Hiring Your First Employee: Paperwork, Pay Structures, an…

The decision to hire your first employee is usually exciting and immediately followed by a low-grade panic about what you’re supposed to do next. Federal forms, state registrations, pay calculations, benefits questions, it lands all at once, and most of it has a deadline tied to someone’s start date.

This guide walks through the actual steps: what paperwork requires, how to structure pay, what the workers’ comp decision means, and the things that catch first-time employers off guard. It’s written for business owners, not HR departments.

Before You Hire: Your Business Structure Matters

If you’re operating as a sole proprietor and you’re about to bring on a W2 employee, this is a good moment to evaluate your entity structure. As a sole proprietor, you have no legal separation between your business and personal assets. An employment dispute, a wage complaint, or a workplace injury becomes a personal liability.

An LLC is often the minimum liability layer business attorneys recommend before you add payroll. If you’re already an LLC, make sure it’s in good standing before you hire, registered agent current, franchise tax report filed if applicable, operating agreement up to date.

If you’re still in the early stages of building your business, this is also a great time to look at our Launch packages. Launch gives you everything in our Momentum membership, unlimited email support, access to document templates, and monthly meetings with an attorney, plus five courses covering legal risk, sales, pricing, marketing, and more. It’s built specifically for business owners who are setting things up right from the start.

The Required Paperwork

For every W2 employee you hire, you need to complete and retain the following:

Federal Requirements

Form I-9 (Employment Eligibility Verification) You must complete Section 1 with the employee on or before their first day of work. You complete Section 2 within three business days of the first day. You must physically review identity and work authorization documents, remote verification has specific rules. Retain the I-9 for three years from hire date or one year after termination, whichever is later.

Form W-4 (Federal Withholding) The employee fills this out so you know how much federal income tax to withhold from each paycheck. State withholding requirements vary by state. Use the state form required where your employee works, and keep those forms on file with the W-4.

State Requirements

New Hire Reporting Most states require new-hire reporting shortly after the employee starts. You typically report the employee’s name, address, Social Security number, and your FEIN through the state new-hire portal or your payroll service.

Workforce Commission Registration You must register with your state unemployment insurance agency before running payroll. Liability thresholds vary by state, so confirm when your business becomes responsible for state unemployment taxes (SUTA).

Payroll Setup

You’ll need an EIN (Employer Identification Number) from the IRS before you can run payroll. If you don’t have one yet, it takes about five minutes at IRS.gov. Then set up payroll for federal withholding, Social Security, Medicare, and federal unemployment (FUTA), plus any required state withholding and SUTA.

Most businesses use a payroll service (Gusto, Paychex, QuickBooks Payroll) to handle calculations and remittance.

The Workers’ Compensation Decision

Workers’ compensation rules are state-specific. In some states coverage is mandatory for most employers; in others there are exceptions. Do not assume your default setup is compliant.

For most small businesses with employees doing physical work, carrying workers’ compensation coverage is usually the safer position. For lower-risk office environments, the risk profile is different, but the decision still requires legal and insurance input.

Before day one, confirm notice requirements, reporting obligations, and whether your policy setup matches your actual workforce.

Pay Structure Options

Not every employee gets paid the same way, and wage law allows several structures. What matters is that the arrangement is clear, documented, and compliant with minimum wage and overtime requirements.

Hourly. Track hours, pay at least the applicable minimum wage, and pay overtime at 1.5x for hours over 40 in a workweek unless a lawful exemption applies. Overtime applies to most hourly workers.

Salary, A fixed weekly or annual amount. To be exempt from overtime requirements, a salaried employee must meet both a salary threshold (currently $684/week under federal law) and a duties test (executive, administrative, or professional duties). Just calling someone “salaried” doesn’t exempt them from overtime.

Per-visit or per-unit pay, Common in healthcare and home services. Legal, but average hourly earnings must not fall below minimum wage, and overtime still applies to total hours worked.

Commission. Legal, but verbal changes to commission structures create problems and can result in wage claims. If you change a rate, even informally, document it in writing with employee acknowledgment.

Whatever structure you choose, document it in an offer letter before the employee starts.

Benefits Basics for Small Employers

Smaller businesses have flexibility in benefit design, but consistency is critical. If you offer benefits to one person in a role and deny them to another without a documented, lawful reason, you create avoidable risk.

Federal thresholds still matter. For example, ACA employer obligations generally begin at 50 full-time equivalent employees. Anti-discrimination and leave obligations can be triggered by employee-count thresholds at federal and state levels.

Paid sick leave, PTO payout, and related leave rules vary by state and sometimes by city. Review your policy against local requirements before rollout.

The Employee Handbook Question

You don’t legally need an employee handbook for your first hire. But even without a full handbook, we strongly recommend that every employee sign a confidentiality agreement before they start. From day one, employees have access to your client relationships, your processes, your pricing, and your business methods. Without a written agreement, your recourse if they share or use that information after leaving is limited.

What to Put in an Offer Letter

Every new hire should receive a written offer letter before their first day. We strongly recommend including a clear job description, or attaching one. This is something we see cause headaches repeatedly when it’s missing.

A clear job description does two important things. First, it sets expectations. Second, and often overlooked, if an employee ever requests a workplace accommodation for a disability or health condition, the analysis of whether an accommodation is reasonable depends on the essential functions of the job. Without a written job description, that determination becomes complicated.

A complete offer letter should include:

• Job title and job description (or attached)
• Start date
• Pay rate, pay frequency, and whether the position is exempt or non-exempt from overtime
• At-will employment language, if your state recognizes at-will employment
• Reference to any agreements they’ll sign on day one (confidentiality, handbook acknowledgment)
• Any benefits offered (PTO, stipends, holidays)
• Workers’ compensation status and any required employee notices

Free Resource

Browse our Small Business Employment Resources →

Resources cover worker classification, new-hire paperwork, pay structures, legal thresholds, and what to do when employment relationships get complicated.

One Question a Month Pays for It

Employment law questions usually arrive when something is already happening: a new hire starts Monday, an employee issue escalates, or a dispute is forming. Our Momentum Membership gives business owners unlimited email access to our attorneys for $95/month.

Schedule a free consultation →