Bringing on your first employee changes your compliance picture more than most business owners expect. Up until now, you’ve been the only one whose taxes, insurance, and paperwork you had to think about. The moment you add someone to payroll, you’re responsible for registrations, insurance, and payroll tax obligations at the federal, state, and city level simultaneously. Get these wrong, and the penalties, especially around workers’ compensation, can be severe enough to threaten the business you’ve spent years building.
This isn’t a scare piece. Every one of these requirements is manageable if you set it up in the right order before day one. The problem most business owners run into isn’t that the rules are impossible to follow, it’s that nobody hands them the sequence, so they find out about a requirement only after they’ve already missed it.
Federal Registration
If you don’t already have one, you need an Employer Identification Number (EIN) from the IRS before you can legally pay anyone. Most business owners already have this from when they formed their LLC or corporation, but if you’ve been operating as a sole proprietor using your Social Security number, this is the first stop.
Once you have an EIN, you need to set up federal payroll tax withholding: income tax, Social Security, and Medicare (FICA) withheld from the employee’s paycheck, plus your employer share of FICA, an amount you pay on top of their wages, not out of their paycheck, and federal unemployment tax (FUTA), which is entirely employer funded.
Get a Payroll Service in Place
Most business owners handle the actual running of payroll through a payroll service (Gusto, ADP, QuickBooks Payroll, and similar) rather than manually, since the withholding calculations and deposit deadlines carry their own penalty exposure if miscalculated or filed late. A payroll service will also handle your federal and state tax deposits and filings automatically once it’s set up correctly.
One benefit worth knowing about: many payroll services offer pay as you go workers’ comp coverage bundled into the platform, where your premium is calculated off actual payroll each run instead of an estimated annual figure you true up later. It’s worth asking your payroll provider whether they offer this before shopping for a policy separately.
New York State Registration
Once you have an employee, you need to register with the NY Department of Labor for state unemployment insurance and withholding tax. This is separate from your federal EIN and requires its own registration process. New York also requires:
- State income tax withholding on every paycheck, calculated using NY’s own withholding tables
- NY unemployment insurance (SUI) contributions, paid entirely by the employer at a rate that starts as a new employer default and later adjusts based on your claims history
Insurance: Workers’ Comp and Disability (DBL)
New York requires workers’ compensation insurance for virtually all employers, even with just one employee, even part time, even if that employee is a family member. There’s no small business exemption most owners assume exists, and there’s no exemption for how few hours the employee works.
The penalty for not carrying it is severe. Fines run up to $2,000 for every 10 day period without coverage, and operating without it is a misdemeanor that can escalate to a felony for repeated or willful violations. Beyond the statutory fine, if an employee gets hurt while you’re uninsured, you lose the liability protection workers’ comp is designed to provide. You become personally exposed to the full cost of their claim: medical bills, lost wages, and everything the policy would have otherwise covered, with no cap.
This is one of the few compliance items on this list where the downside isn’t a fine you can absorb, it’s exposure that can genuinely sink a small business. Get the policy bound and the certificate in hand before the employee’s first day, not after you’ve onboarded them and meant to get around to it.
Alongside workers’ comp, New York also requires Disability Benefits Law (DBL) coverage, a separate short term disability insurance policy that covers non work related injuries and illnesses. It’s a different requirement from workers’ comp, which only covers work related injuries, but the two are commonly bound through the same insurance carrier, which simplifies setup.
Paid Family Leave (PFL)
Paid Family Leave is a separate New York requirement from both workers’ comp and DBL. It’s funded through a small employee payroll deduction rather than an employer cost, and it gives employees paid time off for qualifying family and medical reasons, such as bonding with a new child or caring for a seriously ill family member. Most carriers that write DBL policies also write PFL, so it’s usually set up alongside your disability coverage rather than as a separate search.
Budgeting for the Real Cost
Salary is only part of what an employee actually costs you, and this is the number that catches new employers off guard most often. A commonly used rule of thumb: budget roughly 10% on top of salary for employer side payroll costs. That figure covers the employer share of FICA, SUI, workers’ comp premiums, and PFL/DBL contributions combined.
It can run meaningfully higher than 10% depending on your industry’s workers’ comp rate (a desk job and a physical trade carry very different premiums) and how your unemployment insurance experience rating shakes out over time. But 10% is a reasonable starting estimate when you’re deciding whether a hire pencils out financially.
If you’re budgeting $60,000 in salary, plan for something closer to $66,000 in actual cost once these are layered in, before adding benefits like health insurance if you offer them. Business owners who skip this step and budget salary alone are the ones who find themselves surprised by their actual payroll expense in month one.
Employee Benefits: A Cost That Can Usually Wait
Beyond what’s legally required, some employers choose to offer benefits like a retirement plan or health insurance to attract and keep good employees. These aren’t mandatory for a first hire, but they do add real cost if you offer them. A common approach is to cover roughly half the cost of health insurance premiums, splitting it with the employee rather than covering it in full, as a middle ground that still makes the offer attractive without taking on the full expense.
For most first time employers, this is something that can wait. It’s worth having in the back of your mind as you plan to grow and compete for talent, but it isn’t part of what you need to have set up before your first employee’s start date.
New Hire Reporting
Federal and state law require you to report every new hire to the New York State Department of Labor’s New Hire Registry within 20 days of their start date. This isn’t a formality, it feeds child support enforcement systems directly, and it’s a legal requirement, not optional paperwork you can skip if you’re busy. Most payroll providers handle this automatically as part of onboarding a new employee, but it’s worth confirming it’s actually happening rather than assuming.
I-9 and Employment Eligibility Verification
Every employee, regardless of citizenship status, must complete Form I-9 within three business days of their start date, verifying their identity and eligibility to work in the U.S. You’ll need to review original identity and work authorization documents in person, not copies. Keep completed I-9s on file separately from regular personnel files. They’re subject to their own retention rules and are what federal auditors ask for first if your business is ever reviewed.
One to Watch as You Grow
If you eventually reach 10 or more employees in New York State, you’re required to offer a workplace retirement plan under the state’s Secure Choice Savings Program, or set up your own qualified plan instead. It’s not a first-hire concern, but worth knowing it’s coming as you scale.
Practical Sequence
Before someone’s first day, in this order:
- Confirm your EIN is active, or apply for one if you don’t have it yet
- Register with the NY Department of Labor for withholding and SUI
- Set up a payroll service and confirm whether it offers pay as you go workers’ comp
- Bind your workers’ comp policy and set up PFL/DBL coverage, and have all certificates in hand
- Have I-9 and new hire paperwork ready to complete on day one
- Report the hire to the New Hire Registry within 20 days of their start date
Doing these in sequence, before the offer is accepted and the start date is locked in, avoids the scramble, and the real financial exposure, of trying to backfill compliance after someone is already on payroll and working. The employers who run into trouble here almost never do it out of carelessness. They simply didn’t know the full list existed until something already went wrong.
Meir Spear is a CPA and CFP based in New York City. He specializes in New York City and New York State taxes, working with small business owners on tax planning, entity structuring, and accounting. Schedule a consultation