Required Documents and Compliance Checklist for Hiring Your First Employee

You’ve reached that pivotal moment in your business journey-you’re ready to hire your first employee. It’s exciting, nerve-wracking, and if you’re like most small business owners, a little overwhelming. The compliance maze for your first W-2 employee can feel impossible, but it doesn’t have to be.

Who this applies to: This guide covers requirements for all U.S. employers hiring W-2 employees, not independent contractors. Compliance with these rules is mandatory for any business moving from sole proprietorship to employer status.

I’ve seen countless entrepreneurs get tripped up at this stage-missing critical paperwork that delays onboarding or exposes them to penalties. According to the IRS, 33% of employers make payroll errors annually, often from incomplete documentation during that crucial first hire.

One restaurant owner thought he was ready to hire a cook, only to realize he lacked workers’ compensation insurance. That cost him three additional weeks and nearly lost a talented candidate. This is why platforms like DocuStrong exist-turning reactive compliance tracking into a proactive system. Proper document management and expiration tracking prevent these scenarios.

Ready to streamline your first employee onboarding? Start your free trial and get all your compliance documents organized before day one.

Documents you should prepare before their first day:

• Employer Identification Number (EIN) from the IRS
• State tax registration confirmation
• Workers’ compensation insurance policy
• Form W-4 (for employee to complete)
• Form I-9 (to verify within 3 days of hire)
• Payroll system setup and testing
• Employee handbook outlining policies

In this guide, you’ll learn which documents and certifications you need to legally hire your first employee-federal and state requirements, industry-specific certifications, and practical compliance strategies. By the end, you’ll have a clear roadmap and actionable checklist for your first hire.

What is the First Step to Legally Hiring an Employee? (Documents Needed Before Hiring)

Key takeaway: You must obtain an EIN, register with state tax agencies, secure workers’ compensation insurance, and establish compliant payroll systems before your employee starts work.

Before you can legally employ anyone, you must obtain an EIN from the IRS, register with your state’s tax agency, secure workers’ compensation insurance, and set up compliant payroll systems.

In simple terms: These documents are your business’s employment license. Just as you need a business license to operate, you need these to legally put someone on payroll. Skip one, and penalties can reach thousands of dollars.

Federal Requirements: The Non-Negotiables

These apply to every U.S. employer, regardless of industry or location.

Every U.S. employer must complete these federal requirements regardless of industry, location, or business size.

Employer Identification Number (EIN): This is your business’s tax ID number. According to the IRS, you can apply online at no cost in less than 15 minutes.

Form I-9 (Employment Eligibility Verification): The USCIS requires you to complete Form I-9 for each new hire within three business days of their start date. This verifies identity and work authorization-keep the completed form on file for the longer of three years after the date of hire or one year after the date employment ends.

Form W-4 (Employee’s Withholding Certificate): Your employee fills this out to tell you how much federal income tax to withhold from their paycheck. Keep this form in your records, but don’t file it with the IRS.

New Hire Reporting: Within 20 calendar days of hiring (most states), you must report the new employee to your state’s New Hire Directory. Some states require shorter deadlines-as few as 7 days. This requirement helps locate parents for child support enforcement.

State-Specific Requirements: Where Location Matters

State requirements vary significantly-what’s mandatory in one state may not exist in another.

State requirements vary significantly. Research your specific state’s requirements thoroughly-this is where many first-time employers stumble. For example, California requires state disability insurance and extensive workplace posters, while Texas has no state income tax but strict workers’ comp requirements.

State Tax Registration: Most states require you to register with their tax agency to withhold state income tax. Some states, like Florida and Texas, don’t have state income tax, simplifying this step.

State Unemployment Insurance Tax (SUI): Register with your state’s unemployment insurance program. Rates vary by state and industry, typically 1-6% of wages up to a specified cap. Contact your state’s unemployment insurance office for registration details.

Workers’ Compensation Insurance: Nearly every state requires businesses with employees to carry workers’ compensation insurance, which protects employees injured or ill due to work. Premiums typically range from 1-5% of payroll, though high-risk industries like construction can exceed 10%. Check your state’s workers’ compensation board for specific rules.

