Why Hiring Your First Employee Is a Turning Point for Your Business

Hiring your first employee is one of the biggest turning points in your business. It usually means demand is growing, your time is stretched, and you’re ready to stop doing everything yourself.

What most business owners don’t expect is how much responsibility comes with that decision.

Once you hire a W2 employee, your business operates differently. You’re no longer just focused on revenue and delivery. You’re now responsible for payroll taxes, filings, compliance, and systems that have to run consistently whether you’re busy or not.

This is where many businesses start to feel friction. Not because hiring is a bad move, but because they weren’t prepared for what comes with it.

The good news is this is all manageable. You just need to understand what changes and set things up correctly from the start.

What Changes When You Hire Your First Employee

When you bring on your first employee, you move from being a solo operator to running an actual system.

Before hiring, if something slips, it usually just affects you. After hiring, mistakes can trigger penalties, compliance issues, or cash flow problems. You now have obligations tied to payroll, tax filings, and labor rules that don’t pause when things get busy.

The biggest shift is that you become responsible for handling taxes on behalf of someone else. You’re collecting, withholding, and sending money to the government on a schedule. That responsibility alone changes how your business needs to operate.

At the same time, hiring is what allows your business to grow beyond your own capacity. It gives you leverage. It creates the ability to step out of day-to-day tasks and focus on higher-value work. That tradeoff is what makes hiring worth doing, but only if it’s set up correctly.

 

Employee vs Contractor and the Real Cost of Getting It Wrong

One of the first decisions you’ll face is whether someone should be treated as an employee or a contractor. This is not a preference-based decision. It comes down to control. To see how the IRS evaluates this, review the IRS guidelines on employee vs contractor classification, which outline how control determines proper classification.

If your business sets the schedule, defines how the work is done, provides the tools, and determines pay, that person is likely an employee. If the worker controls those elements and operates independently, they may qualify as a contractor.

Where business owners run into trouble is trying to simplify things by labeling someone a contractor when they function like an employee. That shortcut can lead to audits, penalties, and back taxes.

At the same time, many underestimate the actual cost of hiring an employee. Salary is only part of the equation. Payroll taxes typically add another 8% to 12% on top of wages. A $50,000 salary often turns into a $54,000 to $56,000 cost before benefits are even considered. If you’re not familiar with how these taxes work, the IRS provides a full breakdown of employer payroll tax responsibilities, including what needs to be withheld and paid.

Understanding both classification and cost upfront helps you make better decisions. It keeps you from underpricing roles, underestimating cash flow needs, or creating compliance issues that surface later.

The Systems You Need to Set Up From Day One

Hiring becomes much easier when the right systems are in place.

Before running payroll, your business needs to be registered properly. That includes having an EIN, setting up state income tax withholding accounts, registering for state unemployment, and securing workers’ compensation coverage where required. If you don’t already have one, you can apply for an EIN directly through the IRS before hiring.

This setup is a one-time process. It may feel like extra work at the beginning, but once it’s done, it creates a stable foundation for every future hire.

From there, payroll becomes the core system you rely on. This is where many business owners try to cut corners and end up creating bigger problems. Managing payroll manually means tracking tax rates, filing deadlines, deposits, and reporting requirements on your own.

Using payroll software removes that burden. It calculates withholdings, submits payments, files reports, and keeps everything aligned with current requirements. It also reduces the risk of missing deadlines, which is critical because payroll taxes are treated differently than most other obligations.

When payroll taxes are withheld, that money isn’t yours. You’re holding it temporarily before sending it to the government. If payments are missed, penalties and interest start immediately. Over time, those issues can compound and create serious financial strain.

With the right systems, payroll becomes routine. Without them, it becomes a constant source of risk.

Hiring Without Overcomplicating Benefits or Expansion

Another reason business owners hesitate to hire is the assumption that benefits need to be complex or expensive from the start.

That’s not the case.

You have flexible options. Health benefits can be structured through reimbursement arrangements, which allow you to contribute without managing a full group plan. Retirement options can start with simple structures like IRAs or SIMPLE IRAs and evolve over time.

You don’t need to build a full benefits package on day one. You can start with something manageable and expand as your business grows.

