How to Hire Your First Employee as a Solo Contractor
Going from working solo to bringing on your first employee is one of the bigger transitions in a contractor's business. It changes your paperwork, your taxes, your insurance requirements, your cash flow, and how you structure your days.
It's not complicated once you understand the steps. But there are more steps than most contractors expect, and skipping any of them creates real problems. This guide walks through how to hire your first employee as a solo contractor: the legal setup, the costs, the paperwork, and the operational changes you'll need to make before they show up for day one.
Before You Hire: Know the True Cost
The biggest mistake solo contractors make when thinking about hiring is planning for the wage and forgetting everything else.
According to the Society for Human Resource Management, the average cost per hire in 2026 is $4,700, and that's just recruitment. Once someone is on your payroll, the real ongoing costs stack up fast.
When you hire an employee at $25 per hour, your actual cost is closer to $30 to $35 per hour once you add employer-side payroll taxes, workers' compensation premiums, and administrative overhead. Here's what those add-ons look like:
Employer payroll taxes: As the employer, you pay 6.2% toward Social Security, 1.45% toward Medicare, and federal unemployment taxes (FUTA) on the first $7,000 of wages, roughly $420 per employee per year. You also pay state unemployment taxes (SUTA), which vary by state and your unemployment claims history.
Workers' compensation insurance: Required in most states the moment you have an employee. For a mid-risk trade like general carpentry or plumbing, expect $4 to $8 per $100 of payroll. On a $50,000 salary, that's $2,000 to $4,000 per year in additional insurance cost.
Benefits and paid time off: Even if you offer no formal benefits package, any paid holidays or vacation you give have a real cost. Two weeks of paid vacation on a $25-per-hour employee costs roughly $2,000 per year.
For a $50,000 salary employee, your true annual cost including taxes, workers' comp, and basic PTO could be $60,000 to $70,000. That's the number you need to use when you're deciding whether you can afford to hire.
Step 1: Get an Employer Identification Number (EIN)
You need an EIN before you can pay anyone as an employee. This is your business's tax ID number, separate from your personal Social Security Number.
Apply at irs.gov. It's free, takes about 10 minutes online, and issues immediately. Do this first. You'll need it for payroll accounts, tax filings, and state registrations.
Step 2: Register with Your State
Every state has different requirements, but most require you to register as an employer with your state's labor or taxation department before you run your first payroll. This sets up your state unemployment tax account (SUTA) and may trigger other state-level registrations depending on where you operate.
Search for "[your state] new employer registration" to find the right agency. This is usually a one-time setup.
Step 3: Get Workers' Compensation Insurance
In nearly every state, carrying workers' compensation insurance is mandatory the moment you employ anyone, even one person for a single day. Operating without it is illegal and exposes you personally if a worker gets hurt on your job.
For trade contractors, workers' comp premiums are calculated as a rate per $100 of payroll. The rate varies by job classification. A roofing employee costs more to insure than a finish carpenter. Contact your insurance broker before the hire date.
Step 4: Set Up Payroll
You can run payroll manually, but most contractors shouldn't. The calculations are specific, the filing deadlines are rigid, and the penalties for late or incorrect filings are real.
Payroll software runs about $40 per month for basic plans and handles withholding calculations, direct deposit, and tax form generation. This is money well spent. Options include Gusto, QuickBooks Payroll, and OnPay.
Payroll taxes are deposited on a schedule the IRS assigns based on your total tax liability. Most new employers deposit monthly. Miss a deposit and you get a penalty. Get the software, have it run the deposits, and don't try to do this in a spreadsheet.
Step 5: Collect the Required Paperwork
Before your new hire's first day, you need:
Form W-4: The employee fills this out so you know how much federal income tax to withhold from their pay. Updated 2020 version is required.
Form I-9: Employment eligibility verification. You verify the employee's identity and authorization to work in the US by reviewing documents (passport, driver's license plus Social Security card, etc.). You don't send this to anyone; you keep it on file and make it available if the Department of Labor ever audits you.
State withholding form: Many states have their own withholding form, similar to the W-4. Check your state's requirements.
Direct deposit authorization: If you're paying via direct deposit, collect their bank account and routing numbers.
Step 6: Define the Job and How Work Gets Assigned
This part gets skipped because it feels soft, but it matters for both productivity and legal protection.
Write down:
- What the employee's job is
- How they'll receive and track assignments
- What tools and equipment they're responsible for
- How their time gets recorded
A clear job description protects you if there's ever a wage dispute or workers' comp question. It also makes your hiring conversation easier because you can tell candidates exactly what the work looks like.
The scheduling and calendar tools in Bit & Grain let you assign jobs to employees directly, so they see their schedule, the job details, and the client address without you having to text it all to them every morning. That transition from solo to team operations is smoother when your job management system has multi-person scheduling built in.