State-Specific Posting Requirements: Each state mandates workplace posters informing employees of their rights-minimum wage, discrimination laws, workers’ comp, and unemployment insurance. Some states require industry-specific posters for restaurants or construction sites. Check your state labor department website for current information and required posters.

Industry-Specific Certifications: When Your Business Needs More

Beyond basic employment documents, certain industries require additional licenses, certifications, and background checks.

Depending on your industry, you may need additional certifications or permits before hiring employees who’ll perform certain tasks.

Most commonly required certifications:

• Food Service: Food handler permits, food manager certifications
• Healthcare: Professional licenses, CPR/First Aid, HIPAA training, background checks
• Childcare: Criminal background checks, fingerprinting, CPR certification
• Construction: Trade licenses (electrician, plumber), OSHA 10/30 training
• Transportation: Driver’s licenses, CDL for commercial vehicles, DOT medical certifications

Verify these credentials are current and maintain copies in your files.

How to Set Up Essential Employment Systems

Setting up compliant systems from day one prevents costly corrections and penalties later.

Beyond individual documents, you need functioning systems for ongoing compliance-payroll, recordkeeping, and reporting.

Establishing a Compliant Payroll System

Choose a payroll method that matches your comfort level with tax compliance and administrative work.

Setting up payroll correctly from day one prevents costly corrections later. You have three main options: doing it yourself with accounting software, using a dedicated payroll service, or working with a professional employer organization (PEO).

For first-time employers completing their first employee payroll setup, I typically recommend a payroll service. Companies like ADP, Paychex, or Gusto handle tax calculations, withholdings, filings, and payments automatically. Yes, they charge fees (usually $30-150 per month plus $5-15 per employee), but the peace of mind and time savings are worth it when you’re learning the ropes.

If you choose to handle payroll yourself, you must:

1. Calculate gross pay and withhold federal income tax (based on W-4)
2. Calculate and withhold Social Security and Medicare taxes (FICA-7.65%)
3. Withhold state and local taxes where applicable
4. Make timely tax deposits (new employers typically begin as monthly depositors)
5. File quarterly Form 941 and provide annual W-2 forms by January 31
6. File annual Form 940 (FUTA rate is 6.0% on first $7,000, typically reduced to 0.6% with state credit)
7. Consider using the Social Security Number Verification Service to confirm SSN accuracy

Case Study: Oregon Boutique Owner

A boutique owner in Oregon decided to handle payroll herself to save money on her first two employees. Within three months, she miscalculated overtime, underwithheld state taxes, and missed a quarterly 941 deadline. The penalties totaled significantly more than a year of payroll service fees. She switched to Gusto and hasn’t looked back.

Creating a Document Management System

Organize and secure employee documents from day one to avoid compliance gaps and audit stress.

From day one, you’re collecting sensitive employee information-Social Security numbers, bank account details, medical information, performance reviews. You need a secure, organized system for storing and retrieving these documents.

In simple terms: Think of document management as your business’s filing system. Whether physical or digital, it needs clear organization, secure access controls, and reliable backup. Proper document management isn’t just good practice-it’s often legally required.

Don’t let document chaos derail your first hire. Get started with DocuStrong and keep all employee documents secure and organized from day one.

What to keep and for how long: Form I-9 must be kept for three years after hiring or one year after termination, whichever is later. Tax records: four years minimum. Payroll records: three years per Department of Labor requirements.

Digital vs. paper storage: Digital document management offers searchability, automatic expiration alerts, role-based access, and disaster recovery. Use encrypted storage compliant with data privacy regulations. Compliance and security features should include encryption, backups, and audit trails.

This is where a platform like DocuStrong’s document management system becomes invaluable, storing all employee documents with expiration tracking that alerts you when renewals are due.

Understanding Your Ongoing Compliance Obligations

Hiring creates ongoing obligations managed consistently throughout the year.