The same applies to hiring outside your local area. If you find the right person in another state, there are additional steps, but they are straightforward. You may need to register for tax accounts in that state and follow local labor laws, but once those pieces are in place, the process becomes just as manageable as hiring locally.

Hiring doesn’t need to be complicated. It just needs to be intentional.

Why Hiring Is the Move That Unlocks Growth

At some point, every business owner reaches a ceiling. There are only so many hours in a day, and growth becomes limited by your own capacity.

Hiring is how you break through that ceiling.

It allows you to build systems that operate without you handling every task. It creates space for you to focus on strategy, revenue, and long-term direction instead of staying buried in daily work.

A business that depends entirely on the owner has limited scalability and limited value. A business with a team and systems in place can grow, adapt, and operate more independently.

Hiring your first employee is the step that begins that transition.

Key Takeaways

Hiring your first employee changes how your business operates, but it doesn’t have to be overwhelming when approached correctly.

Keep these points in mind:

• Classification depends on control, not preference

• Hiring introduces tax and compliance responsibilities immediately

• Payroll costs are higher than salary alone

• Proper setup creates long-term simplicity

• Payroll software reduces risk and saves time

• Benefits can be simple and expanded later

• Hiring creates leverage and supports long-term growth

Need Help Setting This Up the Right Way

Hiring your first employee is a major step. Done right, it creates growth and stability. Done wrong, it creates unnecessary risk.

If you want help building the right systems, reducing your tax burden, and setting your business up to scale, we can help.

Visit TaxElm to learn how we help business owners build smarter tax strategies year-round https://taxelm.com

Frequently Asked Questions About Hiring Your First Employee

Do I need an EIN before hiring my first employee?

Yes. You need an Employer Identification Number (EIN) to run payroll, file tax forms, and report employee wages to the IRS. Most businesses already have one, but if you don’t, you’ll need to get it before hiring.

What is the difference between a W2 employee and a 1099 contractor?

The difference comes down to control. If you control how, when, and where the work is done, the worker is typically a W2 employee. If the worker controls those factors and operates independently, they may qualify as a 1099 contractor. Misclassifying workers can lead to penalties and back taxes.

How much does it cost to hire an employee?

Hiring an employee costs more than just their salary. Payroll taxes usually add about 8% to 12% on top of wages. For example, a $50,000 salary may cost closer to $54,000 to $56,000 before benefits.

Do I need payroll software to pay employees?

You’re not required to use payroll software, but it’s strongly recommended. Payroll software handles tax calculations, filings, and payments automatically, which helps you avoid missed deadlines, penalties, and errors.

What taxes do employers have to pay for employees?

Employers are responsible for withholding federal and state income taxes, as well as Social Security and Medicare taxes. They must also pay the employer portion of Social Security and Medicare, plus federal and state unemployment taxes.

What happens if I miss a payroll tax payment?

Missing a payroll tax payment can result in immediate penalties and interest. Since these taxes are collected on behalf of employees, the IRS takes missed payments seriously. Repeated issues can lead to significant financial problems for a business.

Do I need to offer benefits to my first employee?

You’re not always required to offer benefits right away. Many small business owners start with simple options like health reimbursement arrangements or basic retirement plans and expand benefits over time as the business grows.

Can I hire an employee in another state?

Yes, but you’ll need to register for tax accounts in that state and comply with its labor laws. This may include setting up state income tax withholding and unemployment accounts. Once set up, managing out-of-state employees becomes much easier.

What do I need before I can run payroll?

Before running payroll, you need an EIN, state tax accounts, unemployment registration, and workers’ compensation coverage if required. Once these are in place, payroll can be processed correctly.

Is hiring an employee worth it for a small business?

Yes, when done correctly. Hiring allows you to delegate work, increase capacity, and focus on growth. It also makes your business more scalable and valuable over time.

Transcript: Hiring Your First Employee

The Transition of Hiring Your First Employee

[00:00:00] Hiring your first employee feels like a breakthrough moment. It means you’re growing. It means you can finally stop doing everything yourself. It means your business is becoming real, but here’s the part that nobody really talks about. The second that you decide to hire someone as a W2 employee, your business changes overnight.

You’re no longer just selling. You are now responsible for payroll, taxes, filings, state compliance, workers’ comp, and deadlines. That don’t care if you are busy and if you miss something, the penalties they stack up fast. Today I’m gonna walk you through exactly what needs to happen after you decide to hire an employee so that you can grow confidently without stepping into a tax mess.

