You’re ready to hire your first employee — but is your business? You’ve grown your business solo, juggling every task, and now, it’s time for help. That first hire feels like a big milestone (because it is). But before you post that job listing, there’s a question many solopreneurs ask: “Can I hire someone as a sole proprietor? Or do I need to form an LLC or S-Corp first?” The short answer is you can absolutely hire as a sole proprietor, and you don’t need to change your business structure. But before you onboard that first employee, you’ll take on new legal responsibilities that go beyond just cutting a paycheck. That’s where this guide can help you, as we explain the essential legal steps required for a sole proprietorship employer.

Are you truly ready for your first hire?

Hiring someone is a big shift. So, before you jump into legal forms and onboarding paperwork, take a moment to check in with yourself and your business. Ask: Is this really the right time? Here are a few signs that say “yes” to take the next step:

• Consistent overwhelm & bottlenecks: Are you constantly stretched thin? If work keeps piling up and important tasks fall through the cracks, it might be time to share the load.
• Turning down work or growth opportunities: Have you said “no” to new clients or projects lately, not because you wanted to, but because you just couldn’t keep up? When you say no because you’re overloaded, you hold back your own growth.
• Financial stability: Can your business afford a regular paycheck for someone else? Take a good look at your cash flow. Hiring is a commitment, so are you ready to fund it month after month?
• Tasks to delegate: What’s on your plate that someone else could do? If you’re spending hours on admin, customer service, or repetitive tasks, there’s room to bring in support and reclaim your focus.
• Impact on your role: Are you prepared to shift from “doer of everything” to manager or leader? Hiring changes how you spend your time — are you ready to lead instead of just execute?
• Long-term vision: Does hiring fit into your big-picture goals? Think beyond the next few months. Where do you want your business to be a year from now, and does building a team help you get there?

Hiring First Employee: Essential Legal Steps Before Day One

Get your EIN

Before you can set up payroll and officially hire your first employee, you need an Employer Identification Number (EIN). Think of the EIN as your business’s unique tax ID, a nine-digit number the IRS uses to track your tax filings and payroll reports. Every business that hires employees, including sole proprietors and general partnerships, must have one.

Applying for an EIN is straightforward. The IRS lets you apply online through their website, and most applicants get their number right away. You’ll need to provide some basic details about your business, like its structure, and the Social Security number of the “responsible party,” usually the owner. If online isn’t an option, you can also apply by phone, fax, or mail, but those methods take longer to process.

Register for state and local requirements

Your hiring responsibilities go beyond the federal level. You must also get set up with your state (and possibly city or county). Start by registering for state withholding tax and unemployment insurance (SUI). Most states require you to enroll as soon as you hire your first employee. SUI helps support workers who lose their jobs through no fault of their own, and your business will make regular contributions based on a tax rate assigned to you.

To register, head to your state’s labor or workforce agency website. You’ll usually need to provide your company’s EIN, business structure, payroll details, and other basic information. Also, don’t forget to check for any local business licenses or permits tied to hiring. Some cities and counties have extra rules that kick in once you bring someone on board. So, it’s better to find out now than face a surprise fine later.

Verify employee eligibility to work

Before your new hire clocks in, you need to confirm they’re legally allowed to work in the U.S., and that starts with Form I-9. Both you and your employee must complete the Employment Eligibility Verification, which is the Form I-9, within three business days of their start date. Your job is to review the documents they provide, like a passport or a mix of a Social Security card and driver’s permit, to confirm their identity and work authorization.

You’re not required to file the form with any government agency, but you must keep it on file for at least three years after the hire date or one year after the employee leaves, whichever is later. Store these securely and limit access, since you may need to produce them if Immigration and Customs Enforcement (ICE) ever audits your business.

Also, don’t forget to report new hires to your state within 20 days. This includes basic info like the employee’s name, contact details, and Social Security number. States use this to update the National Directory of New Hires, which helps with things like child support enforcement.

Understand worker classification: employee vs. independent contractor

Before hiring first employee, make sure you know how to classify them correctly, as an employee or an independent contractor. It’s one of the most common areas where new employers slip up, and the consequences can be expensive.

Here’s the key difference: Employees work under your direction — you control their schedule, workflow, and tools. Independent contractors, on the other hand, run their own business. They usually work with multiple clients, set their own hours, and invoice you for completed work.

Getting this wrong isn’t just a technicality. If you classify someone as a contractor when they legally function as an employee, you could face back taxes, penalties, and even legal claims. That might include unpaid benefits or wages under the Fair Labor Standards Act.

From a tax perspective, hiring an employee means you’re responsible for withholding and paying income taxes, Social Security, Medicare, and unemployment taxes. You typically don’t withhold or pay those taxes with independent contractors; the contractor handles that separately.

