Hiring guide

First Employee Cost Checklist [2026]

You've been doing it all yourself. Now you're ready to hire your first employee. The salary you negotiated is only the beginning — payroll taxes, workers' comp, unemployment insurance, compliance, and administrative overhead typically add 25-40% above salary. This checklist covers every cost you need to budget for, with real dollar estimates for 2026.

The 25-40% Rule: What Salary Actually Costs

Here's the math for a $50,000/year employee in a typical state:

Cost Category	Calculation	Annual Cost
Gross Salary	$50,000 base	$50,000
FICA (Employer Share)	7.65% of salary (6.2% SS + 1.45% Medicare)	$3,825
FUTA (Net)	0.6% on first $7,000	$42
SUTA (New Employer Rate ~2.7%)	2.7% on wage base (varies by state, typically $7,000-$40,000)	$189–$1,080
Workers' Comp	$0.25–$25 per $100 of payroll	$125–$12,500
Payroll Service	$40/mo + $6/employee	$552
Health Insurance	50% of premium (optional but common)	$3,600–$6,000
Total Estimated Cost		$58,333–$74,000

That's a 16.7%-48% premium over salary, with the wide variance coming from workers' comp (industry-dependent) and health insurance choices. For a white-collar office role, budget ~20-25% above salary. For a skilled trade role, budget ~30-40%.

10-Step Startup Checklist

Follow these steps in order. Steps 1-3 are prerequisites — you cannot run payroll without them.

Obtain an Employer Identification Number (EIN)

💰 Free — apply online at IRS.gov⏰ Before filing your first employment tax return (Form 941)

Apply online at IRS.gov/EIN — you receive your EIN instantly as a PDF. You need this number for every subsequent step: payroll registration, FUTA reporting, W-2 issuance. If you already have an EIN for your business (most LLCs and corporations do), you can use that same EIN — you do NOT need a separate one for employment tax purposes unless your business entity changed.

💡 Pro tip: Keep the EIN confirmation letter (CP 575) in your permanent business records. You will need the exact legal name and EIN exactly as shown on this letter for all payroll tax registrations.

Register with Your State Tax Agency

💰 Free in most states⏰ Before the first payroll run

Register for state income tax withholding and State Unemployment Insurance (SUI) with your state's department of revenue or employment department. Each state has its own online portal. You'll receive a state employer ID number and your SUI tax rate (new employers typically start at ~2.7% for the first 1-3 years, but rates range from 0.1% to 14% depending on state and experience rating).

💡 Pro tip: Some states (CA, NY, NJ, MA, IL) also require state disability insurance (SDI) or paid family leave (PFL) registration alongside SUI. The combined SUI + SDI + PFL rate in California, for example, can exceed 4% on the first $7,000 of wages.

Buy Workers' Compensation Insurance

💰 $500–$3,000/year per employee (varies dramatically by industry, role, and state)⏰ Required before the employee starts work in most states

Workers' comp is mandatory in every state except Texas (where it's optional but strongly recommended). Premium is calculated as a rate per $100 of payroll × annual payroll ÷ 100. A clerical worker (class code 8810) might cost $0.25 per $100 = $100/year on a $40,000 salary. A roofer (class code 5553) could cost $25 per $100 = $10,000/year on a $40,000 salary. Premiums are based on estimated payroll for the coming year, then audited (reconciled) after the policy year ends. Underreporting payroll triggers a large audit bill.

💡 Pro tip: Shop through an independent insurance broker who can quote multiple carriers (Travelers, Hartford, biBERK, NEXT). Get at least 3 quotes. Ask about pay-as-you-go workers' comp — premiums are calculated per payroll run instead of estimated upfront, which helps cash flow.

Set Up Payroll Processing

💰 $20–$150/month base fee + $4–$12 per employee per payroll run⏰ Before the first pay period ends

Options: (a) Full-service payroll providers — Gusto ($40/mo + $6/employee), ADP Run ($59/mo + $4/employee), Paychex ($60/mo + $5/employee) handle direct deposit, tax calculations, quarterly filings (Form 941), year-end W-2s, and new-hire reporting. (b) DIY payroll software — QuickBooks Payroll, Patriot Software ($17/mo + $4/employee) require you to manage deadlines but cost less. (c) Manual payroll — not recommended for anyone without accounting training; one missed tax deposit = 2-15% penalty.

