How to Hire Your First Employee as a Contractor

A plumber I know ran his business solo for six years. Long days, good money, total control. Then he landed a commercial contract that required two trucks on site simultaneously, hired a guy fast, and almost destroyed everything in four months.

Not because the hire was bad. The guy could do the work. The problem was everything around it: the paperwork he did not know he needed, the payroll taxes that hit him sideways, the customer relationships that were built around him personally while the new guy kept making small decisions that did not match how he had always done things. By month three he was working more hours managing one employee than he had been working alone.

He figured it out eventually. But it took a year of mistakes that cost him close to $30,000. The pattern is consistent across the contractors I have talked to who went through the same thing. Here is what they wish they had known.

Make sure it is actually the right time

Hiring because you are busy is the right instinct but not always the right conclusion. Before you bring anyone on, answer three questions honestly.

First: is this busy period permanent or temporary? If you are slammed for two months because a subdivision opened up nearby, adding a full-time employee for that spike may leave you paying wages you cannot support in slow season. Sustainable busy means jobs backing up for four to six consecutive months. That is different from a seasonal rush.

Second: can you afford the actual cost, not just the wage? An employee who costs you $25 an hour in wages costs you $30 to $35 per hour once you add payroll taxes, workers compensation insurance, and basic benefits. The Bureau of Labor Statistics Employer Costs for Employee Compensation data consistently shows employer costs run 25 to 40 percent above base wages across construction and services trades. If your margins do not support that, you are borrowing against future jobs, not growing.

Third: is your problem actually a labor problem? Some contractors think they need another body when what they really need is better scheduling or to stop taking jobs that barely pencil out. Adding a person does not fix a margin problem. It amplifies one.

What it actually costs to hire someone

Walk through the real math before you make any offers. Take the wage you are planning to pay and multiply by 1.30 to 1.35. That is your true cost for an hourly or salaried employee.

The main additions on top of wages:

Payroll taxes. The employer share of Social Security is 6.2 percent of wages up to the annual wage base, which was $168,600 in 2025. Medicare is 1.45 percent on all wages. Federal unemployment tax starts at 6 percent on the first $7,000 in wages but typically drops to 0.6 percent after state credits. State unemployment averages around 2 to 3 percent. Add these together and you are looking at roughly 8 to 10 percent of wages in mandatory payroll taxes before anything else.

Workers compensation. Rates depend on your state, your trade, and your claims history. A plumber in Georgia might pay $4 to $6 per $100 in payroll for the plumbing classification. A roofer in Florida can pay $10 to $20 per $100 or more because roofing carries a high-risk classification. Get a quote before you make an offer. A workers comp bill two or three times higher than expected has undone more than a few contractors who did the math wrong up front.

General liability. Some carriers require notification when you add employees and may adjust your premium. Others fold it into payroll reporting. Check with your insurer before the hire.

Tools and equipment. If you are buying a second truck, that is a capital cost separate from wages. Equipping a helper with $2,000 in tools is a real expense in month one. Factor it in.

Time. The hidden cost nobody prices in. You will spend time onboarding, supervising, and dealing with friction that you are not billing for. The first 30 to 90 days of any hire costs something in lost productivity, even when the hire turns out to be excellent.

The paperwork that catches people off guard

Before someone works their first day, several things need to be in order.

Employer Identification Number. If you have been running as a sole proprietor without employees, you may have been using your Social Security number for tax purposes. You need an EIN to run payroll. Get it at IRS.gov. Takes about ten minutes.

I-9 Employment Eligibility Verification. Required for every hire. Both you and the employee fill out their portions, and you need to physically verify the documents. Keep the I-9 on file for three years after the hire date or one year after termination, whichever is later. ICE audits happen.

W-4. The employee fills this out to tell you how much to withhold for federal income tax. The 2020 redesign eliminated the old allowance system. New hires fill out the current form.

State new hire reporting. Every state requires you to report new hires to a state agency within a certain window, typically 20 days. This is used for child support enforcement. The state will fine you if you miss the deadline. Look up your state requirement before you bring anyone on.

State labor law posters. Federal and state law requires you to post certain notices where employees can see them. The Department of Labor provides the federal poster at no cost. Your state has its own. A combined all-in-one poster from a labor law poster service runs around $30. Put it somewhere visible.