Comply with wage and hour laws

Hiring your first employee means taking on new responsibilities to ensure fair compensation and adherence to labor laws. Here’s what you need to know:

• Minimum wage: The federal lowest wage is $7.25 per hour, as set by the FLSA (Fair Labor Standards Act). The FLSA doesn’t handle claims for unpaid wages or commissions beyond its minimum requirements. But many states do step in — some have their own laws that let employees file claims for things like promised pay, commissions, or even fringe benefits.
• Overtime pay: Under the FLSA, non-exempt employees should get overtime salary at 1.5 times their regular hourly pay rate for overtime hours exceeding 40 per week. Some states have additional overtime laws, so it’s necessary to check both federal and state regulations.
• Pay frequency: Though there is no federal law establishing pay frequency, most states have laws requiring employers to pay employees on a regular frequency, such as weekly, biweekly, or monthly. Ensure you understand your state’s requirements regarding pay periods.

Additionally, employers must maintain accurate payroll records, including hours worked, wages paid, and other relevant employment details. Employers must keep these records for at least four years after the tax due date or the date they pay the tax, whichever comes later, as required by the IRS.

Set up payroll and tax withholding

After hiring your first employee, you must withhold federal income tax, Social Security, and Medicare taxes (together as FICA). These amounts come directly from your employee’s paycheck, based on their W-4 form, salary, and pre-tax deductions. You’re also responsible for paying your share of FICA taxes as the employer. On top of that, you’ll need to pay federal unemployment tax (FUTA) and possibly state unemployment tax (SUTA). FUTA helps fund unemployment benefits, and some states offer a credit on the federal portion if you pay your SUTA on time.

Depending on where you do business, you might also have to withhold state or local income taxes. Always check your state and city requirements so you don’t miss anything.

Here’s what you’ll need to do:

1. Calculate tax withholdings accurately based on the employee’s W-4 and earnings.
2. Deposit all payroll taxes on time through electronic funds transfer (EFT).
3. File tax forms regularly. This includes:

• Form 941 (quarterly) for federal income and FICA taxes
• Form 940 (annually) for FUTA
• W-2 for employees and W-3 for the Social Security Administration

You may also need to complete additional filings if you’re subject to state or local tax rules or if you employ agricultural or seasonal workers.

Managing payroll and taxes can feel overwhelming, but you don’t have to do it all manually. Many small business owners use payroll software or outsourced payroll services to automate calculations, file forms, and ensure compliance. These tools can save time and minimize your risk of costly mistakes. If you’re unsure, consider talking to a tax professional or a payroll provider who can help you set everything up correctly.

Workers’ compensation insurance

When hiring first employee, you’ll probably need workers’ compensation insurance — most states require it. This coverage steps in when an employee gets hurt or sick on the job, helping pay for their medical bills, lost wages, and rehab costs. It also protects you from expensive lawsuits and penalties. Skipping it can lead to fines, legal trouble, or even getting your business license suspended. Start by checking your state’s requirements to get covered, since rules and coverage types vary. Some states have their own programs, while others let you choose from private insurers.

Required workplace postings

When you hire employees, you’re also responsible for keeping them informed about their rights, and a straightforward way to do that is by posting the right labor law notices in your workplace. Federal law requires you to display posters in visible spots, like break rooms or near time clocks, where employees can easily see them. These posters cover important protections, like minimum wage rules, overtime pay, child labor laws, and rights for nursing mothers—all under laws like the Fair Labor Standards Act (FLSA). What you need to post depends on a few things: your industry, number of employees, whether you work with federal contracts, and whether you employ minors, foreign workers, or people with disabilities.

And don’t forget — your state likely has its own posting requirements, too. To stay compliant, check with your state labor department for guidance. You can also take a look at the U.S. Department of Labor’s website to find what’s federally required and get links to state-specific posters.

Essential Paperwork for Hiring Your First Employee

• Form W-4 (Employee’s Withholding Certificate): New hires must fill out Form W-4 so you know how much federal income tax to withhold from their paycheck. It depends on their filing status and tax situation.
• Form I-9: Form I-9 verifies that your employee is legally allowed to work in the U.S. You must complete and retain it within three business days of their start date.
• State-specific new hire forms: Many states require you to report new hires and collect additional tax forms. Check with your state’s labor or revenue agency for requirements and deadlines.
• Employee handbook (recommended): An employee handbook sets expectations and outlines policies like dress code, anti-discrimination, and time-off rules. It’s not always required, but it’s a smart move to protect your business and ensure clarity.
• Offer letter or employment agreement (Recommended): A signed offer letter or employment agreement explains the job terms, title, pay, and start date. It helps avoid confusion and sets a professional tone from day one.

Your hiring journey starts here

Hiring your first employee is a significant step, and while the legal steps can feel a bit overwhelming, staying organized and compliant from the start makes the process much smoother. Understanding your responsibilities, including tax withholding, insurance, and proper documentation, helps you avoid costly mistakes and sets a solid foundation for your growing team. Every business is different, so it’s always a good idea to consult legal or financial professionals who can guide you based on your location and situation.

If you’re operating as a sole proprietor and wondering whether it’s time to formalize your business, now might be the perfect moment. Forming an LLC can offer added protection, tax advantages, and credibility as you begin building a team. At IncParadise, we make business formation simple—helping you register your LLC, stay compliant, and focus on what matters most: growing your business with confidence.