Hiring your first employee (or your 50th) is exciting — but it also brings legal responsibilities. Get the basics right up front and you’ll avoid fines, tax headaches, and costly rework. This guide walks you through what you must do (federal rules and common state tasks), a practical timeline, recordkeeping, plus common pitfalls to avoid. I cite official U.S. resources so you can follow links and act with confidence.
Overview — the goalposts
When you hire someone in the U.S., your main legal responsibilities include:
- Correctly classifying the worker (employee vs contractor).
- Getting an Employer Identification Number (EIN) and registering with federal/state tax agencies.
- Collecting required new-hire forms (Form W-4, Form I-9) and reporting new hires to your state directory.
- Withholding and depositing payroll taxes, paying unemployment insurance, and complying with wage/hour laws (minimum wage, overtime).
- Posting required workplace notices, maintaining records, and following nondiscrimination and labor law requirements.
- Providing workers’ compensation where required by state law.
These are legal requirements — not optional. The IRS and USCIS require correct completion of W-4 and I-9 forms for every new hire, and the U.S. Department of Labor enforces wage/hour rules and posting requirements.
Step-by-step checklist to hire legally (simple workflow)
Step 1 — Decide classification: employee or independent contractor
Before you hire, determine whether the individual is an employee or an independent contractor. Misclassification can trigger back taxes, penalties, and legal exposure. The IRS and state agencies use factors like control over work, financial relationship, and permanency to decide classification. If in doubt, consult a local employment attorney or your accountant.
Quick rule: If you control what is done and how it’s done (hours, methods, training), the worker is likely an employee.
Step 2 — Get your paperwork in order (EIN, state accounts)
- Apply for an EIN (Employer Identification Number) from the IRS — you’ll need it for payroll and tax filings. (Free from IRS.gov.)
- Register with your state labor/tax agencies as an employer (state income tax withholding and unemployment insurance). Each state has its own registration process and rates.
- Check if you need business licenses or local registrations (city/county).
These registrations must be done before you run payroll.
Step 3 — The legal forms new hires must complete
- Form W-4 (Employee’s Withholding Certificate): Every employee completes this so you can withhold the correct federal income tax. Use the most recent W-4 version and keep it on file. See IRS Publication 15 for payroll guidance.
- Form I-9 (Employment Eligibility Verification): You must complete and retain Form I-9 for every person you hire, including U.S. citizens — and you must review acceptable identity/authorization documents in person (or through an authorized representative). Section 2 generally must be completed within three business days after hire. E-Verify is a separate program some employers use where required or by choice.
Tip: Do W-4 + I-9 on the employee’s first day of work — it’s standard practice.
Step 4 — New hire reporting, payroll & tax withholdings
- New hire reporting: Federal law requires that employers report newly hired and rehired employees to the state directory (each state maintains a directory used for child-support enforcement and other programs). Do this promptly — rules vary by state.
- Payroll taxes: Withhold federal income tax, Social Security, and Medicare (FICA) from employee wages; you must also pay employer Social Security and Medicare and Federal Unemployment Tax (FUTA). File and deposit federal payroll taxes according to IRS schedules and state tax rules. Use payroll software or an accountant if this is new to you.
Practical help: Payroll providers (Gusto, ADP, QuickBooks Payroll) simplify tax deposits and filings — consider one if you have limited payroll experience.
Step 5 — Wages, overtime, and labor laws
- Minimum wage & overtime (FLSA): The federal Fair Labor Standards Act (FLSA) sets minimum wage and overtime rules; many states/municipalities have higher minimums. Non-exempt employees must receive overtime (typically 1.5× pay) for hours over 40 in a workweek unless an exemption applies. Keep accurate time records.
- Youth labor and special rules apply if you hire minors. Check DOL guidance.
Tip: Confirm both federal and state wage rules before setting pay.
Step 6 — Workers’ compensation & unemployment insurance
- Workers’ compensation: Most states require employers to carry workers’ comp insurance; requirements and costs vary. This covers employee injuries on the job.
- Unemployment insurance (UI): You pay state UI taxes (reporting and rates differ by state) so former employees can collect unemployment if eligible. Register with your state workforce or unemployment agency.
Both are state-managed programs with federal overlays — register early. (Your state department of labor can guide you.)
Step 7 — Posters, policies & nondiscrimination
- Required workplace posters: Federal and state labor laws require certain employee rights posters (minimum wage, OSHA safety, Workers’ Compensation, FMLA summary if you’re covered, anti-discrimination notices from EEOC). The DOL offers electronic copies of required posters.
