We are planning on hiring our first employee, what do I need to know?
Hiring your first employee is one of the biggest milestones in small business ownership. It signals that your business has grown beyond what you can manage alone, but it also introduces new responsibilities, legal requirements, and costs. Done right, this step can help your business thrive. Done poorly, it can create stress, compliance risks, and financial strain.
This comprehensive guide will walk you through everything you need to know before, during, and after hiring your first employee—from legal considerations to building a strong workplace culture.
Step 1: Know When It’s Time to Hire
Many small business owners struggle with knowing the right time to bring on their first team member. Signs it may be time include:
You’re turning down work because you don’t have enough time.
Administrative tasks are pulling you away from core business activities.
You’ve identified clear, repeatable tasks that don’t require your expertise.
Your business is financially stable enough to cover wages, taxes, and benefits.
Hiring too soon can drain cash flow. Hiring too late can stunt growth. The sweet spot is when your workload consistently exceeds your capacity, and revenue justifies the investment.
Step 2: Understand Legal and Compliance Requirements
Before you post a job ad, you need to set up your business for compliance as an employer. Requirements vary by state, but in the U.S., some universal steps include:
Apply for an Employer Identification Number (EIN): If you don’t already have one, you’ll need it to report taxes and payroll information.
Register with your state’s labor department: This covers unemployment insurance and state payroll taxes.
Set up workers’ compensation insurance: Most states require this as soon as you hire your first employee.
Prepare for payroll taxes: You’ll need to withhold Social Security, Medicare, and income taxes.
Comply with labor laws: Federal laws like the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA) may apply, depending on your business size.
Create employee records: Employers are required to keep certain records such as W-4 and I-9 forms.
Failing to set up compliance correctly can lead to penalties. Many small businesses use payroll providers or HR services to simplify this step.
Step 3: Define the Role Clearly
One of the biggest hiring mistakes is being vague about what you need. Before you start recruiting, define:
Job title that reflects responsibilities
Core duties and daily tasks
Required skills or certifications
Performance expectations
Salary range that aligns with market standards
A well-written job description helps attract the right candidates and sets clear expectations from day one.
Step 4: Recruiting and Job Posting
When you’re ready to hire, spread the word through multiple channels:
Online job boards (Indeed, LinkedIn, ZipRecruiter)
Local community boards and chambers of commerce
Networking and referrals from trusted contacts
Industry-specific websites
For small businesses, referrals often produce the best hires because they come with built-in trust and recommendations.
When writing your job ad:
Highlight your company’s mission and culture.
Focus on growth opportunities (employees value career progression).
Be transparent about compensation and benefits.
Step 5: The Interview and Selection Process
Interviews should go beyond technical skills. For your first hire especially, cultural fit matters just as much as capability. Consider:
Behavioral questions: How they handled challenges in past jobs.
Problem-solving tasks: Give them a small sample project.
Values alignment: Do they share your vision for the business?
Check references carefully. A single wrong hire can have an outsized impact on a small business.
Step 6: Making the Job Offer
Once you’ve chosen your candidate:
Provide a written offer letter: Include compensation, start date, job title, and reporting structure.
Clarify benefits and policies: Even if you don’t offer health insurance yet, include details about PTO, sick leave, and other perks.
Be transparent: Small businesses often can’t match corporate salaries, but flexibility, learning opportunities, and close collaboration can be strong selling points.
Step 7: Setting Up Payroll
Payroll is one of the most critical responsibilities when hiring your first employee. You’ll need to:
Decide whether to use payroll software, a provider, or handle it in-house.
Collect necessary tax forms (W-4 for federal withholding, state equivalents if applicable).
Set up direct deposit if possible.
Track and report hours worked, overtime, and paid leave.
File quarterly payroll taxes.
Many small business owners outsource payroll because mistakes can lead to IRS penalties.
Step 8: Onboarding Your First Employee
Onboarding goes beyond paperwork. It sets the tone for the entire working relationship.
Best practices include:
Orientation: Introduce them to your business, mission, and values.
Training: Provide structured training for their role.
Clear communication: Outline expectations for the first 90 days.
Check-ins: Schedule regular one-on-one meetings.
A smooth onboarding process reduces turnover and increases employee engagement.
Step 9: Building HR Systems
Even if you only have one employee, it’s wise to establish basic HR systems:
Employee handbook: Covers workplace policies, expectations, and legal rights.
Time-tracking system: Essential for wage and hour compliance.
Performance management: Set goals and provide regular feedback.
Recordkeeping: Maintain accurate files for tax and compliance purposes.
These systems make scaling your team much easier later.
Step 10: Fostering a Positive Workplace Culture
Your first hire will set the tone for future employees. A positive culture can improve retention and productivity.
Ways to build culture:
Lead by example with communication and professionalism.
Celebrate wins, even small ones.
Offer flexibility when possible.
Encourage feedback and collaboration.
Employees who feel valued and respected are more likely to stick around and contribute to long-term success.
Step 11: Budgeting for Your First Employee
Hiring isn’t just about salary. Additional costs include:
Payroll taxes (approximately 7.65% for Social Security and Medicare).
State unemployment taxes.
Workers’ compensation insurance.
Potential benefits (health insurance, retirement contributions, PTO).
A good rule of thumb is to budget 20–30% above the employee’s base salary for additional costs.
Step 12: Common Mistakes to Avoid
Hiring too quickly: Take time to find the right person.
Skipping legal steps: Compliance is non-negotiable.
Underestimating costs: Factor in taxes and insurance.
Neglecting onboarding: Don’t assume they’ll “figure it out.”
Avoiding tough conversations: Address issues early to prevent bigger problems.
Step 13: Thinking Ahead – Growing Your Team
Your first hire is just the beginning. As your business grows, think about:
Which roles to add next (administrative support, sales, operations).
Creating career paths for employees.
Documenting processes to make training easier.
Establishing leadership structures.
Scaling your team requires foresight, but your first hire will lay the foundation.
Final Thoughts
Hiring your first employee is a major leap for small business owners. It requires balancing compliance, finances, and culture while also letting go of some control. While it may feel daunting, with the right preparation you’ll set yourself—and your new employee—up for success.
Your business has already proven it can stand on its own. Now it’s time to build a team that can take it even further.
Disclaimer:
This Q&A does not constitute legal, accounting, or tax advice and does not address state or local law.
