this in place before your first hire.
Gusto is the most widely recommended payroll tool for small businesses. It handles withholding, tax filings, direct deposit, and workers' comp in one place. For businesses just starting out, it removes the need to understand all of the above in detail.