What Legal Steps Come Before Hiring Your First Employee?

Hiring your first employee turns your business into an employer under federal and state law, and the paperwork starts before the first day of work. At a minimum you need an Employer Identification Number, state payroll tax and unemployment insurance accounts, a completed Form I-9 and Form W-4, a report to your state’s new-hire registry, and workers’ compensation coverage where required. Two decisions matter just as much because they are harder to fix later: whether the person is truly an employee rather than a contractor, and whether the role is exempt from overtime.

Getting these foundations right is part of the growth planning in our strategic legal guidance for businesses service. Here is the order we recommend.

Before the offer: classification and overtime status

Start by confirming the worker is an employee. The IRS looks at behavioral control, financial control, and the relationship of the parties; the Department of Labor applies an economic reality test for wage and hour purposes; and some states use stricter tests that presume employee status. If you set the hours, provide the tools, and direct how the work is done, you likely have an employee. Misclassifying an employee as a contractor can lead to back taxes, unpaid overtime, penalties, and benefit claims.

Next, decide whether the role is exempt or non-exempt under the Fair Labor Standards Act. Exempt status generally requires both a salary at or above the applicable threshold and job duties that fit an exemption, such as executive, administrative, or professional work. Job titles do not decide it. Non-exempt employees must be paid overtime for hours over 40 in a workweek, and state law may add higher minimum wages or other requirements.

Tax registrations and insurance

Obtain an EIN from the IRS if you do not already have one, then register with your state for income tax withholding and unemployment insurance. Set up payroll, in-house or through a payroll provider, so federal and state withholding, Social Security and Medicare, and unemployment taxes are deposited on time. Late payroll tax deposits are one of the fastest ways for a small business to pile up penalties.

Workers’ compensation insurance is mandatory in most states once you have employees. New York and Washington, DC require it for nearly all employers, while Virginia’s requirement depends on how many employees you regularly employ. Check the rule in each state where your employees work.

First-day paperwork for your first employee

Form I-9

Every employer must verify each new hire’s identity and work authorization on Form I-9. The employee completes Section 1 no later than the first day of work, and the employer must examine the documents and complete Section 2 within three business days after the employee starts. Keep I-9s apart from personnel files and retain them for the required period after employment ends. E-Verify is voluntary for most private employers but required for some federal contractors and in some states. If you plan to sponsor a foreign worker, start well before the intended start date; our overview of the H-1B visa for employers explains why the calendar matters.

Form W-4 and state withholding forms

The employee completes Form W-4 so you can withhold federal income tax correctly, plus any state equivalent.

New-hire reporting

Federal law requires employers to report new hires to the state new-hire registry within 20 days of hire, and some states set shorter deadlines.

Required notices

Display the federal and state labor law posters, and give any written notices your state requires at hire. New York, for example, requires a written wage notice at hiring that states the pay rate and the regular payday.

The offer letter and basic policies

Put the offer in writing: job title, pay and pay frequency, exempt or non-exempt status, start date, at-will status, and any conditions such as a background check. Keep the language consistent with at-will employment, because promises of job security in an offer letter can be read as a contract.

Have the employee sign a confidentiality and invention assignment agreement at hire. It makes sure the company owns what the employee creates, which matters when you raise money or sell the business; see our post on legal prep before raising capital. Be cautious with noncompetes: Virginia and Washington, DC restrict them for lower-wage workers, and the rules keep changing.

Even a small team benefits from a short handbook covering anti-harassment and anti-discrimination policies, a complaint procedure, timekeeping, and leave. New York and Washington, DC both require paid sick leave.

Plan for the next hires

Many employment laws apply only once you reach certain headcounts, such as federal anti-discrimination law at 15 employees and federal family and medical leave at 50. Track your headcount and revisit policies as you grow. If you expect to hire in more than one state, our guide on expanding your business to another state covers the extra registrations. For ongoing employment questions, our outside general counsel services give you a lawyer to call before each hiring decision.

If you are about to hire your first employee and want the classification, paperwork, and offer letter right from day one, Capitol Law Partners can set it up with you. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our strategic legal guidance for hiring and growth page or schedule a consultation.