Hiring your first employee follows a set order: confirming the worker is an employee rather than an independent contractor, getting an employer identification number (EIN) and state employer accounts, completing Form I-9 and Form W-4 as the job starts, reporting the hire to your state, then withholding, depositing, and filing payroll taxes on schedule. Federal rules come from agencies such as the IRS, U.S. Citizenship and Immigration Services (USCIS), and the U.S. Department of Labor (DOL). Each state adds its own — California, for example, requires workers' comp even with one employee.
This guide explains how the rules work; it isn't legal or tax advice. A CPA, an employment attorney, or your state agency can confirm what applies to your business.
For timing and recruiting, see deciding when to hire. For the bigger picture, see starting a small business.
Key takeaways
Under the IRS's general rule, a worker is an independent contractor if you have the right to control or direct only the result of the work, not what will be done and how (checked November 2026).
The IRS says you need an EIN if you have employees, and you never have to pay a fee for one (checked November 2026).
For private employers, workers' comp is set state by state. Florida's law covers private employment with four or more employees — one or more in construction — with exceptions the statute lists, while in Texas, private employers can choose in most cases (checked November 2026).
New employees complete Section 1 of Form I-9 no later than their first day of employment. You complete Section 2 within 3 business days of their first day of work for pay (USCIS, checked November 2026).
For 2026, the IRS lists Social Security at 6.2% each for employer and employee on wages up to $184,500, and Medicare at 1.45% each. Federal unemployment (FUTA) tax is 6.0% on the first $7,000, or 0.6% with the maximum credit (checked November 2026).
Employee or independent contractor?
Under the IRS's general rule, a worker is an independent contractor if you have the right to control or direct only the result of the work, not what will be done and how it will be done. The IRS weighs three kinds of evidence — behavioral control, financial control, and the type of relationship — and no single factor decides it. If an employer-employee relationship exists, it makes no difference how it's labeled or whether the work is full time or part time.
As a general rule, the IRS says, you withhold and deposit income tax, Social Security tax, and Medicare tax from an employee's wages. For independent contractors, the general rule is that you don't withhold or pay any taxes on their payments. Backup withholding, when a contractor doesn't give you a correct taxpayer identification number, is an exception.
If you classify an employee as an independent contractor with no reasonable basis, you may be held liable for employment taxes for that worker. In that case, the IRS relief provisions won't apply.
Either the business or the worker can file Form SS-8 to ask the IRS to determine a worker's status for federal employment taxes and income tax withholding. The IRS says a determination may take at least six months.
For federal wage law — the Fair Labor Standards Act (FLSA) — DOL proposed on February 26, 2026 to revise how it tells employees from independent contractors. The proposal would rescind DOL's 2024 rule, which DOL says it no longer applies in its investigations. It would replace that rule with an "economic reality" test of whether a worker is in business for themselves or is economically dependent on a potential employer for work. The comment period ended April 28, 2026.
Under California's ABC test, a worker is an employee, not an independent contractor, unless the hiring entity satisfies all three conditions below.
- The worker is free from the hiring entity's control and direction in performing the work, under the contract and in fact.
- The work is outside the usual course of the hiring entity's business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature.
Massachusetts law — MGL c. 149, § 148B — has its own three-prong test. It covers control and direction, the usual course of the employer's business, and an independently established trade, occupation, profession, or business of the same nature.
Taking on unpaid help? See whether interns or volunteers can work unpaid.
Before you hire: get an EIN and state employer accounts
The IRS says you need an EIN if you have employees. The online application is free, the IRS issues the EIN immediately if it's approved, and the IRS says you never have to pay a fee for an EIN.
See how to get an EIN. If you'd rather not apply yourself, we offer a paid EIN service — it's optional, since the IRS application itself is free.
Your state adds its own employer accounts. The SBA says businesses with employees are responsible for state employment taxes, which often include unemployment insurance taxes, workers' compensation insurance, and temporary disability insurance. The IRS says most employers pay both a federal and a state unemployment tax, and it points to DOL's list of state unemployment tax agencies.
