Hiring Your First Employee: A Freelancer's Guide

Hiring your first employee turns you from a freelancer who sends invoices into an employer who also runs payroll. Those are different jobs with different rules. Invoicing is how your clients pay you; payroll is how you pay your own people, with tax withheld and paid over on a fixed schedule whether or not clients have paid. This guide sets out the US federal steps in the order you meet them, with the deadline and official source for each, a worked cost and break-even example, the UK equivalents in brief, and where invoicing fits once you have staff.

Scope: US federal rules for a business hiring one employee in 2026, plus a short UK section. State rules differ and are only flagged, not listed. This is general information, not legal or tax advice; check with the IRS, your state agency or an adviser before you act. Last reviewed: October 27, 2026.

What do you need before your first payday?

All sources accessed October 27, 2026.

Are you hiring an employee or a contractor?

Decide this first, because everything else follows from it. The IRS treats a worker as an employee when you have the right to control what will be done and how it is done, even if you never exercise that control. It weighs three kinds of evidence: behavioral (do you direct how the work is done?), financial (who supplies tools, sets the method of payment and carries the expenses?) and the type of relationship (is it ongoing, are there employee-style benefits, is the work central to your business?). See the IRS page Independent contractor (self-employed) or employee? (accessed October 27, 2026).

In practice, compare two hires a design freelancer might make:

• A production assistant who works set hours you choose, uses your software licences, follows your checklists and does nothing but your client work is very likely an employee.
• An illustrator who quotes per project, works for other studios, uses their own equipment and decides how to produce the artwork is more likely a contractor.

The difference shows up in paperwork. An employee goes on payroll with tax withheld. A contractor sends you an invoice and you pay it; you generally don't withhold tax, though you may need to file Form 1099-NEC. For payments made after December 31, 2025 that form is required once you pay a contractor $2,000 or more in the year, up from $600 (IRS Instructions for Forms 1099-MISC and 1099-NEC, accessed October 27, 2026). If status is unclear, either side can file Form SS-8 for an IRS determination, which the IRS says can take at least six months. The independent contractor glossary entry covers the invoicing side.

What does a first employee cost? A worked example

Worked example: you hire one full-time employee on a $52,000 salary, paid every other Friday ($2,000 gross per paycheck). The federal employer costs for 2026 come from IRS Publication 15 (accessed October 27, 2026).

Your employee also has 6.2% and 1.45% withheld from their own pay, plus income tax under their W-4. That money is theirs, held in trust by you until you deposit it; it is not a cost to you, but missing the deposit is a penalty risk for you.

Now set the cost against what the hire lets you bill. Suppose the employee bills clients at $75 an hour. To cover the federal minimum cost alone they need $56,020 ÷ $75 = about 747 billable hours a year, roughly 14.4 hours a week over 52 weeks. If they bill 1,200 hours, revenue is 1,200 × $75 = $90,000, leaving $33,980 before state taxes, insurance, benefits, equipment and the time you spend managing. Run the same sum with your own bill rate, a realistic number of billable hours and your state's quoted rates before you post the job.

Step 1: Get an EIN and decide how you will run payroll

Apply for an Employer Identification Number on IRS.gov. It is free, and if the application is approved the IRS issues the number immediately online. The online tool has set hours (Monday to Friday 6 a.m. to 1 a.m. Eastern, shorter at weekends) and allows one EIN per responsible party per day. A single-member LLC that hires must use its own name and EIN to report and pay employment taxes, even if it uses your Social Security number for income tax.

Then choose how payroll will run. Federal law doesn't require a payroll provider, but a provider such as ADP or Gusto calculates withholding, files the returns and makes the deposits for you. InvoiceQuickly is not a payroll product and doesn't connect to ADP, Gusto or any other payroll provider, so payroll runs entirely in the provider you choose.

Step 2: Register with your state before the first payday

Expect to register for state income tax withholding (where the state has an income tax) and state unemployment insurance, and to arrange workers' compensation coverage where your state requires it. The forms, rates and wage bases are set state by state, so start with your state's labor department and revenue department websites. State unemployment tax also matters federally: the 5.4% FUTA credit depends on paying it in full and on time.

Step 3: Collect Form W-4 and complete Form I-9

Ask the new employee for a signed 2026 Form W-4 when they start, and apply it from the first wage payment. For Form I-9, the employee completes Section 1 no later than their first day of work for pay, and you can't ask anyone to complete it before they have accepted a job offer. You complete Section 2 within three business days of the start date: for someone starting on a Monday, by Thursday. Never send I-9s to USCIS. Keep each one for three years after the hire date or one year after employment ends, whichever is later (USCIS M-274, retaining Form I-9, accessed October 27, 2026).

Step 4: Report the new hire to your state

Federal law requires you to report each new employee to the State Directory of New Hires within 20 days of hiring, with the employee's name, address and Social Security number, the date they first worked for pay, and your name, address and EIN. States may set a shorter deadline and may fine you up to $25 for each failure, or up to $500 where an employer and employee conspire not to report. A rehire counts as a new hire if they were away for at least 60 consecutive days. Many states accept a copy of the W-4 as the report.

Step 5: Deposit taxes and file returns on schedule

As a new employer you are a monthly schedule depositor for your first calendar year, because your lookback period counts as zero. Deposit each month's withheld income tax plus both halves of Social Security and Medicare by the 15th of the next month, electronically. File Form 941 each quarter (April 30, July 31, October 31 and January 31), Form 940 for FUTA annually, and give the employee a Form W-2. For 2026 wages, W-2s are due to employees and the Social Security Administration by February 1, 2027, because January 31 falls on a Sunday.

How does hiring work in the UK?

