How to Hire Employees as a Small Business Owner

When businesses look to hire their first employee(s), many do not know where to start. Finding the right team members and staying compliant with payroll laws is essential. At Paper Trails, we understand the headaches that come with starting a business and all things payroll and HR. We’re here to assist you through this process. In this article, you’ll learn how to hire your first employees effectively, ensuring a smooth and successful hiring experience.

Before you hire your first employees

Before you start the hiring process, there are a few important steps to take to ensure everything is set up correctly and legally.

Step 1: Obtain an EIN

Before hiring your first employee, you need to get an Employer Identification Number (EIN), also referred to as an Employer Tax ID or Form SS-4. The EIN is necessary for reporting taxes and other documents to the IRS. Additionally, the EIN is required when reporting information about your employees to state agencies. You can apply online for an Employer Tax ID from the U.S. Internal Revenue Service.

Step 2: Set up tax accounts

Below are three types of withholding taxes you need for your business:

Federal income taxes

Every employee must provide an employer with a signed withholding exemption certificate (Form W-4) on or before the date of employment. The employer must then withhold federal income tax from employee wages each pay period.

FICA (Social Security and Medicare) taxes

Employers must withhold FICA (Social Security & Medicare) taxes from each employee and also contribute towards FICA for each employee. The for this tax is 15.3% of employee wages. The social security portion is currently 12.4%. Employees and employers each contribute 6.2% of wages to social security tax.The current Medicare portion of this tax is 2.9%. Employees and employers each contribute 1.45% of wages to Medicare tax.

Unemployment taxes

There are two different types of unemployment taxes: Federal Unemployment (FUTA) and State Unemployment (SUTA) taxes. FUTA taxes cover a portion of unemployment benefits at the federal level. Businesses are required to pay the full amount of this tax. The current federal unemployment tax rate is 6% on only the first $7,000 of wages paid to employees in a calendar year. However, because there are state tax credits in play in most states, businesses usually only end up paying 0.6% of employee wages to federal unemployment benefits.

SUTA taxes fund the unemployment trust run by each state. Each employer is “rated” by the state and issued an unemployment tax rate annually to contribute on behalf of each employee. For the state of Maine, unemployment tax is paid only on the first $12,000 in wages. The individual rate varies by company; however, the “new employer rate” for 2025 is 2.41% of wages.

State taxes

Depending on the state where your employees are located, you may be required to withhold state income taxes or state taxes such as PFML contributions. Check with your state for it’s income tax requirements.

Step 3: Set up payroll management

First, businesses must consider how they are going to manage their payroll process and pay their employees. We recommend implementing a reliable payroll system to manage paying your employees and ensure compliance with tax and labor requirements. Outsourcing payroll can save time, reduce errors, and keep your business compliant.

How to hire employees

Now that you have done some planning, you are ready to hire your first employee.

Step 1: Interviewing potential candidates

Interviewing potential candidates is a critical step in the hiring process. It’s important to prepare thoroughly and be consistent. Review resumes and prepare strategic questions that focus on the candidate’s skills, experience, and fit with your company culture. Behavioral-based questions can help assess their competency and character.

Step 2: Conduct background checks

Conducting background checks is essential to ensure the safety and reliability of your new hires. At Paper Trails, we assist small businesses by providing thorough background checks that comply with legal requirements. This includes verifying the candidate’s previous work, education, criminal records, and driving records. Make sure to obtain the candidate’s written authorization and follow all Fair Credit Reporting Act (FCRA) requirements.

Step 3: Verify employee eligibility

Federal law requires employers to verify an employee’s eligibility to work in the United States. Within three days of hire, employers must complete Form I-9, which requires examining documents to confirm the employee’s citizenship or eligibility to work in the U.S. Optionally, use E-Verify to electronically verify employment eligibility.

What to do after hiring your first employee

Now that you have hired your first employee, there are many things to consider next.

Report the hire to State Employment Agency

After hiring an employee, you need to report the new hire to your state’s labor agency. This is required for payroll tax purposes and involves providing specific information about your business and the new employee. Visit your state’s Department of Labor site to learn more about the requirements.

Managing ongoing payroll and HR as a small business

Now that you have your first employee, you need to process payroll and manage HR tasks accurately. We know this can be overwhelming for many small business owners. At Paper Trails, we specialize in assisting small businesses with these tasks. Here’s a detailed checklist to help you get started:

Step 1: Collect new employee paperwork

When onboarding new employees, there are several forms that U.S. employers need to have their employees fill out. Having an onboarding checklist and new hire packet can ensure all paperwork is completed efficiently. Here are the essential forms:

Form I-9

The Form I-9 verifies a new employee’s identity and their eligibility to work in the United States. It has an employee and employer section, with employees required to complete their portion by the first day of their employment. Employers must physically examine identification documents the employee provides and complete the form no later than three days after the employee starts employment. Retain the Form I-9 on file for three years after the date of hire or one year after the date employment ends.

Form W-4

The W-4 tells you, the employer, how much to withhold from an employee’s pay for the correct federal income tax. Every employee should complete this when they are hired and must submit an updated W-4 if they ever want to change their withholding. Retain the Form W-4 on file for each employee for at least four years.

State tax withholding form

Many states require new employees to fill out a separate form for withholding state income tax. Check with your state’s employment laws to see what tax forms are required.

Employee benefits form

These forms outline all of the benefits your employee is eligible to receive, including plan summaries and enrollment instructions. Make it as easy as possible for them to sign up for the benefits your company provides.

Other internal documents

Internal forms are any additional paperwork your company requires to establish its relationship with your employees. This may include direct deposit forms, non-compete agreements, non-disclosure agreements, acknowledgment form of the employee handbook, and other forms.

Step 2: Obtain workers’ compensation insurance

All businesses with at least one employee are required to carry workers’ compensation insurance coverage through a commercial carrier, on a self-insured basis, or through their state’s Workers’ Compensation Insurance program. Workers’ comp provides benefits to employees injured while on the job.

Step 3: Post required notices

Employers are required to display certain labor law posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. Check with your state for specific federal and state posters that you’ll need for your business based on your industry.

Step 4: File payroll taxes

Generally, employers who pay wages subject to income tax withholding, Social Security, and Medicare taxes must file IRS Form 941 on a quarterly basis. These taxes are due on the last day of the month following the end of the quarter. If you are working with a payroll vendor, the vendor should file wage reports and remit quarterly payments on your behalf so be sure to check with them.

Step 5: Keep payroll records

Being a good employer doesn’t stop with fulfilling your various tax and reporting obligations. Every covered employer must keep certain records for each non-exempt worker. The following is a listing of the basic records that an employer must maintain.