How to hire your first employee: a practical checklist for small business owners

Hiring your first employee changes the business more than any other early decision. You stop being a person who does the work and become a person who also has to pay, schedule, train and legally answer for someone else. Done well, it buys back your time and lets you take on more work. Done in a hurry, it adds a fixed cost to a business that may not be ready to carry it.

This guide walks through the order that tends to work: decide whether you need an employee, work out what one really costs, handle the paperwork before day one, then hire and onboard.

Step 1: Be sure you need an employee

Ask what, exactly, you are handing off. Write down the tasks and roughly how many hours a week each one takes. Three outcomes are common:

• It is a few hours a week. A part-time hire, a bookkeeper, or a service you pay per task may fit better than a full job.
• It is a project with an end. A contractor or freelancer may be right, but see the warning below.
• It is steady work you do every week and that you are turning down business to avoid. That is the case for an employee.

A useful test: if you could not keep this person busy and productive for the hours you are paying them, wait or start smaller.

Employee or contractor: do not guess

Calling someone a contractor does not make them one. Whether a worker is an employee is decided by the facts of the working relationship, such as who controls how, when and where the work is done, not by what the agreement is titled. Misclassifying a worker can lead to back taxes, penalties and unpaid wages. Read the IRS guidance on independent contractors versus employees and the Department of Labor's overview of the Fair Labor Standards Act, and ask an accountant or employment lawyer if the situation is not clear. Your state may apply its own tests, and some are stricter.

Step 2: Work out what the hire really costs

The hourly wage is only the start. For an employee, plan for these on top of pay:

• Employer payroll taxes. You pay a share of Social Security and Medicare on wages, plus federal and state unemployment taxes.
• Workers' compensation insurance. Required in most states once you have employees; the cost depends on the type of work.
• Overtime and paid leave rules. These depend on how the job is classified and on your state and city.
• Equipment, software, uniforms and training time. Including the hours you spend not doing your own work.

Ask your accountant or payroll provider for the exact percentages that apply to you, since they vary by state and by insurance class. Then build a simple total:

Illustrative example only. Say you plan to pay $20 an hour for 30 hours a week. That is $600 a week in wages. If payroll taxes, insurance and other required costs added a combined 15%, the true weekly cost would be $690. Add $60 a week for tools, software and the payroll service and you are at $750, or $25 an hour. Your own figure will differ, but the point holds: budget for the whole number, not the wage.

Step 3: Check that the work pays for the hire

Take the weekly cost from the example above, $750, and ask what must happen for it to be covered. If your gross margin on sales is 40%, you need about $1,875 of extra sales per week to cover it ($750 divided by 0.40). If the new person frees you to book that much more work, the hire pays for itself. If it only makes your week less stressful, that has value, but then it is a decision about your time, not about growth.

Step 4: Handle the setup before the first day

The exact steps depend on your state, but most first-time employers need to cover this list:

1. An employer identification number (EIN). The IRS issues it free. See the IRS page on getting an EIN.
2. State and local registrations. Most states require you to register for withholding and unemployment insurance. Check your state labor or revenue department.
3. Workers' compensation coverage. Arrange it before the person starts work.
4. A payroll system. Payroll software or a payroll service files and deposits taxes for you. Missing deposits brings penalties.
5. New-hire forms. Every employee completes a W-4 for tax withholding and an I-9 to verify they may work in the U.S. The USCIS I-9 page explains your obligations. Your state may also require new-hire reporting.

Step 5: Find and screen candidates

Start with the cheapest channels: people you already know and trust, your customers, other owners in your trade, and a post on a local job board or your own website. Then:

• Use a short screening call first. Ten minutes tells you whether the schedule, pay and role fit before you spend an hour on an interview.
• Ask about real situations. "Tell me about a time a customer was upset and what you did" reveals more than "are you a hard worker?"
• Check references. Call at least two. Ask what the person was reliably good at and what supervision they needed.

Step 6: Write the offer and onboard

Put the offer in writing: title, start date, pay and schedule, hours, and who they report to. Promise nothing you have not decided to deliver. The first two weeks then decide whether the hire works out. A simple plan:

• Day one: paperwork, a tour, introductions, the tools they will use, and a clear picture of what a good week looks like.
• Week one: have them watch, then do a task with you beside them, then do it alone while you check the result.
• Check in at the end of every week for the first month: what went well, what was unclear, what they need from you.
• Set a review date, perhaps at 30 and 90 days, and tell them what you will be looking at.

Rules differ by state and change over time, so use this guide as a map rather than legal advice, and confirm the details with your state labor department, an accountant or an employment lawyer. For a look at what the economic calendar means for hiring and wages, see our economic calendar. More reading: how to check a contractor before you hire.

Sources: IRS, U.S. Citizenship and Immigration Services and U.S. Department of Labor pages linked above. Worked examples are illustrative arithmetic, not data. This is general information, not legal, tax or investment advice.