Hiring your first employee — every step, every form, every deadline.
Hiring is one of the most exciting milestones in a founder's journey — and one of the most compliance-heavy. This guide walks you through every step from the decision to hire through your first payroll run, with all Hawaii-specific requirements included.
12+Federal and state forms to file
20 hrsHawaii PHC Act threshold
20%+True cost above salary
Day 1When I-9 must be completed
The most important hiring decision you'll make: employee or independent contractor? Getting this wrong triggers back payroll taxes, penalties, and interest — sometimes years later. The IRS and Hawaii DLIR both audit worker classification aggressively.
Employee
You control how, when, and where they work
You control their scheduleYes → Employee
They work exclusively for youYes → Employee
You provide tools and equipmentYes → Employee
Work is central to your businessYes → Employee
Ongoing relationship expectedYes → Employee
Your tax obligationsWithhold + match FICA, FUTA, SUI, TDI, PHC
Annual tax formW-2 by Jan 31
Independent Contractor
They control how the work gets done
They set their own hoursYes → Contractor
They work for multiple clientsYes → Contractor
They provide their own toolsYes → Contractor
Project-based or specialized workYes → Contractor
Defined project with end dateYes → Contractor
Your tax obligationsGet W-9, issue 1099-NEC if $600+
Annual tax form1099-NEC by Jan 31
The IRS 3-category test for worker classification
The IRS uses three broad categories to determine worker status. No single factor is decisive — it's the totality of the relationship that matters.
A
Behavioral controlDoes your business control or have the right to control what the worker does and how they do it? If you dictate the process (not just the result), that points toward employee status. Contractors are given a result to achieve and determine their own methods.
B
Financial controlDoes the business control the economic aspects of the worker's job? Employees are paid a set wage, have expenses reimbursed, and don't risk financial loss. Contractors invest in their own tools, can profit or lose money, and typically work for multiple clients.
C
Type of relationshipAre there written contracts? Are employee-type benefits provided (insurance, vacation, pension)? Is the relationship indefinite or project-specific? Ongoing work with benefits and no defined end date strongly suggests employee status.
When in doubt — classify as an employee. The penalties for misclassifying an employee as a contractor are severe and retroactive. If the relationship looks like employment, treat it as employment. You can always engage true contractors for specific projects — just make sure the facts match the classification.
True cost of hiring calculator
Salary is just the starting point. Here's what an employee actually costs a Hawaii business owner — before you make the offer.
$50,000
—
$3,825
employer FICA (7.65%)
$42
FUTA (0.6% on $7k)
$1,361
Hawaii SUI (~2.4%)
$750
Hawaii PHC (1.5% wages)
$500
workers comp (est.)
$56,478
total true employer cost
A $50,000 salary costs approximately $56,478 — 12.9% above salary. Factor this into your pricing and profitability before making an offer.
Before hiring — ask yourself: Will this person generate at least 3x their total cost in value? A $56,000 total cost employee should realistically help generate $150,000+ in revenue or savings. If the math doesn't work, consider a part-time hire or contractor relationship first.
Complete hiring checklist — in order
Do these in sequence. Each step unlocks the next. Don't skip anything — compliance gaps discovered years later are expensive.
Before you make an offer
Confirm your EIN is active — required for all payroll filings. Apply free at irs.gov/ein if you don't have one.
Set up payroll software — Gusto, QuickBooks Payroll, or ADP. Do this before the first paycheck, not after.
Open a dedicated payroll bank account — keep payroll funds separate for clean records and easy reconciliation.
Get workers compensation insurance — required in Hawaii before first employee's first day. Contact HEMIC or a private insurer.
Set up Hawaii TDI coverage — purchase a private TDI policy or enroll in the state plan before first eligible employee.
Arrange Hawaii Prepaid Health Care coverage — required for employees working 20+ hours/week for 4+ consecutive weeks.
On the offer
Send a written offer letter — includes title, salary/rate, start date, classification (employee), and at-will statement. Not legally required but strongly recommended.
Clearly state the employment is at-will — unless you intend a contract employment relationship. Hawaii is an at-will state.
Do not promise employment for a specific duration — unless you intend to be bound by that commitment legally.
On or before day one
Complete Form I-9 (employment eligibility verification) — must be completed on or before the first day of work. Verify identity and work authorization documents. Keep on file for 3 years after hire or 1 year after termination, whichever is later.
Have employee complete Form W-4 — federal withholding elections. Keep on file. Update whenever employee's situation changes.
Have employee complete Hawaii HW-4 — state withholding certificate. Hawaii equivalent of the federal W-4.