So let’s dive into it

Employee vs. Independent Contractor: The Control Test

now. The first concept I wanna talk about is employee [00:01:00] versus. Independent contractor, because that’s a conversation that always comes up when people are starting to go down this route. And when we talk about whether somebody can be classified as an employee or an independent contractor, we really look at control.

It all comes down to control who controls the relationship. And if it is the employer or the business that controls that relationship, generally they need to be a W2 employee. There’s not an option. You can’t choose. To pay them as a contractor. Now, if the contractor or the worker definitely typically controls that relationship, then the contractor often, then it’s normally they need to be treated as a contractor.

So I like to go down kind of a checklist of this to see what makes sense. Typically, we look at hours. So who’s determining how many hours the person has to work? Are you saying, yes, you need to work 40 hours, here’s the hours that you need to work, eight to five, whatever it is. And you’re very strategic about when they have to be working.

If the business is really putting that out there, then it’s very likely gonna be a W2 employee pay structure. Does the worker [00:02:00] come in and say, Hey, I would like to be paid $25 an hour, or do you go to the worker and say, here is what we’re paying you. Again, who is in control of that? What about tools?

Do they bring their own computer or are you providing them with everything that they need to do to complete? The work that’s gonna lean one way or the other, and then how the work is done. If you are the one that’s controlling and saying, here’s how I need you to do it. Here’s the exact process you need to do.

Again, that’s typically gonna be if the business is controlling all that, they held more of the control. So when we look at, do I bring out a W2 employer? Do I bring out a 10 99 contractor? It all comes down to control. If the business has more control, they set the hours, they set the pay, they provide the tools, they explain how the work needs to be done.

Typically that’s gonna lead to a W2 employee. If the worker is in my control, they tell ’em, here’s the hours that I’m going to work, here’s the pay that I need. I’m gonna bring my own tools, and I am an expert, so I’m gonna kind of work my own way. Then if it’s more of that in control of the worker, definitely gonna lean more towards an independent contractor.

So what’s the difference between employee [00:03:00] versus an independent co. With a contractor, there’s no withholdings. There’s no FICA taxes, and typically there’s gonna be no benefits. So basically you just agree whatever the agreed upon price is, you make that payment for ’em. You don’t withhold any taxes, you do nothing with taxes.

With that, you just make that payment and send it off to them. All you need to do for a contractor is grab a W nine. And move on. So grab a W nine. When you first bring them on as a worker, you’re gonna send them a 10 89 at year end, but you don’t do anything with tax filings for them. Now let’s look at a W2 employee With a W2 employee.

You have tax withholdings, you have FICA taxes, you need to pay, you have benefits that you might need to offer them. All of those are associated with that. Oftentimes people try to say, well, I’m just gonna hire contractors, but they really classify as W2 employees. I just wanna say, make sure you look at that control piece because the last thing you wanna do is get stuck in an audit with the IRS or the state of somebody that you’re treating as a contractor.

That really should be a W2 employee because that can create a big penalty in tax mess as well. [00:04:00]

The Reality of Payroll Taxes for W2 Employees

So what we really wanna talk about today is those that are hiring W2 employees. So let’s talk about the next steps. The first thing we need to think about is this payroll tax reality. When you pay an employee, you’re just not paying wages. You are now a tax middleman. So what does that mean? It means that you’re gonna have to withhold taxes for them, and you’re gonna have to pay some of those taxes on their behalf.

So what are you withholding? First, you need to withhold federal income tax. You need to withhold state income tax. You’re in a state that has state income tax. You need to withhold the employee portion of Social security and Medicare taxes also often called FICA taxes. So you need to withhold those items and then you’re gonna send them off to the state.

But you also need to pay certain taxes as the employer, and that is the employer portion. A Social Security and Medicare or FICA taxes. So the employee covers half of FICA taxes that you withhold on their behalf, and then you as the employer, cover the other half of FICA taxes. You also need to pay federal unemployment, which is fuda, or state unemployment, which is suda.