The UK steps are different in name and order. GOV.UK's Employing staff for the first time guide lists: check the person is an employee rather than a contractor, check you can afford the National Minimum Wage, National Insurance, sick pay and pension costs, make the workplace safe, register as an employer and set up PAYE, check your workplace pension duties, and get Employers' Liability insurance. Two timing rules to note:

• Register with HMRC before the first payday to get your employer PAYE reference, but not more than two months before you start paying people (GOV.UK: Register as an employer).
• Check the right to work before employment starts. If you employ someone who isn't allowed to work and you didn't carry out a correct check, you can face a civil penalty (GOV.UK: Check a job applicant's right to work).

All accessed October 27, 2026. Rates and thresholds change each April, so take them from GOV.UK at the time you hire.

How is payroll different from invoicing contractors?

They move money in opposite directions on different schedules:

Keep two numbers apart. The rate you pay your employee belongs in payroll; the rate you bill the client goes on the invoice. If Jamie, your new assistant, spent 64 hours on bookkeeping support for Harbor Dental in March, the client invoice reads 64 × $75.00 = $4,800.00. Jamie's $25 hourly pay and the tax withheld from it never appear on it.

In InvoiceQuickly you can type or say "Invoice Harbor Dental for 64 hours of bookkeeping support in March at $75 an hour, due in 30 days" and the AI fills in an editable draft that you check before saving. The Free plan covers 5 invoices, 5 clients and 3 AI drafts. Pro ($9 a month) adds unlimited invoices, email delivery, scheduled reminders, payment links through your own Stripe or PayPal account and five team seats. A new hire can join as a member, who can view and create invoices but can't change settings, billing or connected payment accounts. On Pro, the new hire can also log their hours with a timer or manual entries, and you can bill selected unbilled time into a draft invoice you review. InvoiceQuickly doesn't run payroll or process the bills contractors send you.

Will client payments arrive before payroll is due?

Usually not at first, and this is where first hires go wrong. Worked example: Jamie starts on Monday, March 2, 2026, with paydays every other Friday. You bill March's work on March 31 on Net 30 terms, so the earliest that money arrives is April 30. Between March 2 and April 30 you pay four paychecks (March 13 and 27, April 10 and 24): 4 × $2,000 = $8,000 in wages plus $612 employer Social Security and Medicare (7.65% of $8,000), and the first monthly tax deposit falls due on April 15. That is at least $8,612 out before the first client payment comes in, and more if the client pays late.

Ways to narrow the gap: bill twice a month instead of monthly, ask for a deposit on new projects (see the deposit invoicing guide), shorten payment terms with new clients, and keep at least two months of payroll in cash before the start date. The small business cash flow guide covers forecasting in more detail.

When is hiring an employee the wrong move?

• The work is a defined project with an end date. A contractor who invoices per deliverable may be the honest and cheaper answer, provided they really are independent.
• Your income swings month to month and you have no cash buffer. Payroll is due on payday whether or not clients pay.
• You can't yet describe a full week of work. Ten hours of overflow is usually a contractor or a part-time arrangement, not a full-time hire.
• You want help but not a manager's role. Employment brings record-keeping, deposits, filings and HR obligations every pay period. If that admin would push out your billable work, the break-even sum above gets worse.

What mistakes do first-time employers make?

• Calling an employee a contractor. The label in the contract doesn't decide it; the IRS looks at control and the relationship as a whole.
• Unpaid internships at a for-profit business. The Department of Labor applies a seven-factor "primary beneficiary" test; if the business is the main beneficiary, the intern is an employee owed at least minimum wage (DOL Fact Sheet #71, accessed October 27, 2026).
• Paying below the applicable minimum wage. The federal minimum is $7.25 an hour; where a state rate is higher, you must comply with both laws, so the higher rate applies (DOL: Minimum wage, accessed October 27, 2026).
• Missing the I-9 or new-hire deadlines. Both run from the start date, not from the first payday.
• Treating withheld tax as spare cash. It must be deposited on schedule, and late deposits carry penalties.

Frequently asked questions

Should my first hire be W-2 or 1099?

That depends on the facts, not your preference. If you control how, when and where the work is done and it is ongoing and central to your business, the IRS is likely to see an employee (W-2). A worker who runs their own business, serves other clients and controls the method is more likely a contractor (1099). File Form SS-8 if you need an official answer.

How long does it take to get an EIN?

If you apply online at IRS.gov during the tool's opening hours and the application is approved, the EIN is issued immediately. There is no fee.

Do I have to offer health insurance to one employee?

Not under federal law. The Affordable Care Act's employer shared responsibility rules apply to applicable large employers, which had at least 50 full-time employees, including full-time equivalents, on average during the prior year (IRS, accessed October 27, 2026). Some states have their own rules, so check yours.

How much does a first employee cost on top of salary?

At least 7.65% for employer Social Security and Medicare, plus federal unemployment tax (usually $42 per employee a year after the state credit). State unemployment tax, workers' compensation and any benefits come on top and vary by state, job and choice. On a $52,000 salary the federal minimum alone is $56,020.

Can a single-member LLC hire employees?

Yes. For employment taxes the IRS treats the LLC as a separate entity, so it needs its own EIN and must report and pay employment taxes under its own name and EIN.

What is the minimum wage for my first employee?

The federal minimum wage is $7.25 an hour. Many states and some cities set higher rates, and you must pay the highest one that applies.

Does InvoiceQuickly run payroll?

No. InvoiceQuickly creates and tracks the invoices you send to clients. Use a payroll provider or your accountant for wages, withholding and payroll filings.

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Related reading: how to invoice for the first time, what to include on an invoice, quarterly tax payments, freelance tax deductions and pricing your services. More on the InvoiceQuickly blog, or start free.