Hiring Your First Employee? Don’t Make These Expensive Payroll Mistakes

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Mar 18, 2026

Hiring your first employee brings new tax and compliance responsibilities that can quickly become costly. Learn the key differences between W-2 and 1099 classification and why control matters. Discover essential registrations and payroll setup steps you must do before running payroll. Find out why payroll software and timely tax deposits are critical to avoid penalties and keep your business scalable.

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INSIGHT

Control Determines W2 Versus 1099

Employee vs contractor classification depends primarily on who controls the relationship and work.
Control covers hours, pay structure, tools provided, and how the work is performed, which points toward W-2 status if the business dictates them.

ADVICE

Plan For Payroll To Cost 8 To 12 Percent More

Budget payroll at roughly 8–12% above gross wages to cover employer payroll taxes and unemployment.
Example: a $50,000 salary typically costs about $55,000 before benefits because of employer FICA and unemployment taxes.

ADVICE

Complete Registrations Before Running Payroll

Register your business with an EIN and get state withholding and unemployment account numbers plus workers' compensation before running payroll.
These are one-time setups per state and you cannot legally process payroll without them.

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You’ve hired your first employee… Now what? Hiring your first employee introduces a new layer of tax responsibility, compliance, and systems that many business owners are not prepared for. You are now managing payroll taxes, filings, labor laws, and deadlines that carry real penalties if handled incorrectly.

In this episode, we break down exactly what happens after you hire your first employee so you can avoid costly mistakes and set your business up to scale the right way. We cover the difference between W2 employees and 1099 contractors, the real cost of payroll taxes, how to stay compliant with state and federal requirements, and why payroll software is a must.

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Chapters

(01:00) Employee vs Contractor: What the IRS Looks At
Classification comes down to control. Who sets hours, pay, tools, and how the work gets done determines W2 vs 1099.

(04:00) The Payroll Tax Reality Business Owners Miss
Hiring an employee makes you a tax middleman responsible for withholding and paying multiple taxes.

(06:00) What You Need Before Running Payroll
You need an EIN, state withholding accounts, unemployment accounts, and workers’ compensation set up first.

(07:30) Why Payroll Software Is Non-Negotiable
Payroll software handles tax calculations, filings, deposits, and compliance to avoid penalties and costly mistakes.

(09:30) The Risk of Missing Payroll Tax Deadlines
Late payments trigger immediate penalties and interest, and payroll mistakes can shut down businesses.

(12:00) Benefits Without Breaking the Bank
Health reimbursement arrangements and simple retirement plans offer affordable ways to provide benefits.

(14:30) Hiring Employees in Other States
Out-of-state hires require additional registrations, tax accounts, and possible foreign entity filings.

(16:00) Key Takeaways
Hiring is a growth milestone. Set up systems correctly, use payroll software, and build processes that allow your business to run without you.

Need payroll software? We recommend https://gusto.com

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Mike Jesowshek, CPA – Founder and Host of Small Business Tax Savings Podcast
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🎙 ABOUT THE PODCAST
The Small Business Tax Savings Podcast is your go-to resource for cutting-edge tax strategies to help entrepreneurs legally slash their tax bills. Hosted by Mike Jesowshek, CPA, this show breaks down complex tax topics into clear, no-fluff insights so you can keep more of your hard-earned money.