So those are additional taxes, and this is why [00:05:00] when people are looking to bring on employees, we tell clients Plan for payroll to cost. Eight to 12% more on gross wages. So if you’re paying someone $50,000 a year in a salary, you’re likely gonna be, the cost is likely to be closer to $55,000 in actual cost for that person.

So if you say, yeah, we agreed upon a $50,000 a year salary, the actual cost. Your pocket before we even talk about benefits, which we’re gonna talk about later, but your actual cost just from a tax standpoint is probably closer to about 55,000 for that.

Now I wanna make this very clear, ’cause this is so important. ’cause sometimes people step away from hiring employees because they hear this and they’re like. Seems stressful. It seems like a lot of work and I just don’t want to deal with that. But let me be very clear. The number one way to make your business more valuable is allow it to run without you, and you cannot do this without employees.

So I want to be so clear that it is so important to bring employees onto your business and to help bring that assistance on, especially [00:06:00] as your business is growing. So do not. Push off hiring employees just because there’s some legwork. We’re gonna walk through that legwork and hopefully make it super easy, but I just want you to know what you’re getting yourself into so that you can be prepared for it and you can do it in the most efficient way possible.

Step 1: Proper Business Registration and Setup

Now the step one when we say, okay, we’re bringing an employee is you need to get your business registered properly. So before you even can run payroll, your business has to be set up correctly. You need an EIN if you don’t already have one in. Most businesses already have an EIN, so we don’t need to worry about worrying about that.

But if you don’t have an EIN, you do need an EIN. Then you also need a state income tax withholding account in a state unemployment account and a workers’ compensation. Policy. So those are the things you need, EIN, state to income tax withholding account, state unemployment tax account based on the state that you’re hiring this employee in.

And then a worker’s comp policy. If you miss one of these, you can’t legally process payroll properly. So this is where most, first time employers feel overwhelmed. But really it’s just a one-time [00:07:00] setup. Once it’s done, it runs pretty smoothly. So there’s a little bit of work. You need to go to the state, you need to apply for some numbers.

You get those numbers relatively quickly, and then you can start paying that employee. It’s not a ton of work, but it is just a little bit of a pain upfront. But once you get those numbers are done. You don’t need those numbers anymore. You have ’em. They’re with you forever.

You don’t need to do this every single year. It’s do at once. Now you gotta sit up. Now if you hire another employee, you’re not doing those same ones again, unless it’s in a new state. And we’ll talk about multi-state as well a little bit later.

 

Non-Negotiable: The Importance of Payroll Software

Now the key thing that I want to talk about whenever we’re talking about Don to employees is to use payroll software.

This is absolutely a non-negotiable. This is not a DIY project because good payroll software is gonna help you out in so many different ways. You know, I’ve seen a lot of business owners that thought that they could do this on their own or thought that it’d be cheaper to do this on their own, and then they get into a big old mess.

And next thing you know, five, 10 years later, they’re way back on taxes and it’s causing, it’s [00:08:00] wrecking businesses. So this is non-negotiable. Use a payroll software and what is that payroll software gonna do? It’s gonna help you understand or calculate, the withholdings automatically. So what withholdings do you need to do?

It’s gonna calculate that automatically. It’s gonna deposit payroll taxes on time, whether that’s monthly or semi-weekly. It’s gonna process those to the state government, to the federal government. It’s gonna do that for you, so you don’t have to worry about that. It’s gonna file the quarterly payroll reports, so you don’t need to worry about filing payroll reports, ’cause the software’s gonna take care of that for you.

It’s gonna file annual, federal and state forms, including W twos at the end of the year. It’s gonna do all that for you. All you need to go into the software is say, here’s the hours they worked, or here’s the salary that we’re paying them and process the payroll. But all of that tax headache, they’re gonna handle it for you.

And that can be super powerful. It can be complex. This whole payroll thing, but the software truly makes it easy. And let’s be honest, software is relatively inexpensive. You know, you might be looking, if you have four or five employees, you might be looking at, you know, 70 to a hundred dollars a month [00:09:00] to, to get that handled for you.

Relatively inexpensive. Now we have a check the link at it. We have check the link in our show notes for one of our preferred vendors, which is Gusto. Have been using them for a long time and really think that they help make this payroll process easier. Use a payroll software, I don’t care what company it is, but use a payroll software or a payroll software provider that’s gonna take care of some of these headaches for you, the payroll tax payments, the form filings, all of that can be done.

