The jump from zero employees to one is a huge one. There’s a ton to consider here, from the company culture you’re going to start developing to the specific responsibilities of that first hire.
A lot of your work here depends on your company, your product/service, and your growth goals. But there are two categories where we see a lot of founders need support in their early-stage hiring. As you bring on your first employees, make sure you understand the applicable employment law and have a robust plan for managing early employees’ compensation.
Employment law
Hiring even one employee at your company opens you up to a wide range of new requirements. Only hiring contractors can help you get around some of the compliance to-dos here, but be careful you don’t misclassify workers. Since this is a particularly risky area, let’s focus on it first.
Employee classification
Employee classification is a major issue for any company, even a pre-seed or seed-stage one.
You can hire someone as either an employee or a contractor. The category you choose here affects everything from your tax reporting forms (1099 for contractors, W-2 for employees) to the laws that apply to that worker.
The U.S. Department of Labor (DOL) has a handy guide to help you figure out what kind of hiring you need to do. Generally, if the person is in business for themselves and can make their own decisions (e.g., decline a project from you), you’re probably safe to classify them as a contractor. If you assign them work and decide how and when they need to do it, they’re probably an employee.
Employees get more protections from employment laws, so they’re generally more work for companies to manage. Sticking with contractors as long as you can might make it easier to scale.
Note, though, that some states are trickier than others. California has particularly stringent contractor laws, for example.
Make sure you really understand the requirements that apply. If you misclassify someone as a contractor when they should be an employee, you could land in legal trouble and on the hook for financial penalties. The money you saved by not paying for a benefits package almost certainly isn’t worth it.
Once you classify even one person as an employee, your company is suddenly subject to a wide range of laws.
Laws for employers
Not understanding the employment laws that apply to your company can get expensive fast. In a lot of states, for example, you need workers’ compensation insurance from your very first hire. In New York, if you fail to get that coverage, you get fined $2,000 for every 10 days you don’t have it. We’ve seen clients in the Empire State get letters saying they owe $15,000 in penalties there — all because they didn’t fully understand their requirements.
In short, it’s critical that you know which local, state, and federal employment laws apply to your company before you make your first hire.
Some areas to consider here are:
- Employee identification number (EIN) and state/local registration: The EIN is a federal identifier and requirement to hire employees. Getting your EIN is fairly painless — you can do it online. In a lot of states, you also need to register with the applicable department that manages employers and employees.
- Application/interviewing requirements: Some jurisdictions prohibit employers from asking certain questions on applications or during interviews. Look up what applies to you so you don’t misstep here.
- Workers’ comp insurance: A lot of states mandate that employers carry workers’ compensation from the point of their first hire. This insurance pays for medical attention and time off if an employee gets hurt or sick while doing their job. It’s also a boon to you: since it offers the necessary care, it lowers your risk of getting sued for that injury or illness.
- Minimum wage: There’s a federal minimum wage. Then, on top of that, each state has the power to set its own floor here. A lot of states have higher minimums than the current federal base of $7.25 an hour. The DOL has a map to help you find out what applies. Don’t stop there. Some cities (e.g., San Francisco, Seattle, Los Angeles) have their own higher minimum wage requirements, too. Your accountant should be able to tell you what applies based on where your company and employee(s) are located.
- Sick and family leave: The laws here range widely by state and city. Sometimes, you’re required to pay for sick time. Other times, you just need to let the employee take family leave without it putting their job at risk. In some states, this requirement kicks in once you hit five employees. Again, researching what applies locally helps you make sure you’re compliant. Building any paid leave requirement into your compensation planning also helps you avoid unwelcome surprises there.
- Labor law posters: You might be legally required to post certain notices or posters where your employees can see them.
Clearly, a lot of employer laws hinge on where you’re located. If you’re hiring employees in the same city, this is fairly straightforward.
But if you’re going to hire remote workers, this can get a lot more complicated. If that employee performs work for your company from a different jurisdiction, it’s usually enough to establish a nexus in that jurisdiction. That can be enough to make your company subject to any employer laws that apply to their locale.
Salaries, benefits, and perks — plus payroll considerations
Paying an employee might feel big in and of itself, but a lot of early-stage founders don’t understand just how massive that exchange of money for work really is. You don’t just hand the employee cash or a check (and not because many employees prefer direct deposit). Once you start paying employees, a whole suite of payroll requirements come into play.
Deductions and taxes
For every amount you pay an employee, you’re also responsible for:
- Federal income tax
- State income tax (where applicable)
- Local payroll taxes (where applicable)
- Federal Insurance Contributions Act (FICA) taxes: Medicare and Social Security
- Federal Unemployment Tax Act (FUTA) taxes
- State unemployment insurance (SUI) taxes
For employers, all of this usually adds about 10% on top of the employee’s gross pay.
As with all things we’ve covered so far, what’s required here depends on your jurisdiction. Some cities like New York City and San Francisco add in their own payroll taxes, for example.
Look into your local requirements carefully because this can get complex. To illustrate, Texas doesn’t have income tax, but you’re still required to pay state payroll taxes in the form of unemployment insurance.
Your CPA can help you understand the tax requirements that apply to your company based on where you operate. They can also point out any additional to-dos here, like state unemployment insurance registration.