In California, commercial employers register with the Employment Development Department (EDD) on Form DE 1 within 15 calendar days after paying more than $100 in wages during any calendar quarter. Registration is online at e-Services for Business, and the EDD assigns an eight-digit employer payroll tax account number.
In Florida, an employer owes reemployment tax if it meets any of the state's listed conditions. One is at least one quarterly payroll of $1,500 or more in a calendar year. Another is one or more employees for at least part of a day during any 20 weeks in a calendar year.
Hiring someone remote? See hiring an employee who works in another state.
Workers' comp and state disability insurance
For private employers, workers' compensation — workers' comp — is a state program. DOL tells people injured on the job at private companies to contact their state workers' compensation board, while its own programs cover federal workers and specific groups. A workers' compensation policy provides lost wages and medical benefits to employees injured on the job, as the Texas Department of Insurance puts it.
State | Who must have workers' comp |
|---|---|
California | Required by law, even with only one employee |
New York | Virtually all employers; notice of coverage must be posted at the place of business |
Florida | The law covers private employment with four or more employees — or, in construction, one or more |
Wisconsin | Three or more full- or part-time employees, or one or more employees paid combined gross wages of $500 or more in any calendar quarter for work in Wisconsin |
Kansas | The act applies to employers with employees in Kansas, with exceptions the statute lists — among them an employer whose total gross annual payroll was $20,000 or less in the preceding calendar year and who reasonably estimates it won't exceed $20,000 in the current calendar year |
Texas | Private employers can choose to carry it; it isn't required in most cases. Except when gross negligence results in a fatality, coverage limits the employer's liability if an employee sues |
General rules from each state's law or agency page; not every exception is listed. Sources: New York Workers' Compensation Board, Florida Statutes § 440.02, Wisconsin Department of Workforce Development, K.S.A. 44-505, California Division of Workers' Compensation, Texas Department of Insurance; checked November 2026.
For other states, check your state's workers' compensation board.
Some states also run or require disability insurance. Here are four examples, not a complete list.
- California: the EDD says State Disability Insurance (SDI) is withheld from employees' wages, with no taxable wage limit or maximum withholding since January 1, 2024.
- New York: the Workers' Compensation Board says virtually all employers must provide disability and Paid Family Leave benefits coverage.
- New Jersey: its Department of Labor says most employers must have Temporary Disability Insurance (TDI).
- Hawaii: its Department of Labor and Industrial Relations says the TDI law requires partial wage-replacement coverage for eligible employees' nonwork-related injury or sickness. The employee's share is capped at 0.5% of weekly wages and at the maximum weekly deduction.
Day one: Form I-9, E-Verify, W-4, and new-hire reporting
USCIS says all U.S. employers must complete Form I-9 for every individual they hire for employment in the United States, citizens included.
Form or report | When |
|---|---|
Form I-9, Section 1 — completed by the employee | No later than the first day of employment |
Form I-9, Section 2 — completed by you or an authorized representative | Within 3 business days of the first day of work for pay |
Form W-4 — signed by the employee | When they start work; you make it effective with the first wage payment |
New-hire report — federal rule | Within 20 days of hire, to the state where the employee works; some states require it sooner |
California new-hire report, Form DE 34 | Within 20 calendar days of the start-of-work date |
Massachusetts new-hire report | Within 14 days of the first day of work, for new employees and independent contractors paid $600 or more over the year |
Sources: USCIS, IRS Hiring employees, HHS Office of Child Support, California EDD, Massachusetts Department of Revenue; checked November 2026.
Before day one, you can put the job terms in writing with our employment agreement template or job offer letter template.
Employers keep Form I-9 for three years after the date of hire or one year after employment ends, whichever is later. They don't file it with USCIS or Immigration and Customs Enforcement (ICE).
E-Verify compares information from an employee's Form I-9 with Department of Homeland Security and Social Security Administration records to confirm employment eligibility.
Under Arizona law — A.R.S. § 23-214 — every employer must verify each new employee's eligibility through E-Verify. The employer keeps the record for the duration of employment or at least three years, whichever is longer. Florida Statutes § 448.095 has required private employers with 25 or more employees to use E-Verify for new employees since July 1, 2023. These are two state rules, not a full list.
