You've decided to hire. Your first employee. And then it hits you: the offer letter you drafted in Google Docs might be a legal liability dressed up as an email.
I've been on both sides of this moment. I've hired as a founder and I've watched half a dozen founder friends stumble through their first W-2 hire. The pattern is always the same: everything gets handled except the paperwork that actually carries legal weight. And the legal steps for hiring your first startup employees are not complicated, but they are sequential — skip one and the ones after it don't stick.
Here's what actually matters, in the order that matters.
Key Takeaways
- You cannot legally pay anyone until you have an EIN — everything else depends on it.
- The employee-vs-contractor decision is the single highest-risk call you'll make, and misclassifying can trigger penalties going back years.
- Form I-9 must be completed within three business days of the start date, not "whenever you get to it."
- Most state obligations (unemployment insurance, new-hire reporting) are invisible until you register — nobody sends you a reminder.
- Your offer letter is not a contract by default. If you need enforceability, say so explicitly.
The legal steps for hiring your first startup employees, in order
Think of this as a dependency chain. Each step unlocks the next, and doing them out of sequence means redoing work.
Step 1: Get your EIN before you do anything else
The Employer Identification Number comes from the IRS and it's free. You can apply online and get it same-day in most cases. Without an EIN you cannot set up payroll, cannot file quarterly returns, and cannot open a business bank account that any payroll provider will accept.
If you incorporated through a service, check whether they already applied for one on your behalf. I've seen founders apply for a second EIN because they didn't know the first existed — that's a mess to unwind.
One concrete detail: the name on the EIN application must match your legal entity name exactly, including "LLC" or "Inc." A mismatch creates friction months later when you file your first 941.
Step 2: Decide employee or contractor — and be honest about it
This is where startups get hurt. A 1099 contractor who reports to you, works your hours, and uses your equipment is not a contractor in the eyes of the IRS or most state labor agencies. Several states use an "ABC test" that presumes worker status is employment unless three conditions are all met — most importantly, that the worker is free from your control and does work outside your usual course of business.
I watched a two-person startup reclassify four "contractors" after a state unemployment audit and end up owing back payroll taxes plus penalties for the prior year. The number was not catastrophic for them — roughly the cost of a mid-level hire's annual salary — but it landed at exactly the wrong moment in their runway.
My opinion, and I'll defend it: if you're going to direct their daily work, hire them as an employee. The tax savings on 1099 look nice on a spreadsheet and evaporate the moment someone files a claim.
Step 3: Register with your state, not just the feds
Nobody tells you this clearly enough. Your EIN handles federal obligations. Your state wants its own registrations, and they vary meaningfully:
- State employer/withholding account — required before you can remit state income tax withholding
- State unemployment insurance — a separate account in most states, with its own rate assigned to you as a new employer
- New-hire reporting — you generally must report each new hire to the state within a short window (often 20 days) for child support enforcement purposes
- Workers' compensation — mandatory in nearly every state once you have employees, though thresholds vary
The new-hire reporting requirement is the one everybody forgets. It's unglamorous, it's a form, and skipping it can generate a penalty notice for something you didn't know existed.
Step 4: Set up payroll properly, or outsource it
You have three realistic paths:
| Approach | Best for | What it handles | Watch out for |
|---|---|---|---|
| DIY payroll software | 1–2 employees, one state | Calculations, filings, W-2s | You still own every deadline |
| Payroll service (PEO-lite) | 3–10 employees, multi-state | Filings, tax remittance, compliance calendar | Monthly fee per employee adds up |
| Full PEO | 10+ employees, benefits needed | Everything including health insurance | You lose some control over benefits design |
For a first hire, I'd go with the middle option. Not because DIY is wrong — it genuinely works for one person in one state — but because the cost of a single missed quarterly filing in penalties and interest usually exceeds a year of payroll service fees.
The paperwork with actual deadlines attached
Some forms are administrative. Some have clocks on them. These are the ones with clocks.
Form I-9: three business days, no exceptions
Every employee hired in the US must have a Form I-9 on file. The employee completes Section 1 by their first day of work. You complete Section 2 — verifying identity and work authorization documents — within three business days of the start date.
"Business days" is not a suggestion. During a period of high hiring volume, I once had a start date fall on a Thursday before a long weekend and had to scramble to get Section 2 done by Tuesday. That's a genuinely tight window, so build document verification into your onboarding checklist rather than treating it as an afterthought.
Note what you do not do: you don't specify which documents the employee provides. They choose from the acceptable list. Insisting on a specific document is a compliance violation in itself.
Form W-4 and state withholding
The federal W-4 tells payroll how much income tax to withhold. Since the redesign a few years back it no longer uses allowances, which confused a lot of founders who remembered the old version. You just need the employee to complete it accurately; you're not responsible for calculating their withholding, but you are responsible for having it on file and entering it correctly.
Some states have their own withholding certificate. Check before your first pay run.
Written agreements — and the trap most founders fall into
Here's a nuance worth money: an offer letter is typically not an employment contract. It outlines terms. If you want enforceability on things like confidentiality, IP assignment, or non-solicitation, those need a separate agreement.
The single most important document in your first-hire packet is the confidential information and invention assignment agreement. Without it, the code or designs your employee produces may not automatically belong to the company. That's a problem every investor will flag in diligence.
Two other documents worth having from day one:
- A written offer letter specifying title, compensation, start date, and at-will status
- An equity grant document if you're offering options — with the vesting schedule and exercise terms spelled out in plain language, not buried
What you do not need at hire one is a lengthy employee handbook. It can come later. But you do want a one-page acknowledgment of key policies — attendance, expense, and expected conduct — signed and dated.
Questions founders ask about first-hire compliance
What if my first hire lives in another state?
This is common now, and it's more work than hiring locally. You generally need to register as an employer in the employee's state as well as your own — that means a state withholding account, unemployment insurance registration, and often a registered agent. Some payroll services handle multi-state registration for you. Others don't. Ask before you sign.
Do I need a lawyer to hire my first employee?
You don't need one to file forms. You probably do need one to review your equity grant and your IP assignment agreement. Those two documents get expensive to fix retroactively, and cheap to get right the first time. Everything else, a good payroll provider and a compliance checklist will cover.
What happens if I skip steps?
Mostly silence, for a while. Then a notice. The riskiest gaps — misclassification and missing I-9s — are the ones that surface during an audit or a former employee's claim, often a year or more after the fact. The silence is not proof you got away with it.
The part nobody puts in a checklist
Every guide tells you to get the EIN and file the I-9. Almost none tell you that the legal foundation of your first hire is really about one judgment call: whether the person in front of you is an employee or something else. Everything downstream — the taxes, the insurance, the filings — is bookkeeping. That one call is a legal decision with a price tag attached.
So make it deliberately. Write down why you classified the role the way you did, date it, and file it. You may never need that note. But if you do, it's the difference between a defensible position and a story about how you read some blog post once.
The paperwork is the easy part, honestly. It's the decision underneath it that deserves a slow afternoon.
