Hiring Your First Employee: 13 Things You Must Do

If you are hiring your first employee, you must file documents with and pay taxes to various government agencies.

1. Obtain an employer identification number.
When you hire employees, you must get an employer identification number (EIN) to use on tax returns and other documents you submit to the IRS. To get an EIN, you must file IRS Form SS-4. You can download the form from the IRS website at www.irs.gov.

2. Register with your state's labor department.
Once you bring on employees, you will have to pay state unemployment compensation taxes. These payments go to your state's unemployment compensation fund, which provides short-term relief to workers who lose their jobs. Go to http://workforcesecurity.doleta.gov/map.asp for a list of state unemployment insurance tax agencies.

3. Get workers' compensation insurance.
You should have workers' comp coverage to protect workers who might suffer on-the-job injuries. Workers' comp insurance is required in the vast majority of states, although some make an exception for very small employers. For more information on workers' compensation laws, see The Manager's Legal Handbook, by attorneys Lisa Guerin and Amy DelPo (Nolo).

4. Set up a payroll system to withhold taxes.
You'll need to withhold a portion of each employee's income and deposit it with the IRS, and also make Social Security and Medicare tax payments to the IRS. For more information, get IRS Publication 15, Circular E, Employer's Tax Guide from the IRS website at www.irs.gov. (You may also have to withhold taxes for your state. For more information, check with your state's tax agency; you can find links to each state's agency at the website of the Federation of Tax Administrators at www.taxadmin.org/fta/link.)

5. Have each employee fill out IRS Form W-4, Withholding Allowance Certificate.
On the W-4 form, employees tell you how many allowances they are claiming for tax purposes, so that you can withhold the correct amount of tax from their paychecks. (You don't have to file the form with the IRS.) You can find this form at www.irs.gov. You should ask employees to fill out a new W-4 form each year if they want to change their allowances. 

6. Fill out Form I-9, Employment Eligibility Verification for each new employee.
U.S. Citizenship and Immigration Services (USCIS, formerly known as the INS) requires employers to use this form to verify that every employee they hire is eligible to work in the United States. (You don't have to file this form with the USCIS, but you must keep it in your files for three years and make it available for inspection by officials of the USCIS.) You can obtain the form online at www.uscis.gov. Note that these filled out forms should be kept in a separate I-9 folder for all employees -- not in each employee's personnel file.