How to hire your first employee: checklist and costs

First: employee, contractor or EOR hire?

How you hire decides which paperwork and taxes apply.

• W-2 employee: you control how and when the work is done, and you withhold and pay payroll taxes. Everything below applies.
• 1099 contractor: runs their own business, sets their own methods and invoices you. No withholding; you file Form 1099-NEC if you pay them $2,000 or more for 2026 work (the threshold rose from $600). The IRS weighs behavioral control, financial control and the type of relationship. California, Massachusetts and Illinois (for unemployment) use a stricter ABC test that presumes the worker is an employee. Several states, including Florida, Oregon, Virginia, Ohio, Massachusetts, New Hampshire and Illinois, also want contractors reported. See W-2 vs 1099 rules and paying contractors.
• Someone outside the US: you cannot run US payroll for them. An employer of record hires them in their country for a monthly fee, $399 to $699 per employee on published list prices (checked October 16, 2026). See what an employer of record does and EOR pricing.

The Department of Labor proposed a new contractor test in February 2026, but it was not final as of October 16, 2026; the 2024 rule is still in the regulations.

The first-employee checklist

1. Get an EIN from the IRS if you do not have one. Every payroll filing uses it.
2. Register with your state for unemployment tax (all states) and income tax withholding (all but AK, FL, NV, NH, SD, TN, TX, WA and WY). Add paid leave accounts where the state runs a program, and local tax accounts in places such as Pennsylvania and Ohio. See your state in the payroll tax hub.
3. Buy workers’ comp before the start date if your state requires it (thresholds below).
4. Set pay and classification. Pay at least the higher of the federal minimum wage ($7.25) and your state or city rate; see 2026 minimum wage by state. To pay a salary with no overtime, the job must pass the duties test and pay at least $684 a week ($35,568 a year) federally, more in some states. See exempt vs non-exempt.
5. Write the offer letter with pay rate, schedule, start date and whether the role is exempt or hourly.
6. Run a background check if you use one. Checkr reports start at $29.99 each through QuickBooks (checked October 16, 2026). See background check costs.
7. Collect new employee paperwork on day one: Form W-4, the state withholding form, Form I-9 with the employee’s identity and work authorization documents, and a direct deposit form. Gusto charges $20 per remote I-9 if the employee is not on site.
8. Report the hire to your state within 20 days of the hire date, the federal maximum. Alabama and Maine allow 7 days; Georgia and Vermont 10; Massachusetts, Rhode Island and West Virginia 14; Iowa 15; Mississippi 15 business days.
9. Set up payroll and a pay schedule your state allows. See how to set up payroll.
10. Decide on benefits (health coverage, retirement) and enroll the employee in any state paid leave program.

What your first employee really costs

Salary is the biggest number but not the only one. Here is a $50,000 employee in Texas and California in 2026, before workers’ comp and benefits:

Workers’ comp is priced per $100 of payroll and depends on the job’s class code and your state, so an office job and a roofing job can differ by a wide margin. Get a quote before you set the salary; see workers’ comp cost by industry and pay-as-you-go workers’ comp, which bills with each payroll instead of a large upfront deposit.

Benefits are optional for most very small employers but drive hiring. Two low-admin options for a first hire: a QSEHRA, which reimburses individual health premiums up to $6,450 (self-only) or $13,100 (family) in 2026, and a 401(k), where the employee can defer up to $24,500 in 2026. See how a QSEHRA works, small business health insurance and 401(k) plans for small businesses.

Put your own state, salary, workers’ comp rate and benefits into the calculator for a full yearly figure:

State programs that change the cost of one employee

Several state paid leave programs exempt or discount small employers, which matters most when you have one or two people:

Workers’ comp rules differ too:

Hiring a remote employee in another state

A remote hire in another state usually means registering in that state for withholding and unemployment tax, following its pay frequency, minimum wage, paid leave and final pay rules, and buying workers’ comp that covers it. Multi-state payroll is a recurring complaint in Trustpilot reviews of Gusto and Justworks (2025 and 2026): employees who moved states but stayed on old state reports, and wages reported to the wrong state.

Check the plan before you hire: Gusto Simple covers one state (Plus, at $80 + $12 per person, is multi-state), while QuickBooks and Patriot charge $12 a month per extra state. Arizona is an example of how one state adds rules: new hires reported within 20 days, workers’ comp for any regular employee, at least two paydays a month no more than 16 days apart, and a $15.15 minimum wage in 2026 rising to $15.65 in 2027 (secondary source). See Arizona employer rules.

Payroll software or a PEO for your first hire

Payroll software runs pay and taxes; you stay the only employer and buy benefits and workers’ comp yourself. A PEO co-employs your staff and adds group health plans, workers’ comp and HR support for a per-employee fee.

One founder on Hacker News wrote, in a comment more than a year old, that their payroll provider "wouldn’t provide us health plans for our first W-2 hire," so they moved to a PEO. If health insurance is part of the offer, price both. See PEO vs payroll software, best payroll software and payroll for teams of 1 to 10.

Common first-hire mistakes

• Calling a full-time worker a contractor to avoid payroll. The back taxes and penalties cost more than the payroll you skipped.
• Starting before workers’ comp is in place in a state that requires it from the first employee.
• Missing a short new hire deadline, such as 7 days in Alabama and Maine.
• Paying salary without checking the exempt test. Below $684 a week, a salaried employee is owed overtime under federal rules.
• Forgetting the state paid leave account in states like Colorado, Washington or Minnesota.
• Budgeting salary only. Employer taxes alone add 8.22% to a $50,000 salary in Texas or California, before workers’ comp and benefits.