Hiring Your First Employee: What It Actually Costs

The wage is the smallest number in the deal. Hiring your first employee at $25 an hour is not a $52,000 commitment. It lands somewhere between $61,000 and $72,000, and most of the gap arrives in the first quarter, before the new hire has produced a dollar of billable work.

That gap is where first hires go wrong. The decision usually gets made on a Friday afternoon after a brutal week, on the theory that another set of hands will fix everything. Then the workers’ compensation quote comes back. The state registration takes eleven days. The first payroll run sits well above what the spreadsheet promised, and by month two the owner is doing the same volume of work with a much larger fixed cost underneath it.

What hiring your first employee actually costs

The federal portion is fixed and knowable

Start with the burden rate. That is the percentage you add to a wage to reach the true annual cost. Employer FICA runs 7.65% of wages, split as 6.2% for Social Security and 1.45% for Medicare. Social Security stops at $184,500 in 2026. Medicare has no cap at all.

Federal unemployment tax is 6.0% on the first $7,000 of wages. However, employers who pay their state unemployment tax in full claim a credit of up to 5.4%. That drops the net federal cost to roughly $42 per employee per year.

State costs are where the number moves

Each state sets its own unemployment rate and its own taxable wage base. New employers get a default rate until they build an experience rating. Workers’ compensation moves considerably more. Construction class codes commonly run several dollars per $100 of payroll, so a roofing crew and a low-risk finish trade in the same state can face premiums that differ fourfold.

Because that single line item swings the total more than everything else combined, get a real quote before you make an offer. Not after. The table below breaks down what hiring your first employee actually costs on a $25 hourly rate.

Line item	Illustrative annual cost	Notes
Base wage ($25/hr × 2,080 hrs)	$52,000	The number most owners budget for
Employer FICA (7.65%)	$3,978	6.2% Social Security plus 1.45% Medicare
Federal unemployment (FUTA)	$42	6.0% on the first $7,000, less the 5.4% state credit
State unemployment (SUTA)	$200–$600	Varies by state and experience rating
Workers’ compensation	$2,600–$10,400	Trade class code and state drive this
Paid time off, phone, tools, training	$2,000–$5,000	Rarely budgeted, reliably spent
True annual cost	$60,800–$72,000	17% to 38% above the wage

Overtime moves the base wage too

These figures assume full-time hours and are illustrative. Your own class code and state assignment will shift the total in either direction, so treat the table as a structure rather than a quote.

One more line gets forgotten. An hourly employee is generally owed time and a half beyond forty hours in a week, and seasonal trades routinely run fifty. Therefore the effective annual wage on a $25 rate often sits closer to $58,000 than $52,000, before a single tax is added.

Settle the classification question first

Before hiring your first employee, be certain the role is genuinely an employee at all. Plenty of contractors try to sidestep the burden by paying a full-time helper on a 1099. It remains the most expensive mistake in this category.

If you control when they work, how they work, and what they work with, the IRS will treat the person as an employee. What the paperwork says does not change that. Back taxes, penalties, and interest then arrive together, usually with a state audit behind them.

Worth reading first: our breakdown of 1099 vs W-2 status for US contractors, and the deeper look at how worker classification actually gets decided. If the honest answer is “subcontractor,” none of what follows applies to you yet.

The paperwork that clears before day one

The administrative side of hiring your first employee is not difficult. Instead, the trap is timing. All of it carries a deadline tied to the start date, which is precisely why it catches people. Federal requirements are set out in the IRS guidance for new employers. Your state labor and revenue departments handle the rest, and their timelines are rarely instant.

• EIN — free from the IRS and issued online in one sitting. You cannot run payroll without one.
• Form I-9 — completed within three business days of the first day of work. Store it separately from the personnel file.
• Form W-4 — signed and on file before the first paycheck, rather than after it.
• State withholding and unemployment registration — usually two separate accounts, and neither is same-day.
• New hire reporting — most states require it within 20 days of the start date.
• Workers’ compensation — bound and effective on the start date, not the week afterward.
• Commercial auto — confirm the policy covers an employee driving your truck.
• A written offer — rate, schedule, overtime expectation, and what counts as on the clock.

That commercial auto line catches more contractors than anything else on the list. Coverage that was perfectly adequate when the owner was the only driver frequently is not. If your new hire will be behind the wheel, read our guide to commercial auto insurance for contractors before the keys change hands.

What hiring your first employee changes about your day

Here is the cost nobody budgets. The moment someone else is on payroll, your day acquires a second job. You are telling them what to do, confirming it got done, and answering the client when it wasn’t. Most first-time employers underestimate this badly. It surfaces as the owner leaving a job at ten in the morning to straighten something out across town.

The operators who get through year one cleanly stopped relaying the day through text messages. When each job’s address, scope, and client notes sit in one system the crew can open directly, which is exactly what a tool like SendWork is for, the eight-o’clock phone calls stop arriving.

The first ninety days

Budget for the ramp. A new hire on a trade crew is rarely productive at full rate before month three. During that window your own billable hours drop, because you are the one training. Assume a real cost of roughly one and a half employees for the first quarter and the early payroll cycles will not surprise you.

Set the review dates before the start date. Thirty days, sixty days, ninety days, and keep them short and written. Contractors are notoriously bad at this step. The predictable result is a poor hire kept for eighteen months, because nobody ever created a moment where saying so felt natural.

One last thing worth stating plainly. Hiring your first employee is a growth decision, not a workload decision. If the hire exists to relieve pressure rather than to serve demand you can already prove on paper, the burden rate will find you by the second quarter. Hire against a pipeline, not against exhaustion.

More US business and tax guides for contractors: Business Admin & Taxes — USA.