Hiring your first employee
Employee or contractor is decided by who controls the work. For an employee: a W-4 and an I-9 on day one, the state's new-hire report within 20 days, and registrations before the first payday.
Northwind opened on September 1, 2026 with two hires: Priya Shah, operations manager, and Marcus Lee, warehouse associate. Before either is paid, three things have to be true: each is really an employee, the paperwork for each is on file, and Northwind is registered to withhold and pay tax where they work. The core lesson on people drew the map. This one walks it, with dates.
Employee or contractor is decided by the work
Worker classification isn't a choice the company makes in the contract. For federal employment tax the IRS asks whether the business has the right to control what is done and how — the common-law test — and weighs the evidence in three groups. A worker who is an employee under it goes on payroll whatever the agreement calls them.
Two other tests can reach a different answer, and passing one doesn't pass the others. The Fair Labor Standards Act decides who is owed minimum wage and overtime with an "economic reality" test: is the worker economically dependent on the business, or in business for themselves? The Department of Labor proposed a new version of its rule in February 2026, so check its status before relying on either version. And several states apply a stricter ABC test, usually for unemployment insurance and sometimes for everything.
Wrong
Marcus signs a contractor agreement and a W-9, so he's a contractor.
Right
Marcus works set shifts in Northwind's warehouse, indefinitely: he's an employee, with a W-4 and an I-9.
The label is one fact among many. The work decides, and a misclassified worker's taxes land on the company.
Before the first day, and the first week
Step 1: Register as an employer
An EIN, a state withholding account where the employee works (if the state has an income tax) and a state unemployment account. The core lesson on registrations covers the order; the provider can't file in a state it has no account number for.
Step 2: Collect the W-4, and the state's certificate
The employee's Form W-4 sets federal income tax withholding. Northwind keeps it, and produces it only if the IRS asks. A state with an income tax may want its own certificate, such as California's DE 4.
Step 3: Verify they may work in the US
The employee completes Section 1 of Form I-9 by the first day of work. Northwind examines their documents and completes Section 2 within three business days: for a September 1, 2026 start, by Friday, September 4, 2026. The form is kept on file, not mailed to anyone.
Step 4: Report the hire to the state
New-hire reporting: name, address, SSN, start date and Northwind's EIN to the state's directory of new hires, within 20 days — by September 21, 2026 — or sooner if the state sets a shorter window. Many states take a copy of the W-4 with the employer's details added.
Step 5: Insure the work
Workers' compensation coverage, under the state's rules. In a few states it can only come from the state's own fund — a monopolistic state fund.
Step 6: Set them up in payroll
Salary, pay schedule, bank details and the W-4 go into the payroll provider before the first run. Northwind pays monthly, on the 25th, for the whole month: the first payday is Friday, September 25, 2026.
September 1, 2026
Priya and Marcus start; Section 1 of each I-9 and each W-4 completedW-4, I-9
September 4, 2026
Section 2 of each I-9 completedI-9
September 21, 2026
Both reported to the state directory of new hires
September 25, 2026
First payroll
Hire an employee
- Good at
- The company can direct the work, the hours and the tools
- No classification exposure, and options can be granted under the employee plan
- Watch for
- Payroll from the first paycheck: withholding, the employer's taxes, deposits and returns
- Registration in the state where the person works, before the first payday
- Best for
- Work the company directs, ongoing, at the core of the business
Engage a contractor
- Good at
- No withholding: a W-9 before paying and a 1099-NEC at year end
- Starts and ends with the project
- Watch for
- The company may control the result, not the method
- Wrong if the facts look like employment, whatever the contract says
- Best for
- A defined project, done the contractor's way, by someone in business for themselves
Classification follows the work, not the paperwork. Once it's employment: W-4 and I-9 on day one, I-9 Section 2 within three business days, the state's new-hire report within 20 days, and registrations before the first payday.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 42 U.S.C. §653a(b)(2)(A) (opens in a new tab)State Directory of New Hires — the employer's reportFree to read
