What do I need to know about hiring employees?
Takeaway: Hiring your first employee transforms your startup into a formal employer, triggering a cascade of legal and administrative obligations, from payroll taxes and benefits to workplace compliance, that must be managed professionally.
The decision to hire your first true W-2 employee is a major inflection point in the life of your startup. It is a sign of growth and a transition from a simple founder-led project to a formal business. This transition, however, brings with it a significant new set of legal and administrative responsibilities. You are no longer just a company; you are now an employer, and you are subject to a complex web of federal and state employment laws.
Ignoring these obligations is not an option. A failure to correctly set up your payroll and comply with labor laws can lead to significant financial penalties and legal risk.
The Pre-Hiring Checklist
Before your first employee's start date, you must have several key pieces of infrastructure in place.
Obtain Your Employer Identification Numbers (EINs): You will need a Federal EIN from the IRS and a state-level employer tax ID number from the state(s) where your employee will be working. These are the numbers that identify your company as an employer for tax purposes.
Set Up Payroll: Do not try to manage payroll yourself. You must engage a professional payroll service provider (like Gusto or Rippling, which are popular with startups). These platforms will handle the complex calculations for:
Tax Withholding: Withholding the correct amount of federal and state income tax from the employee's paycheck.
Payroll Taxes: Withholding and paying both the employee's and the employer's share of Social Security and Medicare taxes (FICA).
Unemployment Insurance: Paying federal and state unemployment taxes.
Secure Workers' Compensation Insurance: Nearly every state requires employers to have workers' compensation insurance. This insurance provides benefits to employees who are injured on the job. Your payroll provider can often help you secure the necessary policy.
Prepare Your Onboarding Documents: You must have a standard set of documents ready for every new hire to sign on their first day. This includes:
A Formal Offer Letter: Outlining their position, salary, and start date.
A Proprietary Information and Inventions Agreement (PIIA): To ensure the company owns all the IP they create.
A Form I-9: To verify their identity and eligibility to work in the U.S.
A Form W-4: For federal tax withholding.
Ongoing Compliance
Being an employer is an ongoing responsibility. You must be aware of:
Minimum Wage and Overtime Laws: Ensuring you are compliant with the requirements of the Fair Labor Standards Act (FLSA).
Anti-Discrimination Laws: Federal and state laws prohibit discrimination in hiring and employment practices.
Employee Benefits: If you choose to offer benefits like health insurance or a 401(k) plan, you must administer these plans in accordance with the law.
Hiring your first employee is a major step toward building a real, sustainable business. By taking the time to set up your HR and payroll infrastructure correctly from the beginning, you can ensure you are meeting your legal obligations and creating a professional and compliant workplace for your team.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.