- Nondiscrimination & ADA: Follow Equal Employment Opportunity laws — hiring decisions cannot discriminate on race, sex, religion, national origin, age (40+), disability, genetic information, and more. The EEOC enforces these laws; have basic policies and maintain fair hiring practices.
Step 8 — Background checks, drug testing & privacy
- Background checks are common, but they’re subject to federal and state rules (e.g., Fair Credit Reporting Act if you use a third-party consumer reporting agency). Some states restrict certain background questions or require notices/consent. Drug testing and medical inquiries must be handled carefully under ADA and state law. When in doubt, get legal guidance.
Step 9 — Onboarding, contracts & employee handbook
- Prepare a clear offer letter that covers job title, pay, start date, and at-will notice (U.S. default unless state law or contract alters it).
- Consider employment agreements for key staff (confidentiality, IP assignment, non-compete limits vary by state). Many states restrict or limit non-competes — get legal advice for enforceability.
- Create an employee handbook summarizing workplace rules, leave policies, anti-harassment policy, and complaint procedures.
Recordkeeping — what to keep and how long
Federal rules require you to retain payroll records, tax documents, and I-9 forms for specific periods (for example, I-9s generally must be retained for three years after the hire date or one year after employment ends, whichever is later). Keep wage and hour records for at least three years and payroll tax records for at least four years. Exact retention rules vary — the IRS and DOL give specifics.
Practical timeline: hiring day → 90 days
- Before hire: Confirm classification, prepare job description, get EIN & state registrations.
- Day 1: New hire completes W-4; you complete/verify I-9 (Section 2 within 3 business days). Provide required workplace posters and collect any state new-hire reporting details. Start payroll setup.
- Week 1–4: Enroll employee in benefits (if offered), set up payroll, explain handbook and policies.
- 90 days: Conduct first performance check, ensure records are complete, and confirm tax withholdings and benefits are functioning.
Common mistakes & how to avoid them
- Misclassifying contractors as employees — costly. Use IRS/state tests or professional advice.
- Late or missing payroll tax deposits and filings — use payroll software or a payroll provider if unsure.
- Failing to complete/retain I-9s correctly — I-9 compliance is heavily enforced; follow USCIS guidance and retention rules.
- Ignoring state rules (minimum wage, paid-leave mandates, local taxes) — state and city laws often add extra obligations. Check your state labor website.
- Not posting required notices — federal and state posters are mandatory in many cases; the DOL provides free versions.
Affordable ways to stay compliant
- Use reputable payroll services (Gusto, ADP, Paychex, QuickBooks Payroll) that handle tax filings and state registrations.
- Use an HR platform or PEO for benefits and compliance if you prefer outsourcing HR admin (good for small firms that want predictable costs).
- Keep a legal or accounting relationship you can consult quickly on classification, contracts, and tax issues.
Helpful official resources (bookmark these)
- IRS — Hiring Employees & Employer’s Tax Guide (Pub 15): payroll, withholding, EIN.
- USCIS — Form I-9 Guidance & I-9 Central: how to complete and retain I-9s.
- U.S. Dept. of Labor (DOL): wage/hour rules, posters, youth labor rules.
- EEOC: nondiscrimination rules and hiring guidance.
- State labor and unemployment agency sites: for state-specific withholding, UI, and new-hire reporting.
Final checklist — the essentials to complete before payroll runs
- Worker classification confirmed (employee vs contractor).
- Employer registrations done (EIN, state withholding, UI).
- New hire paperwork collected: W-4, I-9 completed & retained.
- New-hire reported to state directory (if required).
- Payroll tax withholding & deposit schedule set (payroll vendor or accountant engaged).
- Workers’ comp & unemployment coverage in place.
- Required federal/state workplace posters displayed.
- Employee handbook/offer letter provided; benefits enrollment planned.
- Records retention plan in place.
Hiring legally in the U.S. is mostly a matter of following predictable steps — classify correctly, collect the right forms, register with agencies, withhold and remit taxes, and obey wage and anti-discrimination laws. Start with official guidance (IRS, USCIS, DOL, EEOC) and use payroll/HR tools to reduce administrative risk. If a situation looks complex (classification disputes, exempt status, multi-state payroll), get professional legal or payroll advice — it’s worth the cost.
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