Register for Hawaii new hire reporting — Hawaii requires employers to report new hires to the Hawaii Department of Labor within 20 days of hire. Report at labor.hawaii.gov.
Within first 30 days
Register as a Hawaii employer with DLIR — for unemployment insurance and TDI. Register at labor.hawaii.gov if you haven't already.
Register for Hawaii withholding tax — with Hawaii Department of Taxation at hitax.hawaii.gov if not already registered.
Set up workers comp policy to cover new employee — notify your insurer immediately when a new employee starts.
Run your first payroll — on the agreed pay schedule. First paycheck must comply with Hawaii's payday requirements.
Hawaii-specific employment requirements
Hawaii has several employment requirements that are unique in the US or significantly more stringent than federal minimums. Know all of these before your first hire.
PHC
Prepaid Health Care Act — health insurance for 20+ hr/week employeesHawaii is the only state that requires employers to provide health insurance to employees working 20 or more hours per week for 4 or more consecutive weeks. The employer must pay at least 1.5% of the employee's wages — employees cannot be required to contribute more than 1.5% of their wages toward coverage.Unique to Hawaii — no other state requires this
TDI
Temporary Disability Insurance — wage replacement for non-work injuriesRequired for all employees working 20+ hours per week. Provides 58% of average weekly wages (up to a cap) for employees unable to work due to non-work-related illness or injury. Employer and employee share the cost. Purchase a private policy or use the state plan through DLIR.One of only 5 states requiring TDI
WC
Workers Compensation — required for all employeesAll Hawaii employers with one or more employees must maintain workers compensation insurance. This covers employees injured on the job. Get coverage before your first employee's first day — operating without it exposes you to significant liability and fines.
Min
Hawaii minimum wage — $14/hour as of January 2024Hawaii's minimum wage is higher than the federal minimum ($7.25/hr). The Hawaii minimum is scheduled to increase annually — verify the current rate at labor.hawaii.gov before setting wages. Tipped employees have a lower minimum but total compensation including tips must reach the full minimum.Check current rate — increases annually
PTO
Paid sick leave — required in HawaiiHawaii requires employers to provide paid sick leave. Employees accrue 1 hour of sick leave for every 40 hours worked, up to 40 hours per year. This applies to employees who have worked for you for at least 6 months. You can provide more — but not less.
Pay
Hawaii payday requirementsHawaii requires wages to be paid at least twice per month. Pay periods cannot be longer than 16 days. Wages must be paid within 7 days after the close of the pay period. Final wages on termination must be paid immediately if you terminated the employee, or on the next regular payday if they resigned.Final wages on termination must be paid immediately
Hawaii's final paycheck law is strict. If you terminate an employee, their final wages must be paid immediately — on the day of termination. If the employee resigns, final wages are due on the next regular payday. Violating this triggers penalties of up to $500 per violation plus back wages.
Every onboarding document — what it is and why you need it
I-9
Employment Eligibility Verification (federal)Verifies that your employee is legally authorized to work in the US. Section 1 completed by employee on or before day one. Section 2 completed by employer within 3 business days of start date. Keep on file 3 years after hire or 1 year after termination (whichever is later). Never expired documents.
Day one
W-4
Employee's Withholding Certificate (federal)Employee declares filing status and withholding adjustments. You use this to calculate federal income tax withholding from each paycheck. Keep on file — do not submit to IRS. Update when employee requests a change.
Before first paycheck
HW-4
Hawaii Withholding Exemption Certificate (state)Hawaii's equivalent of the W-4 for state income tax withholding. Employee declares Hawaii withholding allowances. Required for calculating Hawaii income tax withholding from each paycheck.
Before first paycheck
Offer
Written offer letterDocuments the agreed terms — title, compensation, start date, at-will status, and any other agreed conditions. Both parties should sign and retain a copy. Not legally required but prevents disputes.
Before start date
Policy
Employee handbook / policiesNot legally required but strongly recommended once you have employees. Covers workplace policies, leave, conduct expectations, and complaint procedures. Signed acknowledgment from employee protects you in disputes.
Day one
Direct
Direct deposit authorizationEmployee authorizes you to deposit wages directly into their bank account. Collect bank name, routing number, and account number. Keep securely — do not share or store insecurely.
Before first paycheck
NDA
Confidentiality / NDA (if applicable)If your employee will have access to trade secrets, client lists, or proprietary information — have an attorney draft an appropriate confidentiality agreement. Hawaii courts scrutinize non-compete agreements closely — be careful with scope.
