Hiring Your First Employee: The Compliance Checklist Most Owners Skip

Most owners get this backwards

Most people think hiring means making an offer and running a first paycheck. The compliance reality is different: before you can legally run that first paycheck, you need workers comp insurance, a payroll account, and a signed I-9. The sequence matters, and skipping steps creates liability that follows the business — and the owner personally — for years.

This guide covers the actual mechanics: what to do before the offer, what to do on day one, and what to do in the first 30 days. In rough order.

Before you make the offer

These four things need to exist before you hire anyone:

1. Get an EIN (if you don't have one)

Payroll requires an EIN — you can’t withhold and deposit employment taxes without one. If you’ve been operating as a sole prop under your SSN, get an EIN now at IRS.gov/ein. It’s free and takes five minutes.

2. Get workers comp insurance

California requires workers comp before your first employee’s first day. Not after. Not once they’re established. Before day one.

How to get it: contact a commercial insurance broker, or use the embedded workers comp through Gusto (powered by AP Intego — they quote and bind during your payroll setup). For most small businesses, annual premiums run 1–5% of payroll depending on industry. Higher-risk industries (construction, landscaping) pay more.

3. Set up a payroll service

Don’t try to run payroll manually. Employment tax deposits have specific schedules (see payroll deposit rules), the forms are numerous, and one mistake triggers penalties. A payroll service costs $50–120/month and handles everything automatically.

The three most common for small businesses:

• Gusto — Best for small businesses new to payroll. Clean UI, embedded workers comp, excellent onboarding for employees. ~$46/month + $6/employee.
• Rippling — Better if you need HR features (benefits, devices, apps). More powerful but more complex. ~$8/employee/month + base fee.
• QuickBooks Payroll — Best if you already use QuickBooks Online heavily. Direct integration, but less polished than Gusto. ~$50/month + $6/employee.

4. Register with California’s EDD

You’ll need an employer payroll tax account with the California Employment Development Department (EDD) to pay state income tax withholding and state unemployment insurance (SUTA). Register at edd.ca.gov within 15 days of paying $100 or more in wages. Your payroll service will prompt you for the account number during setup.

Day one: paperwork that can’t wait

Form I-9 — Employment Eligibility Verification

This is not optional and not skippable. The I-9 verifies that your employee is legally authorized to work in the United States. Here’s how it works:

• Section 1 — Employee fills this out on or before their first day. Provides name, address, date of birth, citizenship status, and signature.
• Section 2 — You (the employer) fill this out within three business days of the start date. You physically examine the employee’s documents and record them. You don’t keep copies (optional), but you record what you saw.

Keep the I-9 for three years from the date of hire, or one year after the employee leaves — whichever is longer. Store them separately from your general HR files — ICE can audit them independently.

Form W-4 — Employee’s Withholding Certificate

The employee fills out a W-4 to tell you how much federal income tax to withhold from their paycheck. The 2020+ version of the W-4 is simpler than the old one — most employees just fill in Steps 1 and 5 (name, address, filing status, signature) and the payroll software handles the rest.

California equivalent: Form DE 4. Same concept for state income tax withholding. Your payroll service will collect both during employee onboarding.

Within the first 20 days: new hire reporting

California requires employers to report all new hires to the state within 20 days of the date of hire. This helps the state track child support obligations and unemployment insurance.

Report at: edd.ca.gov(New Employee Registry). You’ll need the employee’s name, address, SSN, date of hire, and your EIN. Gusto and most payroll services submit this automatically — confirm it’s enabled in your settings.

First 90 days: establishing the payroll rhythm

What you owe on top of the wage

Every dollar of wages generates additional employer tax obligations. For a quick reference: at a $40,000/year wage, the employer owes roughly $3,060 in FICA taxes (employer share), $42 in FUTA, and $500–2,000 in workers comp premiums depending on industry. That’s before state unemployment (SUTA) rates, which vary. See the employee cost calculator for the full picture.

The mistakes that create real problems

• Skipping the I-9. Ignorance isn’t a defense. ICE audits happen and the fines are substantial.
• Classifying employees as contractors to avoid payroll. California’s ABC test is strict. If you control the work, provide the tools, or the person works exclusively for you — they’re likely an employee. The back taxes, penalties, and interest on misclassification can be devastating.
• Paying cash without withholding. This is tax fraud. The IRS and EDD can reconstruct unreported wages from bank deposits.
• Using payroll taxes for operations. Employee withholding is trust fund money — it belongs to the government the moment you withhold it. Spending it creates personal liability through the Trust Fund Recovery Penalty.
• Missing the new hire report deadline. California’s $24 fine per missed report seems small — until you’ve missed 50 employees and it adds up.