# 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.

Source: https://lopifi.com/learn/hiring-your-first-employee
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

---

**How do I hire my first employee and put them on payroll?** 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](https://lopifi.com/md/learn/hiring-employees-and-contractors) drew the map. This one walks it, with dates.

## Employee or contractor is decided by the work

[Worker classification](https://lopifi.com/md/glossary/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.

> “Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.”

— [IRS Pub. 15-A (2026), §2](https://www.irs.gov/pub/irs-pdf/p15a.pdf) (PDF), Employee or independent contractor: the common-law rules

*[Figure: w2 vs 1099]*

Marcus's facts weighed in the IRS's three categories. The weights are an illustration of the weighing, not an IRS score.

| Category | What the IRS looks at | Marcus |
| --- | --- | --- |
| Behavioral control | Instructions on when, where and how to work; training | Priya sets his shifts and how orders are picked and packed |
| Financial control | Who supplies tools and premises; who can make or lose money on the work | Northwind's warehouse, scanner and van. He has no investment and no chance of a profit or loss |
| Type of relationship | Benefits, permanence, whether the work is a key part of the business | Open-ended, and getting orders out is the business |

Marcus, by the IRS's categories.

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](https://lopifi.com/md/glossary/abc-test), usually for unemployment insurance and sometimes for everything.

— [US DOL, NPRM RIN 1235-AA46 (Feb. 26, 2026)](https://www.dol.gov/agencies/whd/flsa/misclassification/2026rulemaking), Employee or independent contractor under the FLSA — the 2026 proposed rule

**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.

**Use case — The designer who is a contractor.** Northwind's logo was designed by a freelancer who quoted a fixed price, worked from her own studio with her own software, chose her own hours and invoiced on delivery. She has other clients and could lose money on the job. That's a contractor: a [Form W-9](https://lopifi.com/md/glossary/form-w-9) before the first payment and a [Form 1099-NEC](https://lopifi.com/md/glossary/form-1099-nec) in January if she crosses the threshold. The AP track handles her.

> **If it was got wrong.** A company that has treated employees as contractors owes the employment tax it didn't withhold or pay, with penalties and interest, plus state unemployment and workers' compensation. Going forward, the IRS's [Voluntary Classification Settlement Program](https://lopifi.com/md/glossary/voluntary-classification-settlement-program) lets an eligible employer reclassify and settle the federal side for part of one year's liability. Reclassify on a date, from that date, and keep the paper.

## Before the first day, and the first week

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](https://lopifi.com/md/learn/ein-and-state-registrations) covers the order; the provider can't file in a state it has no account number for.
2. **Collect the W-4, and the state's certificate.** The employee's [Form W-4](https://lopifi.com/md/glossary/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.
3. **Verify they may work in the US.** The employee completes Section 1 of [Form I-9](https://lopifi.com/md/glossary/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.
4. **Report the hire to the state.** [New-hire reporting](https://lopifi.com/md/glossary/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.
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](https://lopifi.com/md/glossary/monopolistic-state-fund).
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.

Northwind's onboarding for each hire, in the order it's done.

> “Complete Form W-4 so that your employer can withhold the correct federal income tax from your pay.”

— [Form W-4 (2026)](https://www.irs.gov/pub/irs-pdf/fw4.pdf) (PDF), Form W-4, Employee's Withholding Certificate

> “Employees must complete and sign Section 1 of Form I-9 no later than the first day of employment … Complete Section 2 within three business days after the employee's first day of employment.”

— [Form I-9 Instructions (01/20/25)](https://www.uscis.gov/sites/default/files/document/forms/i-9instr.pdf) (PDF), Form I-9, Employment Eligibility Verification — instructions

> “not later than 20 days after the date the employer hires the employee”

— [42 U.S.C. §653a(b)(2)(A)](https://www.law.cornell.edu/uscode/text/42/653a), State Directory of New Hires — the employer's report

- **September 1, 2026** — Priya and Marcus start; Section 1 of each I-9 and each W-4 completed (W-4, I-9)
- **September 4, 2026** — Section 2 of each I-9 completed (I-9)
- **September 21, 2026** — Both reported to the state directory of new hires
- **September 25, 2026** — First payroll

Northwind's September, from the first day to the first payday.