💡 Pro tip: Gusto and similar platforms auto-file Forms 941, 940, W-2, W-3, and state quarterly reports. For a first-time employer, this automation alone is worth the monthly fee — the penalty for missing a single Form 941 deadline is 5% of the unpaid tax per month (max 25%).

FUTA (Federal Unemployment Tax) Setup

💰 6% on the first $7,000 of wages ($420 max per employee) — but you typically get a 5.4% credit for paying state unemployment tax on time, making the effective rate 0.6% ($42 per employee per year)⏰ Deposited quarterly when liability exceeds $500; Form 940 filed annually by January 31

FUTA is an employer-only tax — you cannot deduct it from employee wages. The 6% rate applies to the first $7,000 of each employee's annual wages. The 5.4% credit (FUTA credit reduction) brings the net rate to 0.6% IF your state's unemployment fund has not borrowed from the federal government. States that have outstanding federal unemployment loans (credit reduction states) may have a reduced credit — check IRS Schedule A (Form 940) annually.

💡 Pro tip: Your payroll provider handles FUTA calculation and deposit automatically. If doing payroll manually, deposit via EFTPS when your cumulative FUTA liability reaches $500 in a quarter.

Collect I-9 and W-4 Forms

💰 Free (forms from USCIS.gov and IRS.gov)⏰ I-9: Within 3 business days of the employee's start date. W-4: Before the first paycheck

Form I-9 (Employment Eligibility Verification): Employee completes Section 1 on or before the first day of work. You (the employer) complete Section 2 within 3 business days by physically examining original identity and work authorization documents (passport, driver's license + Social Security card, etc.). Remote employers can use the DHS-authorized alternative procedure (live video interaction + document review within 3 business days). Form W-4 (Employee's Withholding Certificate): Employee completes this to tell you how much federal income tax to withhold. [2026 note: The 2026 Form W-4 may use the redesigned format effective for 2026 — check irs.gov for the latest version.]

💡 Pro tip: I-9 violations: $281-$2,789 per form for paperwork errors; $627-$25,076 per worker for knowingly hiring unauthorized workers. Do not accept photocopies of documents as originals for Section 2.

Report New Hire to State Directory

💰 Free — online reporting portal in all states⏰ Within 20 calendar days of hire (some states require 7-10 days)

Federal law (Personal Responsibility and Work Opportunity Reconciliation Act of 1996) requires all employers to report new hires to their state's New Hire Directory within 20 days of the hire date. This is used for child support enforcement and to detect improper unemployment benefit claims. Most payroll providers include this automatically. If DIY, each state has an online portal for reporting.

💡 Pro tip: Multi-state employers must report new hires to the state where the employee works (not where the business is headquartered). Some states require reporting within 7 calendar days — check your state's specific deadline.

Post Required Workplace Notices

💰 $20–$80 for an all-in-one compliance poster⏰ Before the employee's first day on-site (or within first week for remote)

Federal law requires posting notices covering: Fair Labor Standards Act (FLSA) minimum wage, Family and Medical Leave Act (FMLA) if you have 50+ employees, Equal Employment Opportunity (EEO), Occupational Safety and Health Act (OSHA), and USERRA (military leave rights). State-specific posters cover workers' comp, state minimum wage, paid sick leave mandates, and anti-discrimination laws. Electronic posting is acceptable for exclusively remote employees (must be on a regularly accessed internal system).

💡 Pro tip: Buy a laminated all-in-one poster that covers federal + your state (sold by LaborLawCenter, J.J. Keller, or similar). Update whenever the minimum wage or law changes — outdated posters still count as non-compliance.

Set Up Employee Benefits (if offering)

💰 Health insurance: $300–$800/month employer contribution per employee (small group plans). Retirement: varies. PTO: ~4-6% of salary in cost.⏰ Health insurance open enrollment: within 30-90 days of hire if offered upon eligibility

Not legally required for employers with under 50 full-time equivalent employees (ACA employer mandate applies at 50+ FTEs). But for competitive hiring: (a) Small group health plans through SHOP marketplace or private brokers. (b) QSEHRA (Qualified Small Employer HRA) — reimburse employees for individual health insurance premiums tax-free, up to $6,150 single / $12,450 family (2024 limits, indexed). (c) ICHRA (Individual Coverage HRA) — more flexible than QSEHRA, no dollar limit, employees must have qualifying individual coverage. (d) Retirement: SEP IRA or SIMPLE IRA are the easiest for first-time employers with 1+ employees. (e) Commuter benefits, FSA, dental, vision — optional but common.