Payroll software. For a first hire, QuickBooks Payroll, Gusto, ADP Run, or Paychex Flex will walk you through setup and handle the tax filings automatically. The $40 to $100 per month most of them charge is worth it. Running payroll manually when you do not know what you are doing is how people end up with IRS penalties.

How to structure the pay

Most trade contractors pay hourly or day rate for field employees. Salary is less common except for office staff or crew leads in larger operations.

The right rate is what the local market supports for the skill level you need. Check Indeed and ZipRecruiter for current postings in your trade and city. Look at what competitors are advertising. If you have a network of other contractors, ask directly what they pay. Most will tell you.

One thing worth thinking through before you make an offer: flat hourly versus straight-time-plus-overtime. Under the Fair Labor Standards Act, non-exempt employees are entitled to 1.5x their regular rate for hours over 40 in a workweek. If your work is seasonal and you regularly hit 50-hour weeks in peak months, that overtime cost adds up fast. Some contractors pay a higher base rate and manage hours carefully. Others build the expected overtime into their labor cost estimates from the start. Know the math either way before you commit to a number.

Two things not to do:

Do not pay cash off the books to avoid payroll taxes. The penalties for misclassification and payroll tax evasion are serious, and audits happen.

Do not call someone an independent contractor when they are actually an employee. The IRS has specific criteria for contractor status: degree of control, permanence of the relationship, whether the work is core to your business. If you misclassify an employee as a 1099 contractor to avoid payroll taxes and you get audited, you are on the hook for back taxes, interest, and penalties on top of the original tax. Several states have stricter standards than the federal rule, including California, Massachusetts, and New Jersey.

The performance problem most contractors do not see coming

The hardest part of your first hire is not the paperwork or the taxes. It is that you have built the whole business around how you work: how you communicate with customers, how you handle surprises on a job, how you maintain your reputation. None of that is written down anywhere.

Your new employee is not incompetent. They just do not know what is in your head. When something unexpected comes up on a job, they make a decision based on what seems reasonable to them. Which might not be what you would have done. And if it is a customer house, the customer notices.

The contractors who scale well spend the first two weeks doing jobs alongside new hires, not sending them out alone. Show them how you talk to the homeowner when you arrive. Show them how you handle a complication mid-job. Show them the small things that feel obvious to you but are not obvious to anyone working for you for the first time.

The contractors who skip this and hand someone a set of keys and a work order on day two tend to get calls from customers saying it felt different. That reputation is hard to rebuild once you start eroding it.

When a hire is not working out

Give a new hire 30 days of real supervision and feedback before concluding they are the wrong fit. A lot of early performance problems are information problems, not character problems. If you have been clear about expectations, provided actual feedback, and things are still not improving, that is a different situation.

If you need to let someone go, do it directly and quickly. Pay them for all hours worked. Collect any company property. If they are in a state with strict final pay timing requirements — California requires same-day final pay in most termination situations — know the rules before you act. Get legal advice if the situation is complicated.

Most states are at-will employment, meaning you can terminate without cause. Document performance issues anyway. It protects you if someone files for unemployment benefits or makes a claim later.

What the contractors who scaled well did differently

Looking at the ones who made it past two or three employees without a crisis, a few things stand out.

They did not hire at peak desperation. They started looking when they were busy but not overwhelmed, so they had time to be selective about who they brought on rather than grabbing the first available person.

They figured out what they needed before posting anything. A helper who does rough work under supervision is a completely different hire from a technician who runs jobs independently. The pay, the onboarding, and the expectations are all different. Knowing which one you need prevents a lot of early friction.

They treated the first few months as a real onboarding, not a trial by fire. The new hire was rarely productive from day one. Expecting otherwise sets both sides up to be disappointed.

And they were honest with themselves about when someone was not working out. Dragging out a bad hire for six months because letting someone go is uncomfortable costs more than a clean separation at 60 days.

The short version

Hiring right is slower than hiring fast. The real cost of an employee is 30 to 35 percent above their wage. The paperwork exists and has to be done correctly. And the biggest returns come from the first two weeks you spend showing a new hire how you actually work, not from hoping they figure it out.

The plumber I mentioned at the start now runs four trucks. He has a crew lead who handles most of the day-to-day. It took about two years after that rough first hire to build something that did not require him on every job. The mistakes he made were expensive. Most of them were avoidable.

Take the time to do it right the first time.