- IRS guidance
- IRS Pub. 15-A (2026), §2 (opens in a new tab)Employee or independent contractor: the common-law rulesPDF · Free to read
- IRS Pub. 15 (2026), §2 (opens in a new tab)Who are employees — common law, and corporate officersPDF · Free to read
- IRS Pub. 15 (2026), §9 — IRS review of requested Forms W-4 (opens in a new tab)The employer keeps the W-4PDF · Free to read
- IRS Pub. 15 (2026), Reminders — New hire reporting (opens in a new tab)New hires: the W-4, the I-9 and the state registryPDF · Free to read
- Federal agency guidance
- US DOL, NPRM RIN 1235-AA46 (Feb. 26, 2026) (opens in a new tab)Employee or independent contractor under the FLSA — the 2026 proposed ruleFree to read
- State authority
- Cal. EDD, Form DE 4 (2026) (opens in a new tab)California Employee's Withholding Allowance Certificate (DE 4) — a state certificate beside the federal W-4PDF · Free to read
- Official form
- Form W-4 (2026) (opens in a new tab)Form W-4, Employee's Withholding CertificatePDF · Free to read
- Form I-9 Instructions (01/20/25) (opens in a new tab)Form I-9, Employment Eligibility Verification — instructionsPDF · Free to read
- Background reading — not an authority
- Wikipedia, “Payroll” (opens in a new tab)PayrollFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Worker classificationDeciding whether a worker is an employee or an independent contractor — federally by the common-law control test (behavioral, financial and relationship facts), in some states by the stricter ABC test. It decides who withholds and pays employment taxes
- ABC testA state test presuming a worker is an employee unless the hiring entity proves all three: (A) free from its control, (B) work outside the usual course of its business, and (C) customarily engaged in an independent trade — California (AB 5), Massachusetts, and New Jersey for unemployment
- Form W-4The form a new employee gives the employer to set federal income tax withholding — filing status, the two-jobs checkbox, credits, other income, deductions and extra withholding. Kept by the employer, not sent to the IRS unless it asks. A state with an income tax may use its own certificate, such as California's DE 4
- Form I-9The Department of Homeland Security form proving a new hire may work in the US. The employee completes Section 1 by the first day of work; the employer examines documents and completes Section 2 within three business days. Kept on file, never filed with the government
- New-hire reportingThe employer's report of each new employee — name, address, SSN, start date and the employer's EIN — to the State Directory of New Hires where the employee works, within 20 days of hire or sooner if the state says so. It feeds child support enforcement
- Voluntary Classification Settlement ProgramThe IRS program letting an employer prospectively reclassify contractors as employees by paying 10% of one year's employment tax liability, computed at the reduced §3509 rates — no interest or penalties, and no audit of the prior classification. Applied for on Form 8952
- Monopolistic state fundA state workers' compensation fund that is the only insurer allowed — North Dakota, Ohio, Washington and Wyoming — so coverage cannot be bought privately (Ohio and Washington permit self-insurance)Convention
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Contractor or employee? Classification for startupsContractor or employee depends on control, not the contract. The IRS test, state rules, 1099s, payroll registration and the cost of getting it wrong.
- Registering in a new state: remote hires and nexusA remote hire or nexus in a new state means foreign qualification, payroll tax accounts and maybe a sales tax permit. What to register, in what order.
- Form 1099-NEC for startups: threshold, deadline, e-filingWho gets a 1099-NEC, the new $2,000 threshold, why a W-9 comes first, what goes on a 1099-K instead, and the deadlines, penalties and state copies.
- Form 1099-NECThe IRS form that reports what you paid a US contractor for services. For payments made in 2026, you file one for each contractor paid $2,000 or more in the year (the IRS can adjust that for inflation from 2027); for 2025 payments the threshold was $600. Payments to corporations (other than for legal services), and payments made by card or through a payment processor, generally don't need one.
- TaxIdInputEIN, SSN, VAT and GST numbers with per-scheme format checks, masked at rest.