💡 Pro tip: If you offer health insurance, you may qualify for the Small Business Health Care Tax Credit (Form 8941) — up to 50% of premiums paid if you have fewer than 25 FTEs with average wages under ~$58,000, and you pay at least 50% of premiums.

Register for State Disability & Paid Family Leave (if applicable)

💰 CA: 1.1% SDI (employee-paid). NY: 0.5% PFL + NY DBL ($0.14/$100 payroll). NJ: varies by plan.⏰ At the time of state tax registration (Step 2)

California, New York, New Jersey, Rhode Island, Hawaii, Massachusetts, Washington, Connecticut, Oregon, Colorado, Maryland, Delaware, Minnesota, and DC have mandatory paid family leave, paid medical leave, or temporary disability insurance programs. Most are employee-paid through payroll deductions (not an employer cost), except Hawaii TDI where the employer pays at least half. But the administrative burden and reporting requirements are yours.

💡 Pro tip: Some payroll providers handle these deductions automatically. Confirm with your provider which state programs they support — smaller providers may not handle CO FAMLI or WA PFML.

Calculate Your Full Employee Cost

Every industry and state has different cost structures. Run the numbers for your specific situation:

Calculate Employee Total Cost →Calculate Labor Burden Rate →

Frequently asked questions

Can I hire someone as 1099 first and convert to W-2 later?+

You can, but it's risky. If the IRS (or state) later determines the worker should have been classified as W-2 from the start, you owe back taxes, penalties, and interest for every quarter they worked. See our 1099 vs W-2 Decision Checklist to determine if the role qualifies as contractor work. If you're unsure, hire as W-2 from day one — the cost of getting it right is far less than the cost of getting it wrong.

What is the minimum salary I need to pay myself and my employee?+

For yourself as an S-Corp owner: the IRS requires 'reasonable compensation' for services rendered. There is no fixed dollar amount — it's based on comparable salaries for your role, experience, and location. An S-Corp owner paying themselves $24,000 while taking $200,000 in distributions will trigger an audit. For your employee: minimum wage laws apply (federal $7.25/hr; many states higher — CA $17.00/hr, WA $16.66/hr, NY $16.00/hr for 2026). Overtime rules (1.5×) for non-exempt employees working over 40 hours/week. DOL salary threshold for exempt employees in 2026: estimated ~$58,000/year (increased from the 2024 rule).

Do I need an HR department or HR software?+

For 1-5 employees: no. A payroll provider (Gusto, ADP) handles most compliance, and you handle the rest with checklists. An employee handbook (not legally required but highly recommended) clarifies policies and reduces disputes. For 10+ employees: HR software (BambooHR, Rippling, or similar) centralizes onboarding, time-off tracking, and performance management. At 15+ employees: federal anti-discrimination laws (Title VII, ADA, ADEA) apply — you need documented policies and procedures.

What if my employee works remotely from another state?+

You must register for payroll taxes in the state where the employee physically works — not where your business is based. This means: withhold state income tax for the employee's state, pay SUTA to the employee's state, buy workers' comp covering that state, and comply with that state's employment laws (minimum wage, paid sick leave, overtime rules). This creates significant administrative complexity. A remote employee in New York while your business is in Florida means you now have to deal with NY state payroll tax registration, NY income tax withholding, NY SUTA, and NY's paid family leave program.

What happens if I can't afford to pay my employee?+

You are personally liable for employee wages. If your business is an LLC or corporation, the corporate veil does not protect you from wage claims under the FLSA — owners, officers, and managers can be held personally liable for unpaid wages. If the business is closing, employee wages and benefits are priority claims in bankruptcy (ahead of most other creditors). The last paycheck must be paid within the state's required timeframe (typically the next regular payday or immediately upon termination in some states like California). Failure to pay final wages on time triggers waiting time penalties — in California, up to 30 days of wages as a penalty.