How to Hire Staff for Your Small Business: EIN, Forms, and Payroll

Hiring your first employee for your small business means working through a fixed sequence of legal steps: get a federal Employer Identification Number, register with your state for unemployment insurance and workers’ compensation, classify the worker correctly, collect a signed W-4 and I-9, set up payroll tax withholding and deposits, report the new hire to your state, and post the required workplace notices. Skip any of them and you’re looking at penalties, back taxes, or a discrimination or wage claim that can dwarf whatever you saved by moving fast.

Get a Federal Employer Identification Number

Everything else runs through your EIN, so start here. You apply by submitting Form SS-4 to the IRS online, by fax, or by mail. The online application is fastest and issues the nine-digit number immediately.¹ That number goes on every payroll filing, W-2, and quarterly return from this point forward.

Register With Your State

Every state requires employers to open an unemployment insurance account. You’ll pay a percentage of each employee’s wages into the state fund, which pays benefits to workers who lose their jobs through no fault of their own. Both the taxable wage base and your rate vary by state, and your rate shifts over time based on your industry and the claims filed against your account. New employers usually start at a default rate the state sets.

Most states also require workers’ compensation insurance in place before your first employee’s start date. The coverage pays medical costs and lost wages for job-related injuries and shields you from direct suits over workplace injuries. Penalties for operating without coverage often include daily fines, stop-work orders, or criminal charges. A few states let very small employers opt out under narrow conditions, so confirm the rules with your state’s workers’ compensation board.

Classify the Worker Correctly

Misclassification is one of the most expensive small-business mistakes. The IRS separates W-2 employees from 1099 independent contractors using three categories: how much you control the way the work is done, how much you control the financial side of the arrangement, and how the relationship is structured overall. If you direct when, where, and how someone works, that person is almost certainly an employee.²

Treating a real employee as a contractor to sidestep payroll taxes exposes you to all the unpaid employment taxes plus penalties. Section 3509 of the Internal Revenue Code allows reduced rates when you’ve been consistent in your treatment, but those rates roughly double if you also failed to file the required information returns.² State agencies stack their own penalties on top for unpaid unemployment and workers’ comp premiums. If you’re genuinely unsure, file IRS Form SS-8 and ask for a formal determination.

Exempt or Non-Exempt Under the FLSA

Once you know someone is an employee, decide whether they are exempt or non-exempt under the Fair Labor Standards Act. Non-exempt employees get overtime of at least one and a half times their regular rate for every hour over 40 in a workweek.³ Exempt employees are paid a fixed salary regardless of hours, but qualifying takes both a salary test and a duties test.

The standard white-collar exemption currently requires a salary of at least $684 per week, or $35,568 per year.⁴ Meeting that number alone doesn’t make anyone exempt. Their primary duties have to fall within a recognized exemption category such as executive, administrative, professional, or outside sales. Job titles don’t count; the actual day-to-day work does.

Minimum Wage

The federal minimum wage is $7.25 per hour in 2026. Tipped employees can be paid a cash minimum of $2.13 per hour as long as tips bring total pay to at least $7.25.⁵ Many states and cities set higher floors, and where they differ you pay whichever is highest. Put the pay rate, overtime status, and duties in a written job description before day one. That document is your first defense in a wage dispute.

Interview and Screen Without Creating Liability

Run structured interviews. Every candidate answers the same core questions against the same standards. Consistency helps you hire well and gives you something to point to if a rejected applicant challenges the decision.

Questions to Keep Off the Table

Federal anti-discrimination law doesn’t hand you a banned-questions list, but the EEOC recommends avoiding anything touching race, color, religion, sex, national origin, age, disability, or genetic information. These topics serve no legitimate hiring purpose and become evidence of discriminatory intent if a complaint follows.⁶ Pregnancy, family plans, and where someone worships are the classics that catch owners who think they’re making conversation. Keep every question about whether the person can do the job.

If an applicant with a disability needs an accommodation during the process, you’re expected to provide one unless it causes significant difficulty or expense. That might mean an accessible interview location, materials in another format, or extra time on a skills test.⁷ The applicant only has to tell you they need a change because of a medical condition; they don’t have to say “accommodation” or cite a statute.

Background Checks Under the FCRA

Running a criminal, credit, or other background check through a third-party screening company triggers the Fair Credit Reporting Act. Before ordering the report, give the applicant a standalone written disclosure that you may obtain a consumer report for employment purposes, and get written authorization. The disclosure has to be a separate document, not a paragraph buried in the application.⁸ If the report leads you to reject the applicant, you must send a pre-adverse action notice with a copy of the report and a summary of the person’s rights before making the decision final.

Collect the Right Paperwork on Day One

Form W-4

Every new hire completes a Form W-4 so you can calculate federal income tax withholding. The form captures filing status, adjustments for multiple jobs, and any credits or deductions they want to factor in.⁹ If the employee doesn’t turn one in, withhold as if they were single with no other adjustments, which usually produces a higher withholding than needed.¹⁰ An employee who submits a fraudulent W-4 to underwithhold faces a $500 IRS penalty, and that penalty is on them, not you.

Form I-9

Every new hire also completes Form I-9 to verify identity and work authorization in the United States.¹¹ The employee fills out Section 1 by their first day of work. You physically examine their identity and work-authorization documents and complete Section 2 within three business days of the start date.¹² Acceptable documents fall into three lists printed on the form. A List A document (such as a U.S. passport) proves both identity and work authorization on its own; otherwise, pair a List B document (such as a driver’s license) with a List C document (such as a Social Security card).