The IRS says to get each employee's name and Social Security number (SSN) for Form W-2 and not to accept an individual taxpayer identification number (ITIN) in place of an SSN. If a new employee doesn't give you a completed Form W-4, you withhold federal income tax as if the employee is single. California employees also complete Form DE 4 so you can determine California income tax withholding.
Payroll taxes, deposits, and filings
When you have employees, the IRS says your employment taxes include Social Security and Medicare taxes, federal income tax withholding, and federal unemployment (FUTA) tax. See how payroll taxes fit with your other business taxes.
Tax | 2026 rate | Wages taxed |
|---|---|---|
Social Security | 6.2% employer + 6.2% employee | Up to $184,500 per employee |
Medicare | 1.45% employer + 1.45% employee | All wages — no wage base limit |
Additional Medicare | 0.9%, withheld from the employee's wages | Wages over $200,000 in a calendar year |
FUTA | 6.0%, or 0.6% with the maximum 5.4% credit; employer only | First $7,000 per employee |
California unemployment insurance | 3.4% for new employers, for two to three years | First $7,000 per employee per calendar year |
Florida reemployment tax | 2.7% initial rate for new employers | First $7,000 per employee per calendar year |
Tax
Sources: IRS Topic 751, IRS Publication 15, IRS Topic 759, IRS federal unemployment tax, California EDD, Florida Department of Revenue; 2026 rates, checked November 2026.
The IRS says FUTA applies in 2026 if you paid $1,500 or more in wages in any calendar quarter of 2025 or 2026. It also applies if you had an employee for at least some part of a day in 20 or more different weeks of 2025 or of 2026. Both tests cover wages for employees who aren't farmworkers or household workers.
The 0.6% rate needs the maximum credit: the IRS says you're entitled to it if you paid your state unemployment taxes in full, by the due date of your Form 940, and on all the same wages as are subject to FUTA tax, and your state isn't a credit reduction state. In a credit reduction state, the credit is reduced, so more FUTA tax is due with Form 940.
As a new Form 941 filer, you're a monthly schedule depositor for your business's first calendar year, the IRS says. Under the monthly schedule, taxes on each month's payments are generally deposited by the 15th day of the following month.
If you accumulate $100,000 or more in taxes on any day of a deposit period, the deposit is due by the next business day on either schedule. All federal tax deposits are made by electronic funds transfer — the Electronic Federal Tax Payment System (EFTPS), IRS Direct Pay, or your IRS business tax account.
Filing | Due |
|---|---|
Form 941, quarterly | April 30, July 31, October 31, and January 31 |
Form 940, annual FUTA return | January 31, or February 10 if all FUTA tax was deposited when due |
Forms W-2 to employees, and Forms W-2 and W-3 to the Social Security Administration, for 2026 wages | February 1, 2027 |
Sources: IRS Form 941 instructions, IRS Topic 759, IRS Forms W-2 and W-3 instructions; checked November 2026.
After your first Form 941, a return is due every quarter, even with no taxes to report, unless you've filed a final return or an exception applies. One exception is an IRS notice to file Form 944 annually instead.
The IRS says to keep all employment tax records for at least 4 years.
Minimum wage, overtime, and required posters
The federal minimum wage is $7.25 an hour, effective July 24, 2009. Many states also have minimum wage laws, and some state laws give employees greater protections; DOL says employers must comply with both. Two examples for 2026: California's minimum wage is $16.90 an hour from January 1, 2026, for employers not covered by a higher industry or local minimum wage. Washington's is $17.13 an hour.
Unless exempt, employees covered by the FLSA must get overtime pay of at least time and one-half their regular rate for hours over 40 in a workweek.
The FLSA requires no particular form for records, but they must include certain identifying information about the employee and data on hours worked and wages earned. Employers keep payroll records for at least three years, and the records wage computations are based on — such as time cards — for two years.
Every employer with any employee subject to the FLSA must post the "Employee Rights Under the Fair Labor Standards Act" poster. DOL lists no citations or penalties for failing to post that one. The OSHA "Job Safety and Health: It's the Law" poster applies to private employers engaged in a business affecting commerce. A covered employer that fails to post it may be cited and penalized.