Step 7: Understand the Employee vs. Subcontractor Distinction
A lot of solo contractors default to classifying everyone as a 1099 contractor to avoid payroll overhead. This is risky.
In 2026, the Department of Labor proposed a new rule using an "economic reality" test to determine worker classification. The IRS also has its own tests. The general rule: if you control when, where, and how someone works (they show up at your job site, they use your tools, they work your hours), they're probably an employee regardless of what your paperwork says.
Misclassifying an employee as a contractor can result in back taxes, penalties, and interest for every year the misclassification happened. The IRS and state labor agencies audit this specifically.
If someone is working for you regularly, under your direction, on your projects, treat them as an employee.
If you're using someone for a specific skilled task outside your normal work (like hiring an electrician sub on a general contracting job), a 1099 sub relationship likely makes sense. The subcontractor management tools in Bit & Grain help you track COIs, assignments, and payments per sub so the distinction stays clear in your records.
Step 8: Consider Your Scheduling and Administrative Load
Hiring your first employee doubles the administrative surface area of your business. You now have to:
- Track their time accurately for payroll
- Assign them jobs in a way they can execute without you being present
- Review their work on completed jobs
- Handle any client issues that arise when you're not on site
Most solo contractors underestimate this shift. The employee saves you field hours, but creates office-side work you weren't doing before.
Build your administrative system before you hire, not after. A field service management tool that handles scheduling, job details, customer communication, and time tracking for multiple people will save you hours every week.
Bit & Grain's scheduling and calendar tools support team scheduling so you can dispatch your employee to jobs, track job status, and see the full picture of your operation in one place. At $29/month, it's far less than the time cost of managing all of that manually.
What It Actually Looks Like After the First Hire
The first 90 days of having an employee are typically the hardest. You're calibrating. They're learning how you want things done. Jobs that you could do in four hours might take them six.
Build buffer into your estimates and schedule during this period. Don't commit to a job-per-day pace that requires the new hire to perform at your level immediately.
After that ramp period, a good hire frees you to take on more work, handle more client relationships, and spend time on the parts of the business that don't need your field skills.
The contractors who grow a solo shop into a real business are almost always the ones who hire deliberately, build systems before the hire, and understand the true cost going in.
How Bit & Grain Helps
Running a team, even a team of two, requires a different set of tools than running solo. Job assignments need to be clear. Schedules need to be visible to everyone. Client communications shouldn't fall through the gaps when you're on one job and your employee is on another.
Bit & Grain is built for exactly this stage: the small trade shop moving from one person to two or three. See how the platform handles scheduling and team coordination, or explore what general contracting looks like on the platform.
Managing Compliance Ongoing
Hiring isn't a one-time event. There are ongoing compliance requirements once you have employees.
Payroll tax deposits: Federal payroll taxes (income tax withholding, Social Security, Medicare) must be deposited on a schedule the IRS assigns. Most new employers deposit monthly, by the 15th of the following month. Falling behind on payroll tax deposits triggers penalties that compound quickly. Use payroll software that handles this automatically.
Quarterly filings: Form 941 is filed quarterly, reporting wages paid and taxes withheld. It's due April 30, July 31, October 31, and January 31. Missing these deadlines triggers penalties.
Annual filings: At year-end, you prepare W-2 forms for employees (due to employees by January 31) and file W-3 with the IRS. You also file Form 940 for federal unemployment taxes.
State requirements: Most states require quarterly state unemployment tax filings. Some states have additional requirements (disability insurance, paid family leave contributions, etc.) that vary by location.
This is the ongoing administrative reality of having an employee. Payroll software handles most of it automatically. The key is getting it set up correctly from day one so deposits and filings happen on schedule.
When to Consider a Payroll Service vs. Software
Two practical options for handling payroll as a small contractor:
Payroll software (DIY): You enter hours, the software calculates withholding, generates pay stubs, makes deposits, and produces tax forms. Cost: roughly $40 to $80 per month for one employee. Platforms like Gusto, QuickBooks Payroll, and OnPay handle the mechanics well.
PEO or payroll service bureau: A Professional Employer Organization handles all payroll and HR compliance on your behalf. More expensive ($100 to $200 per month for one employee) but almost entirely hands-off. Worth considering if you have compliance concerns or plan to add more employees.
For a first hire, payroll software is the right call for most solo contractors. It's affordable, the setup is simple, and it handles the deposit and filing schedules that trip people up.
The Bottom Line
Hiring your first employee as a solo contractor requires more setup than most contractors expect, but the steps are manageable. Get your EIN. Register with your state. Get workers' comp. Set up payroll software. Collect paperwork. Define the job.
Understand the true cost: a $25-per-hour employee costs you $30 to $35 per hour all-in once taxes, insurance, and overhead are counted. Price your work accordingly.
Build your administrative system before the hire. Assign jobs clearly. Track time and work completion. And use a field service management tool that supports multi-person operations from day one.
The transition from solo to first-hire is worth doing. It's just worth doing right.