Now the big thing is that if you miss a deposit to lend, let’s say you’re like, I’m not gonna use this payroll software. I’m just gonna go out and do this on my own. If you miss. A deposit deadline, there’s gonna be penalties, there’s gonna be interest, and that’s gonna start immediately. And like I said, the IRS is extremely aggressive about payroll taxes because technically that those payroll taxes you withhold, it’s money you withheld from somebody else.

You are just the middleman. So somebody else is paying for those taxes. You are grabbing it in the middle, and then you’re supposed to be sending it off to the government agencies. That’s not your money. Even though it sometimes [00:10:00] feels like it’s a money in your bank account and you’re sending it out, sometimes it feels like your money.

It’s not. You’re the middleman for it. And the IRS does not take this lightly. So if you are saying, I’m not gonna do payroll and I’m just gonna handle this myself, and then all of a sudden you hit a cash crunch and you forget to make one of those payroll deposits, it can be detrimental to your business.

You know, talking with a lot of people in the industry, payroll issues is one of the top things that banks bankrupt businesses and their owners. So don’t fall into that trap. Use software that helps take care of this for you.

Now, quick boss, fast forward. You’ve hired your employee, you’ve grown revenue’s up, but now it’s tax season. Are you organized and confident? Are you stressed digging through payroll reports hoping that nothing was missed? The difference comes down to systems. If you want help building smarter tax systems from day one, grab our free tax savings starter kit. You’ll get deductions, you’ll get real world saving examples. We, we’ve already saved people 5,000 to $25,000 or more. And you’ll also get a bonus discovery call with our tax EL team. [00:11:00] Go to Tax Savings Podcast. Com slash starter kit. That’s tax savings podcast.com/starter kit to grab that for free.

Complying with State Labor Laws

Alright, now let’s get back to the more things that you need to do if you hire in order to hire employees. The right way. Now, when we talk about hiring employees, we need to comply with labor laws because that’s an important thing that now we are working with labor laws. We’re not just working with business law and tax law. We’re also working with, labor laws and workers’ Compensation isn’t optional in most.

States. So even one employee can trigger this workers’ compensation policy requirement. And you also need to understand within your, each state, you know, what are minimum wage laws? What are overtime rules? What are termination laws or garnishment requirements? Every state’s gonna be a little bit different, so we’re not gonna touch on every state here.

Just know that if you’re getting into hiring, just look at what some of the employment laws are in your state just to make sure you’re not getting into any trouble there. So just do a little leg work, get that work comp policy as well.

Managing Employee Benefits Without Breaking the Bank

Now the next thing I wanna talk about is benefits, because this is another one of those [00:12:00] things that when people start to hire people, they get a little bit. Nervous about this piece. When we talk about benefits, and this is one that stops and discourages so many business owners, myself included, when I was just getting started my business, I hauled back on hiring employees because of this whole benefits idea. And I’m here to try to talk to you about benefits and bring some light to.

Something that I didn’t have someone talking or speaking this into me back then, but would’ve allowed me to hire so much more quicker than I did if I would’ve known some of these things back then. So you think that you need health insurance, retirement plan, and it’s all gonna be extremely expensive and complicated, and holy smokes to bring on one employee, all of these things I need to do is just going to be a nightmare.

So I’m just not gonna do it. I’m gonna keep doing things on my own. And I’m here to tell you that these types of benefits can surely help you attract and retain talent, but they don’t necessarily have to be expensive. So that’s one thing that I wish people would’ve told me at the beginning. So let’s talk about those two.

Health in retirement health, there are things called [00:13:00] rra, or health Reimbursement Arrangements, or q Sarahs. For small employers, they allow you to offer a health benefit without a group plan. So, for example, you might say that, Hey, finding a group plan for one employee that doesn’t make sense.

But I do wanna offer something where you could set up a qera, which is for small employers, where you say, well, I’m just gonna reimburse you. You go out and buy your own plan. I’m just gonna reimburse you up to a certain amount for that, where you’re not managing a health plan, you’re not managing claims, you’re not managing all those different items.