Tax deposits and filings: Make federal tax deposits monthly or semi-weekly (new employers typically start monthly). Miss a deposit, and penalties accrue at 2-15% of the unpaid amount. File Form 941 quarterly and Form 940 annually. Provide W-2s by January 31.

With expiration tracking, you receive automatic alerts before renewals-workers’ comp, permits, licenses-preventing compliance gaps.

Essential Pre-Hire Checklist for First-Time Employers

Use this checklist to ensure you’ve covered all the bases before your employee’s first day. Check each item off as you complete it-don’t skip steps, as each one protects you legally and operationally.

This checklist covers most businesses, but always verify requirements specific to your state and industry. When in doubt, consult with an employment attorney or HR professional-the cost of a consultation is far less than the cost of non-compliance.

Use DocuStrong’s document management platform to track every item on this checklist with automated reminders and secure storage. Start your free trial today.

What You Don’t Need for Your First Employee

Many first-time employers worry they need expensive systems they don’t actually require yet.

Understanding what you don’t need is just as important as knowing what you do. Here’s what you can skip:

• Full HR department: One employee doesn’t require HR staff. Handle basic functions yourself or outsource specific needs.
• Expensive benefits packages: Health insurance and retirement plans help attract talent but aren’t legally required for most small businesses.
• Professional Employer Organization (PEO): PEOs make sense for multiple employees but are overkill for one.
• Enterprise HR software: Simple payroll software and basic document storage work perfectly. Upgrade as you grow.

Focus resources on required compliance documents and systems. Add nice-to-have benefits as your business expands. Prioritize legal compliance documents over optional benefits in your initial budget.

Common Mistakes First-Time Employers Make (And How to Avoid Them)

Avoid these expensive pitfalls that trip up most new employers during their first hire.

Learning from others’ mistakes is cheaper than making them yourself. Here are the most common pitfalls I’ve seen first-time employers encounter.

Misclassifying Workers as Independent Contractors

Independent contractors seem simpler-no payroll taxes, no workers’ comp, no withholding. But millions are misclassified annually, with penalties including back taxes, interest, and fines reaching tens of thousands per worker.

The IRS uses three tests: behavioral control, financial control, and relationship type. If you control when, where, and how someone works and provide their tools-they’re likely an employee.

The fix: When in doubt, classify as employees. If using contractors, document the relationship clearly and ensure they maintain independent businesses.

Forgetting About Workers’ Compensation Insurance

Many first-time employers don’t realize workers’ comp is required from the first employee in most states. Millions of nonfatal workplace injuries occur annually in private industry. Without coverage, you’re personally liable for medical costs, lost wages, and legal fees-potentially hundreds of thousands of dollars.

The fix: Research your state’s requirements before hiring. Get quotes from multiple carriers. Yes, it costs 1-5% of payroll (higher for high-risk industries), but it’s non-negotiable. Factor this into your hiring budget.

Inadequate Recordkeeping

Casual record systems-scattered folders, spreadsheets, emails-fail during audits. Department of Labor penalties start at $272 per missing I-9 form and escalate.

The fix: Implement proper document management from day one with standardized filing and compliance tracking that automates expiration alerts.

Stop relying on memory and spreadsheets. Try DocuStrong free and automate your compliance tracking with intelligent reminders and secure document storage.

Missing Tax Deadlines and Deposits

Payroll tax deposits must happen within 1-3 days of paying employees, not quarterly. The IRS doesn’t accept excuses. Penalties: 2% (1-5 days late), 5% (6-15 days), 10% (16+ days), 15% (10+ days after IRS notice).

The fix: Use a payroll service for automatic deposits, or set up EFTPS with calendar reminders. Treat payroll taxes as top priority.

Overlooking Required Workplace Posters

States require workplace posters covering minimum wage, equal employment, FMLA, OSHA, unemployment insurance, and workers’ comp. Missing or outdated posters result in fines of hundreds to thousands per violation.

The fix: Visit your state labor department website and DOL poster page for required postings. Many states offer free downloads. Display in a common area and review annually.

How Document Management Technology Simplifies Compliance

Modern platforms transform compliance from reactive scrambling to proactive management.