**Hire an employee**
- Pro: The company can direct the work, the hours and the tools
- Pro: No classification exposure, and options can be granted under the employee plan
- Con: Payroll from the first paycheck: withholding, the employer's taxes, deposits and returns
- Con: 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**
- Pro: No withholding: a W-9 before paying and a 1099-NEC at year end
- Pro: Starts and ends with the project
- Con: The company may control the result, not the method
- Con: 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

Two ways to get work done, as a startup weighs them.

> **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

- [IRS Pub. 15-A (2026), §2](https://www.irs.gov/pub/irs-pdf/p15a.pdf) (PDF) — Employee or independent contractor: the common-law rules (irs)
- [IRS Pub. 15 (2026), §2](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — Who are employees — common law, and corporate officers (irs)
- [US DOL, NPRM RIN 1235-AA46 (Feb. 26, 2026)](https://www.dol.gov/agencies/whd/flsa/misclassification/2026rulemaking) — Employee or independent contractor under the FLSA — the 2026 proposed rule (agency)
- [Form W-4 (2026)](https://www.irs.gov/pub/irs-pdf/fw4.pdf) (PDF) — Form W-4, Employee's Withholding Certificate (form)
- [IRS Pub. 15 (2026), §9 — IRS review of requested Forms W-4](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — The employer keeps the W-4 (irs)
- [Cal. EDD, Form DE 4 (2026)](https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de4.pdf) (PDF) — California Employee's Withholding Allowance Certificate (DE 4) — a state certificate beside the federal W-4 (state)
- [Form I-9 Instructions (01/20/25)](https://www.uscis.gov/sites/default/files/document/forms/i-9instr.pdf) (PDF) — Form I-9, Employment Eligibility Verification — instructions (form)
- [42 U.S.C. §653a(b)(2)(A)](https://www.law.cornell.edu/uscode/text/42/653a) — State Directory of New Hires — the employer's report (statute)
- [IRS Pub. 15 (2026), Reminders — New hire reporting](https://www.irs.gov/pub/irs-pdf/p15.pdf) (PDF) — New hires: the W-4, the I-9 and the state registry (irs)
- [Wikipedia, “Payroll”](https://en.wikipedia.org/wiki/Payroll) — Payroll (reference)

## Read further

- https://lopifi.com/md/startups/contractor-vs-employee
- https://lopifi.com/md/startups/registering-in-a-new-state
- https://lopifi.com/md/startups/form-1099-nec-for-startups
- https://lopifi.com/md/accounting/worker-classification
- https://lopifi.com/md/accounting/1099-nec

- **Track:** [Payroll](https://lopifi.com/md/learn/payroll)
- **Lesson:** Lesson 1 of 8 — 11 min
- **Terms taught:** [Worker classification](https://lopifi.com/md/glossary/worker-classification), [ABC test](https://lopifi.com/md/glossary/abc-test), [Form W-4](https://lopifi.com/md/glossary/form-w-4), [Form I-9](https://lopifi.com/md/glossary/form-i-9), [New-hire reporting](https://lopifi.com/md/glossary/new-hire-reporting), [Voluntary Classification Settlement Program](https://lopifi.com/md/glossary/voluntary-classification-settlement-program), [Monopolistic state fund](https://lopifi.com/md/glossary/monopolistic-state-fund)
- **Previous:** [Running a raise: data room, closing and the wire, Cap table · Lesson 10](https://lopifi.com/md/learn/how-to-run-a-startup-fundraise)
- **Next:** [Gross to net pay, Payroll · Lesson 2](https://lopifi.com/md/learn/gross-to-net-pay)
- **The course:** https://lopifi.com/md/learn