Managing a reimbursement for plans that they get on the marketplace or wherever they might look for that. So there is alternatives without having to go the whole group plan. There are many alternatives in that benefits range, especially when it comes to health, where you can offer something that’s a lot less risky, a lot less work, but it does still fulfill that need for that benefit for that employer.

And then we can talk about retirement plans. There are so many different types of retirement plans. You can go into a 401k, but even before a 401k, if you’re thinking, hey. I’m just starting. My first employee. Seems like a lot of work, but I do wanna have something available. Maybe we open up a [00:14:00] simple IRA or maybe we open up AEP IRA for yourself or you know, there’s many different retirement plans that do not have to cost a lot of money.

Not to mention that there are a lot of credits available out there that for retirement account that oftentimes will cover the cost of that retirement account for the first couple years as well as your contributions to that retirement account. Super powerful where you can get into a retirement account and it’s gonna cost you nothing, even the money that you’re putting towards your employers.

So just think when you’re looking at benefits for a new employee, do not let this be a sticking point for you. My goal is for you to understand and give you confidence that you can dive into this realm of hiring without having to worry about, it being super expensive. There’s plan op options for health.

There’s definitely some inexpensive or even sometimes free retirement accounts if you look at some of the credits that are available. So do not let that be a stopping point.

Special Considerations for Out-of-State Talent

Next I wanna talk about out of state talent because as we’re, you know, in this modern area, there is a lot of talent that’s not [00:15:00] just necessarily in our backyard. So good talent’s not always gonna be next door. Sometimes you have to look outside of your state, and this is common and we always recommend it if it’s a good candidate. But there are some special considerations to remember when we’re hiring out of state one. We need to remember the state laws and what that looks like.

Now, if you find town outta state. You’re gonna need to register for all the state numbers for that state. State income tax withholding if applicable. If it’s a state with income tax, you’re gonna need a state unemployment account number in that new state that you hire that employee in. You may also need to file as a foreign entity in that additional state.

Again, not a huge deal, just some light work you need to upfront. Once it’s done. So don’t let this be a barrier. Just know that it’s a few extra things that you need to do oftentimes, before you hire this employee. And a lot of the payroll software out there, Gusto included, a lot of them will help you along with this.

Summary: Setting Up for Confident Growth

Alright, so let’s summarize kind of where we’ve been today and talk through and just give you confidence as we look to hire this first employee, because this will be a game changer, [00:16:00] allowing yourself to bring employees into your business to make. Yourself, easier to get yourself away from the day to day is going to make your business more valuable.

Now the setup is the hardest part. Then it’s it all gets easier from there. So the setup’s a little bit difficult, a little bit painful, but use the resources available to you. Number one, rule use payroll software. I got a link to Gusto in the show notes is a company that we use for that. Super helpful.

Now the emotional barrier is. Higher than the operational barriers. So yes, there’s registrations. Yes there are forms. Yes, there’s gonna be systems that are put in place, but once that payroll software is running. The accounts are registered, your processes are built out. It becomes routine. You are just clicking a few buttons to process that payroll and moving on, and it can becomes very simple and very easy, but there is just a little bit of setup for that.

But that setup’s, hard part, the operational piece relatively easy. Now, hiring your first employee is a growth inflection point. It forces you to become a real operator, not just like a hustler or a side [00:17:00] hustler, and that’s a good thing. It can really help you expand and grow your business and benefits.

Don’t let this scare you. Start to look into retirement plans and start small and grow into something bigger. Same thing with help. You can start with a ER and work your way up to a full benefit package. You don’t need to come out of the gate with that. All of these things you can allow to grow with you and your business as you’re going along this journey.

Remember, the number one way to make your business more valuable is allowing it to run without you. And you cannot do that without employees. Now, hiring your first employee isn’t just a staffing decision, it’s a tax decision, it’s a compliance decision, it’s a systems decision. And if you set it up correctly from day one, payroll becomes predictable, manageable, scalable.

But if you wing it. That’s when letters start showing up. If you found this helpful, don’t forget to subscribe. Hit that like button and share it with a business owner who’s sick of paying too much in tax. And if you want help from our team of tax professionals implementing this strategy along with so many other different [00:18:00] tax strategies, visit us at tax m.

That’s TAX elm do.com or click the link in the description for a free discovery call. We are helping people like you legally, lower their tax bill every single day. I’ll see you on the next one.