How to hire (and pay) your first employee

Growth is a great problem for any business to have – consider these steps to growing in a smart and legal way.

In Tennessee there are more than 500,000 non-employer establishments, which is almost four times the number of employer establishments in the state. That’s a lot of solopreneurs! With a vibrant economy comes tremendous opportunity for growth. That means many entrepreneurs are thinking about making their first hire.

A word of advice: This is no simple task, so proceed with caution.

In today’s gig-economy many services can be outsourced. This work may include accounting, design, marketing and public relations. Deciding what tasks to hire for and what to outsource comes down to whether the work lies within your business’s main areas of strength and whether those functions are needed on a regular basis.

Distinguishing between employees and independent contractors can impact your bottom line, as this affects how you withhold taxes and avoid costly legal consequences. Learn the differences before hiring your first employee. The Equal Employment Opportunity Commission created a guide for making this determination.

If you’re still ready to hire your first employee, flexible candidates who are used to smaller environments often do best in a small business/start-up environment. In many cases, the ideal first employee must operate with a great deal of autonomy and won’t require too much hand-holding. Ask for referrals from your friends, industry colleagues and advisers, such as your accountant, attorney, board members and organization members. If one of your advisers or colleagues recommends somebody, they’ve done some of your employee screening work already. Start-ups typically find their first 10 or 15 employees this way.

When you make that first hire, remember that adding employees impacts your bottom line, as it affects how you withhold taxes and avoid costly legal consequences. Being an employer carries a number of new obligations. Before hiring the right person, you’ll need to create a plan for paying employees. Here are 7 steps to starting off on the right foot:


  1. Obtain an employer identification number: Your employer identification number (EIN) is used on tax documents you submit to the IRS. To get an EIN, file IRS Form SS-4. Download from
  2. Register with your state’s labor department: Go to for a list of state unemployment insurance tax agencies.
  3. Set up a payroll system to withhold taxes: You’ll need to withhold a portion of each employee’s income and deposit it with the IRS, and also make Social Security and Medicare tax payments to the IRS. For more information, get IRS Publication 15, Circular E, Employer’s Tax Guide from the IRS website at
  4. Have each employee fill out IRS Form W-4, Withholding Allowance Certificate: You can find this form at You should ask employees to fill out a new W-4 form each year if they want to change their allowances.
  5. Fill out Form I-9, Employment Eligibility Verification for each new employee: You can obtain the form online at Note that these filled out forms should be kept in a separate I-9 folder for all employees.
  6. Report each new employee to your state’s new hire reporting agency: To find the name and address of your state’s new hire reporting agency, see the State New Hire Reporting page at the Administration for Children & Families website (
  7. File IRS Form 940 each year: You must file IRS Form 940 to report your federal unemployment tax for any year in which you paid wages of $1,500 or more in any quarter or for any year in which an employee worked for you in any 20 or more different weeks of the year. You can find the form at


Your first hire is a huge step for your business. Take the time to do things the right way, and you’ll make sure that your first employee will be a successful addition to your growing business.

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