Keep each completed I-9 on file for three years after the hire date or one year after employment ends, whichever is later, and produce them if federal authorities inspect.¹¹ Paperwork fines currently run from $288 to $2,861 per form. Knowingly hiring an unauthorized worker starts at $716 for a first offense and climbs above $28,000 per violation for repeat offenders. These figures adjust for inflation each year.

Set Up Payroll Taxes

Hiring an employee means you now withhold, match, and deposit several layers of federal payroll tax. Getting the timing wrong is where penalties hit fastest.

FICA

You and your employee both pay into Social Security and Medicare. For 2026, the Social Security rate is 6.2% each on wages up to $184,500, and Medicare is 1.45% each with no wage cap.¹³¹⁴ Withhold the employee’s share from each paycheck and pay the matching employer share yourself.

FUTA

Federal unemployment tax is entirely on the employer, not deducted from wages. The gross rate is 6.0% on the first $7,000 of each employee’s annual wages, but a credit of up to 5.4% for staying current on state unemployment taxes drops the effective rate to 0.6%, or a maximum of $42 per employee per year in most cases.

Deposits and Filings

How often you deposit withheld income tax and FICA depends on your liability. New employers almost always start as monthly depositors and pay each month’s accumulated taxes by the 15th of the following month. If your lookback-period liability exceeds $50,000, you become a semiweekly depositor with tighter deadlines.¹⁵ Any single-day accumulation of $100,000 or more triggers a next-business-day deposit regardless of your normal schedule.

Most small employers report these taxes quarterly on Form 941. If your total annual employment tax liability is $1,000 or less, you may qualify to file Form 944 annually instead.¹⁶ Missing a deposit deadline triggers a penalty starting at 2% for deposits one to five days late and climbing to 15% for amounts still unpaid ten days after an IRS notice.

State Payroll Add-Ons

Roughly a dozen states impose their own disability insurance or paid family leave programs funded through payroll deductions, with rates from a fraction of a percent up to about 1.3% of wages. Some split the cost between employer and employee; others load it onto one side. Check your state’s tax or labor agency for the specific programs.

Report the New Hire to Your State

Federal law requires every employer to report each new hire to a designated state agency, generally within 20 days of the start date, though some states impose shorter deadlines.¹⁷ The report includes the employee’s name, address, and Social Security number, plus your business name and EIN. Most states accept electronic submissions, and many will take a copy of the employee’s W-4 as the report itself.

Post the Required Workplace Notices

Federal law requires several posters displayed where employees can easily see them. The exact list depends on which laws apply, but most small employers with at least one employee need:

The Fair Labor Standards Act poster, covering minimum wage and overtime.¹⁸
The EEOC “Know Your Rights” poster, covering federal anti-discrimination protections. Failing to display it can cost $680 per violation.¹⁹
The Employee Polygraph Protection Act poster, required for most private employers.

If you reach 50 employees, add the Family and Medical Leave Act poster. The Department of Labor’s online Poster Advisor generates a list tailored to your business size and industry.¹⁸ Post in a conspicuous spot where employees and applicants regularly pass. For remote-heavy operations, digital posting on an internal site may be the only practical option. States have their own required posters as well.

Know Which Anti-Discrimination Laws Apply at Your Size

Federal anti-discrimination laws phase in at different employee counts, which matters if you’re planning to grow. With just one employee, the Equal Pay Act already applies and prohibits paying men and women different wages for substantially equal work. At 15 employees, Title VII, the Americans with Disabilities Act, and the Genetic Information Nondiscrimination Act kick in, covering race, sex, religion, national origin, disability, and genetic information. At 20 employees, the Age Discrimination in Employment Act adds age (40 and older).²⁰

These thresholds apply to hiring decisions, not just how you treat current staff. A business with 15 employees that rejects an applicant because of a disability carries the same legal exposure as a Fortune 500 company doing the same thing. Building fair, documented hiring practices from the first hire is far cheaper than retrofitting them after a complaint forces the issue.

1
IRS. Instructions for Form SS-4 (Rev. December 2025)
2
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
3
U.S. Department of Labor. Fact Sheet 17A – Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees Under the FLSA
4
U.S. Department of Labor. Earnings Thresholds for the Executive, Administrative, and Professional Exemption From Minimum Wage and Overtime Protections Under the FLSA
5
U.S. Department of Labor. Minimum Wages for Tipped Employees
6
U.S. Equal Employment Opportunity Commission. What Shouldn’t I Ask When Hiring?
7
U.S. Equal Employment Opportunity Commission. Job Applicants and the ADA
8
Office of the Law Revision Counsel. United States Code Title 15 – Section 1681b Permissible Purposes of Consumer Reports
9
IRS. Topic No. 753 – Form W-4 Employees Withholding Certificate
10
Internal Revenue Service. Form W-4 – Employees Withholding Certificate
11
U.S. Citizenship and Immigration Services. I-9 Employment Eligibility Verification
12
U.S. Citizenship and Immigration Services. Completing Section 2 Employer Review and Attestation
13
Social Security Administration. Contribution and Benefit Base
14
Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet
15
Internal Revenue Service. Instructions for Form 941 (03/2026)
16
Internal Revenue Service. Employers – Should You File Form 944 or 941
17
Administration for Children & Families. New Hire Reporting – Answers to Employer Questions
18
U.S. Department of Labor. Workplace Posters
19
U.S. Equal Employment Opportunity Commission. “Know Your Rights: Workplace Discrimination is Illegal” Poster
20
U.S. Equal Employment Opportunity Commission. Small Business Requirements