Traditional compliance tools-file cabinets, spreadsheets, calendars-are labor-intensive and error-prone. Modern document management platforms offer a smarter approach.

Centralized Storage with Proactive Expiration Tracking

Centralized storage puts all employee documents in one secure location-certifications, licenses, insurance, tax forms, training records. No more hunting through files.

Automatic alerts notify you 30, 60, or 90 days before documents expire. Expiration tracking prevents fires rather than putting them out with automated expiration alerts.

Team collaboration features let you assign responsibilities and control access. Analytics and reporting tools provide instant audit visibility.

Transform your compliance from reactive to proactive. Start your free DocuStrong trial and see how automated tracking simplifies employee document management.

Frequently Searched Terms: Quick Answers

People also search for:

• Hiring employees checklist: See our comprehensive pre-hire checklist above
• First employee payroll setup: Use a payroll service like Gusto or ADP for your first hire
• Documents needed to hire employees: Form W-4, Form I-9, new hire reporting, plus state-specific forms
• Small business hiring compliance: Includes federal (IRS, DOL), state (unemployment, workers’ comp), and industry requirements

State and Federal Lookup Resources

Use these authoritative resources to find requirements specific to your location and industry:

• IRS Small Business Resources - Federal tax requirements, EIN application, employer obligations
• Department of Labor State Contacts - State labor departments, wage laws, poster requirements
• USCIS Form I-9 - Employment eligibility verification requirements and forms

Frequently Asked Questions

How much does it cost to hire your first employee?

Beyond salary or wages, expect to pay an additional 20-30% of compensation for employer-related costs. This includes the employer portion of FICA taxes (7.65% of wages for Social Security and Medicare), federal unemployment tax (FUTA, which is 6.0% on the first $7,000 of wages, but is typically reduced to an effective rate of 0.6% when full state credit applies), state unemployment insurance (typically 1-6% of wages, varying by state and industry), workers’ compensation insurance (typically 1-5% of payroll, higher in high-risk industries like construction), and potential benefits like health insurance or retirement plans. For example, if you hire an employee at $40,000 annually, you might spend an additional $8,000-12,000 on employment taxes, insurance, and benefits.

Do I need a lawyer to hire my first employee?

Not legally required, but consulting an employment attorney for employee handbooks and state requirements can prevent costly mistakes. Many attorneys offer fixed-fee consultations ($500-1,500). Alternatively, payroll services and PEOs often provide HR guidance.

Can I hire someone before getting an EIN?

No, you must obtain an EIN before hiring. The EIN is required to report taxes to the IRS. Apply online for free and receive your number immediately-don’t wait until you find a candidate.

What happens if I miss a payroll tax deadline?

Automatic IRS penalties: 2% (1-5 days late), 5% (6-15 days), 10% (16+ days), 15% (10+ days after IRS notice). Interest accrues on unpaid taxes. Pay immediately to minimize penalties, and consider switching to a payroll service that handles deposits automatically.

Do I need an employee handbook for just one employee?

Not legally required, but highly recommended. A handbook clarifies expectations, explains policies, and provides legal protection. Even a basic 10-15 page handbook covering essential policies protects both you and your employee. Refine and expand it as you grow.

Taking the Leap: Your Next Steps

Hiring your first employee is a significant milestone. Compliance requirements seem daunting-EINs, registrations, forms, insurance, filings. But with proper preparation and systems, you’ll navigate these successfully.

Begin weeks before hiring. Get the fundamentals right: EIN, state tax registration, workers’ comp, payroll system, and scalable document management. Compliance isn’t a burden-it’s an investment in your business’s longevity and your employees’ wellbeing.

Start Your Hiring Journey with Confidence

Ready to hire without compliance headaches? DocuStrong manages employment documents, tracks certifications, monitors compliance, and enables team collaboration-all in one platform.

Start your free trial and take the stress out of hiring your first employee.

For more resources on small business compliance and hiring, read our comprehensive Business Compliance Document Management Guide, visit our Small Business Resources category, or return to the DocuStrong homepage to learn more about how DocuStrong transforms compliance management for businesses of all sizes.