The Family and Medical Leave Act (FMLA) poster applies to private employers with 50 or more employees in 20 or more workweeks. DOL provides free electronic copies of the required posters and an elaws Poster Advisor for the federal ones. For state poster requirements, it points to state labor departments.
If you hire contractors instead: Form W-9 and Form 1099-NEC
Independent contractors stay off your payroll, and the IRS says their earnings are subject to self-employment tax. When you pay contractors, the paperwork starts with Form W-9: it's how a payee gives you its correct taxpayer identification number for the information return you file with the IRS. Backup withholding is one exception to the general no-withholding rule. If a payee doesn't give you a correct taxpayer identification number, you may be required to withhold at the current backup withholding rate of 24%.
For payments made in 2026, the IRS's reporting threshold for Form 1099-NEC is $2,000, and it may be adjusted for inflation beginning in 2027. You file Form 1099-NEC for each person you paid at least $2,000 during the year, in the course of your business, for services by someone who isn't your employee. It's due on or before January 31, on paper or electronically.
In California, the EDD's employer guide says a business that must file federal Form 1099-NEC or 1099-MISC for personal services also reports its independent contractors on Form DE 542. The report is due within 20 calendar days of paying a contractor $600 or more or entering into a contract for $600 or more, whichever is earlier. In Massachusetts, the new-hire report covers independent contractors too.
Getting help: payroll services, CPAs, and employment attorneys
As a general rule, the IRS says, you stay responsible for filing returns and making deposits even if a third party such as a payroll service does them. You remain responsible if the third party fails to perform any required action. Here's how a payroll service and a PEO differ.
This guide explains the rules; it isn't legal or tax advice. A CPA, an employment attorney, or your state's tax and labor agencies can confirm what applies to you — see when to bring in a business lawyer.
Real questions from Bizee customers
Real questions Bizee customers asked our support team about hiring, payroll, and contractors between April 10, 2025, and November 2, 2026, paraphrased with details removed. Answers come from IRS, USCIS, U.S. Department of Labor, and California EDD sources.
Do I need S corporation status to hire employees?
No. S corporation status is a federal tax election: corporations that make it pass income, losses, deductions, and credits through to their shareholders for federal tax purposes. A single-member LLC that's a disregarded entity can be an employer — the IRS says it reports and pays employment taxes under its own name and EIN.
Is my state payroll tax ID on my state registration paperwork, or do I get it from another agency?
In California, it comes from the Employment Development Department. When you register for an employer payroll tax account, online at e-Services for Business, the EDD assigns an eight-digit employer payroll tax account number. California commercial employers register within 15 calendar days after paying more than $100 in wages during any calendar quarter. Your federal EIN is a separate nine-digit number from the IRS.
What tax forms do I give my first employees, and how do I set up payroll tax?
Form I-9 and Form W-4: the IRS checklist says to have employees fill out both. Section 1 of the I-9 is due no later than the first day of employment, and you make the W-4 effective with the first wage payment. California employees also complete Form DE 4. Payroll tax starts with an EIN. A new Form 941 filer is a monthly schedule depositor for its first calendar year, depositing by the 15th of the following month.
I got a notice to pay for labor law posters, but I have no employees yet — do I need them?
The federal poster rules are written for employers. The Department of Labor's minimum-wage poster applies to employers with any employee subject to the Fair Labor Standards Act. The OSHA poster applies to private employers engaged in a business affecting commerce. The FMLA poster applies to private employers with 50 or more employees in 20 or more workweeks. DOL provides free electronic copies and, for state poster requirements, points to state labor departments.
At year-end, where do I get the 1099 forms I need to file — from my payroll provider or the IRS?
Form 1099-NEC is an IRS information return your business files. For payments made in 2026, its reporting threshold is $2,000, which may be adjusted for inflation from 2027. You file one for each person you paid at least that much during the year, in the course of your business, for services by someone who isn't your employee. It's filed on or before January 31, on paper or electronically, and each contractor's Form W-9 gives you their correct taxpayer identification number.
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