Your First Hire: The Tax Setup Every New Employer Needs
The registrations, forms, deposits, and filings that start the day you hire, and the retirement-plan change most owners miss.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Hiring your first employee turns your business into an employer: you need an employer identification number, state unemployment and withholding registrations, new-hire reporting, a payroll system that withholds and deposits taxes, quarterly and annual federal returns, and a W-2 each January. It also changes any owner-only retirement plan, which must cover employees once they become eligible.
On this page
What has to happen before the first paycheck?
| Step | Detail |
|---|---|
| Employer identification number | Required for payroll; a business that already has one (for banking, say) uses the same number — you should have only one, and a Social Security number cannot substitute |
| Form I-9 | Employee completes Section 1 by the first day of work; employer verifies documents and completes Section 2 within three business days of the first day of work for pay; keep on file |
| Form W-4 | Employee's federal withholding elections; state form where required |
| State registrations | Unemployment insurance account and, in states with income tax, withholding account; Florida has no state income tax withholding |
| New-hire reporting | Report to the state new-hire directory within 20 days of hire (federal maximum; Florida's deadline is also 20 days) |
| Workers' compensation | Required by state law at a threshold number of employees (in Florida, four or more employees for most businesses and one or more in construction, counting owners who are corporate officers or LLC members) |
| Payroll system | Software or a provider that calculates withholding, deposits, and filings |
| Labor law posters | Federal and state notices at the workplace |
What are the ongoing federal obligations?
- Deposits. Withheld income tax plus both halves of Social Security and Medicare are deposited electronically on a monthly or semiweekly schedule based on your prior liability; a new employer is a monthly depositor for its first calendar year. Late deposits carry escalating penalties.
- Form 941 each quarter, reporting wages, withholding, and deposits.
- Form 940 each year for federal unemployment tax — 6.0 percent of the first $7,000 of each employee's wages, reduced by a credit of up to 5.4 percent for state unemployment tax paid, so usually 0.6 percent.
- Forms W-2 and W-3 by January 31 to employees and the Social Security Administration.
- State unemployment returns, usually quarterly, with a new-employer rate that later moves with your claims history.
What changes for the owner's retirement plan?
A Solo 401(k) is only for owners and spouses. Once an employee meets the plan's eligibility rules — commonly age 21 and a year of service, with long-term part-time employees also eligible to make salary deferrals after two consecutive 12-month periods of at least 500 hours each (the SECURE 2.0 rule for plan years beginning after 2024) — the plan must cover them, with nondiscrimination testing. A SEP must give eligible employees the same contribution percentage as the owner. Many owners move to a safe-harbor 401(k) or a SIMPLE IRA at that point, and a tax credit can offset plan startup costs.
What else should you budget for?
Employer payroll taxes add roughly 7.65 percent for Social Security and Medicare plus unemployment taxes on top of wages, before benefits, workers' compensation premiums, and payroll service fees.
Frequently asked questions
Can I pay my first employee as a contractor to keep it simple?
Only if the person actually meets the contractor tests. Treating an employee as a contractor is the most common and costly payroll mistake.
Do I have to offer health insurance?
Not with fewer than 50 full-time-equivalent employees. Small employers can reimburse premiums through a qualified small employer health reimbursement arrangement instead.
What if I hire a family member?
The paperwork is the same. In a sole proprietorship (or a partnership owned only by the child's parents), a child under 18 owes no Social Security or Medicare tax and a child under 21 no FUTA tax; a spouse's wages are exempt only from FUTA tax.
When is the first Form 941 due?
The last day of the month after the end of the first calendar quarter in which you paid wages — for example, October 31 for a July–September quarter.
Official sources
The IRS explains: “All U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States. This includes citizens and noncitizens.” — Internal Revenue Service, Hiring employees, https://www.irs.gov/businesses/small-businesses-self-employed/hiring-employees
The IRS explains: “For Form 941 filers, your tax liability for any quarter in the lookback period before you started or acquired your business is considered to be zero. Therefore, you’re a monthly schedule depositor for the first calendar year of your business.” — Internal Revenue Service, Publication 15 (2026), (Circular E), Employer’s Tax Guide, https://www.irs.gov/publications/p15
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk registers new employers and runs payroll from the first hire. See pricing or book a free fit call.
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