Day one
Store all employee documents securely. I-9s, W-4s, and other personnel documents contain sensitive personal information. Keep them in a locked file or secure digital storage. I-9s must be available for inspection by USCIS, DOL, or ICE upon 3 business days notice.
Running your first payroll — step by step
Your first payroll run is the most important one to get right. Here's exactly what happens and in what order.
1
Enter employee information into payroll softwareName, address, SSN, pay rate, pay frequency, W-4 elections, and bank account for direct deposit. Most payroll software guides you through this setup. Double-check the SSN — incorrect SSNs cause W-2 problems at year end.
2
Enter hours worked or confirm salaryFor hourly employees, enter actual hours worked each pay period. For salaried employees, the amount is fixed each period. Note any overtime — Hawaii follows federal FLSA overtime rules (1.5x for over 40 hours/week).Hourly: track hours carefully. Salaried: confirm period
3
Review calculated withholdings before approvingYour payroll software calculates federal income tax, Hawaii income tax, employee FICA, and any other deductions. Review the summary before approving — especially on the first run. Verify the net pay makes sense for the gross wages.
4
Approve payroll and fund itOnce you approve, the software initiates direct deposit and schedules tax deposits. Make sure your payroll bank account has sufficient funds before approving — payroll software pulls funds on a specific schedule, usually 2 days before payday for direct deposit.
5
Payroll software deposits taxes automaticallyGood payroll software (Gusto, QuickBooks) automatically deposits federal withheld taxes via EFTPS and Hawaii withheld taxes via Hawaii DoTax. Verify this is set up correctly on your first run — confirm the deposit schedule with your software provider.Confirm automatic deposits are configured before first run
6
File quarterly payroll returnsFederal Form 941 is due the last day of the month following each quarter (Apr 30, Jul 31, Oct 31, Jan 31). Hawaii HW-3 follows the same schedule. Your payroll software typically prepares these automatically — you review and file.
7
Issue W-2s and 1099s by January 31By January 31 each year, provide W-2s to all employees and 1099-NECs to contractors paid $600+. File copies with the Social Security Administration and IRS. Your payroll software handles this automatically in most cases.
The most common first payroll mistake: Not having sufficient funds in the payroll account when the software pulls them. Payroll software initiates ACH pulls on a schedule — often 2–4 business days before the pay date. Fund the account before that window, not the day before payday.
The most common hiring mistakes — and how to avoid them
1
Misclassifying employees as contractorsThe most common and most expensive mistake. If the IRS determines you misclassified employees, you owe back payroll taxes, penalties, and interest — sometimes for multiple years. When in doubt, classify as an employee and consult an HR attorney or CPA.#1 most audited area
2
Not completing the I-9 on day oneThe I-9 must be completed on or before the employee's first day of work. Many founders complete it later — or not at all. USCIS I-9 audits result in fines of $272–$2,701 per violation for first offenses. Make I-9 completion part of your onboarding checklist.
3
Not registering for Hawaii new hire reportingHawaii requires employers to report new hires to the DLIR within 20 days. The information is used to locate parents owing child support and to detect unemployment fraud. Failure to report can result in fines. Register at labor.hawaii.gov.
4
Skipping the Hawaii Prepaid Health Care ActHawaii employers routinely miss the PHC requirement — especially for part-time employees who hit the 20-hour threshold. Track hours carefully. As soon as an employee consistently works 20+ hours for 4 consecutive weeks, health coverage is required. Retroactive compliance is expensive.
5
Not collecting W-9s before first payment to contractorsYou need a W-9 before paying a contractor — not at year end when you're scrambling to issue 1099s. Make W-9 collection a condition of your contractor onboarding. Without it you may be required to withhold 24% backup withholding from payments.
6
Paying final wages late after terminationHawaii requires immediate payment of final wages on the day of involuntary termination. Many founders pay on the next regular payday — this violates Hawaii law and triggers penalties. Have the final check (or direct deposit) ready on the termination day if you're letting someone go.Hawaii-specific — stricter than most states
7
Underestimating the true cost before hiringMany founders make a job offer, then realize they can't afford the full cost of the hire once payroll taxes, workers comp, TDI, and health insurance are added. Always calculate the true total cost before extending an offer — use the calculator in this guide.
The best hiring advice: Don't hire until you're ready — but when you are ready, do it right the first time. The compliance requirements are real but manageable with good payroll software and a basic understanding of what's required. Gusto + this guide covers 90% of what most Hawaii founders need.
Ready to set up payroll?
The payroll taxes guide has the full breakdown of every tax you'll owe as an employer.