Non-salary compensation, benefits, and perks
In your company’s early stages, you’re probably not going to be offering a super robust benefits package. Think through ways you can incentivize employees without increasing your overhead. Flex hours or team activities might help you retain employees even while your compensation package is fairly slim.
Remote work can be another attractive perk to employees. To keep things easier for your company from a compliance perspective, you may still want to require employees to work from your city the majority of the time. This prevents them from establishing a nexus somewhere else — and opening you up to a whole new set of compliance requirements.
As you go through your seed stage and Series A, you might also explore offering stock compensation. It’s important to have this and any other perks/benefits clearly outlined in your offer letters and employee agreements.
Capturing everything your company offers — and the requirements around it, like location specifications for remote workers — protects you and gives your team clarity. It’s worth spending time on crafting strong and comprehensive offer letters and employee agreements.
Making payroll and payroll compliance frictionless
If you’re feeling overwhelmed, it’s understandable. Founders have to grapple with a lot as they bring on their first hire, and the to-do list grows alongside your team.
Fortunately, certain software providers have realized this and stepped in to ease some of the biggest pain points here. We partner with several payroll providers and Professional Employer Organizations (PEOs) that can automate a lot of this for you. Using one of these solutions to pay your employees automatically builds in the required taxes and compliance measures.
The solutions we want to highlight here are:
- Gusto – Payroll provider
- Justworks – PEO
- Rippling – Offers both payroll and PEO services
- Trinet – PEO
- Deel – PEO (Specifically for Foreign-Based Workers)
What is a PEO?
A Professional Employer Organization (PEO) helps small and mid-sized businesses manage many of the administrative tasks that come with having employees. When you work with a PEO, your company enters a co-employment relationship where you handle daily operations while the PEO manages payroll, benefits, taxes, and HR compliance.
Because PEOs work with many businesses, they can offer access to large group benefits such as affordable health insurance and retirement plans, which might be too expensive for a small business to obtain on its own.
Payroll Providers vs. PEOs
While both simplify payroll, they serve slightly different needs:
- Payroll providers focus mainly on paying employees, filing payroll taxes, and maintaining compliance. They’re a great fit for small businesses that want to keep HR in-house but need help automating payroll.
- PEOs offer a more comprehensive solution. They become a co-employer and handle payroll plus benefits, workers’ compensation, and HR compliance. This can take a lot off your plate as your company grows
Choosing between a payroll provider and a PEO depends on your business size, budget, and the level of HR support you need. Both options help you stay compliant, save time, and focus on what matters most: growing your business.
These companies we partner with make everything paperless and seamless. You can run payroll in just a few clicks. More importantly, you can rest easy knowing their expertise has been applied to your payroll taxes. These companies handle the required calculations, payments, and reporting to applicable tax authorities.
Plus, since your time is valuable, a payroll platform can deliver notable benefits in this area.
Instead of needing to mail in a cancelled check or manually type in bank account information, these platforms can often automatically connect via a solution like Plaid. They can help you set up pay periods, onboard new employees, and more.
And the experience is equally frictionless for your employees — and from the very start. They can get an emailed offer letter to sign digitally. Once confirmed, the system automatically sends an onboarding email to add their personal info in the portal, including tax details like the amount they want withheld. If you offer optional benefits, they can choose what to opt into, too. And then they get paid with direct deposit.
All of this happens without any extra lift from your team. This frees you up to focus on growing your staff and your company.
Employees 1–10 might seem a little bit early to get started with a payroll provider. But payroll migration can be a huge headache. We’ve seen it take a month, and you risk duplicated filings going to the IRS while you make the changeover. It’s best to set your company up now with a solution that can scale with you and your team.
Support as you scale
As your company grows, some things get easier and some get harder. One thing never changes once you bring on your first employee, though: the human capital in your business means you need to take certain steps. From payroll filings to legal compliance measures, there’s a lot your business needs to do to stay square here.
Ideally, this guide helped you dip your toe into all of it. You still might feel like there are a lot of moving parts here, though — because there are. Bringing the right people and solutions alongside you makes a big difference.
Here at ShayCPA, our team specifically focuses on working with tech startups. That means we have extensive experience with all of the different requirements that come with scaling up your headcount. We can step in to offer guidance and make recommendations to help you stay compliant while setting your company up for success.
As part of that guidance, we again want to highlight our payroll and PEO partners. We’ve chosen to work with these companies because we’ve seen the serious value-add they bring to founders. If you’re looking for help to pay and manage your team — whether that’s your first employee or a whole new wave of hires — we recommend exploring:
If you have any questions, we’re absolutely available to answer them. Because we work with founders from pre-seed to Series A to exit, we should be able to help you get the information you need. Contact our team to book some time with one of our experienced CPAs today.
Disclaimer:
The content provided on this blog is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Reading or accessing this material does not create a CPA-client relationship, nor should it be construed as a substitute for individualized guidance from a qualified professional. While we strive for accuracy, Shay CPA PC makes no warranties—express or implied—about the completeness, reliability, or timeliness of the information, and we expressly disclaim liability for any errors or omissions. You should not act or refrain from acting based on any blog content without seeking the advice of a qualified CPA or other professional who can address your specific circumstances. Links to external resources are provided for convenience only and do not imply endorsement. Shay CPA PC is under no obligation to update this content and disclaims responsibility for decisions made in reliance on it.