Hiring your first employee doesn’t feel like a financial milestone. It feels like relief. Someone to share the load, move faster, make progress visible. What most founders don’t realize is that this moment quietly changes the legal and tax structure of their company. Payroll looks like an operational detail, but it’s actually the point where your startup starts interacting with the government in new, permanent ways.

Hiring Your First Employees

Founders tend to underestimate payroll. Not because they're careless, but because payroll looks simple from the outside. You pay someone, taxes are withheld, and life goes on. Only later do you discover that hiring an employee is like pulling a lever connected to an entire machine you didn’t know existed.

If there’s a single pattern in the founders I’ve seen struggle with payroll, it’s this:
They don’t realize hiring is a tax event.

This isn’t intuitive. You think of hiring as adding help. The government thinks of hiring as creating a new legal structure around your company. There’s no warning bell that rings. You just wake up one morning responsible for filings you’ve never heard of.

Understanding this early saves an enormous amount of trouble later.

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1. Misclassification

The first mistake is misclassification. Many founders think of contractors as the default because it feels flexible. But the IRS has a stronger opinion. If someone works like an employee, you don’t get to call them a contractor.

Founders usually discover this only after the fact, when a state agency informs them retroactively. By then, the best outcome is paperwork. The worst is back taxes, penalties, and a small crisis in confidence.

The rule is simple:
If you're directing the work, they're probably an employee.

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2. State Registrations

The second mistake is forgetting that the United States is not one country but fifty different governments duct-taped together. Hiring in another state means registering in that state. Sometimes multiple times. The surprise isn’t that founders miss this - it's that anyone imagines it would be obvious.

You hire someone in Colorado and suddenly you owe forms to Colorado. Some of these are due before you run payroll. This is why founders get penalized. The system assumes a level of foresight that beginners rarely have.

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3. Missing Filings

The third mistake is believing that payroll companies file everything. They file a lot, but not everything. And they won’t always tell you when you’re missing something.

The government assumes you know what needs to be filed. Payroll software assumes the government will tell you if something is wrong. Neither assumption is true.

Quarterly filings, state unemployment returns, new-hire reports - none of these go away just because the interface looks automated.

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A Better Way to Think About Payroll

Payroll works best when you treat it like infrastructure. It’s less about paying employees and more about creating a system that won’t break as you grow.

Three rules:

1. Choose the right platform.
   The wrong one creates friction. The right one disappears.
   
   
2. Register before paying.
   States are happiest when you do things in their order.
   
   
3. Don’t guess about classification.
   The IRS has more lawyers than you.
   
   

Startups love to optimize product, fundraising, hiring. But payroll mistakes are often what come back to slow them down.

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Which Payroll System Should You Use?

Most founders choose based on what their friends use. That works surprisingly well, but here’s a more principled way to think about the four you’ll see most often.

Gusto

Gusto is the system founders tend to use when they hire their first employee. It works because the abstraction layer is so good you barely notice it. If your team is small and US-based, it’s probably the closest thing to “just works.”

The weakness is scale. The more states you hire in, the more you feel its edges.

Use Gusto if: You want the simplest possible setup.

Rippling

Rippling is what founders graduate into once they get serious about operations. Think of it as payroll plus a general system for managing people and computers. It’s powerful, which means it’s also more to think about.

Rippling is best for teams that are starting to look like real companies - more employees, more states, more process.

Use Rippling if: You’re scaling and want automation everywhere.

Justworks

Justworks is a PEO, which means the legal employer is partly them and partly you. This gives you access to better benefits and fewer compliance headaches. Founders like it because it reduces surface area.

The drawback is that leaving a PEO later can be a hassle. But for early teams, the simplicity is worth a lot.

Use Justworks if: You want someone else to handle as much compliance as possible.

Deel

Deel solves an entirely different problem: international hiring. If someone you want to hire lives in another country, Deel lets you do it without setting up a local entity. It’s the fastest path to becoming a global company.

It’s overkill for purely domestic teams, but indispensable for distributed ones.

Use Deel if: Your team isn’t all in the same country.

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Choosing

If you want a shortcut, it’s this:

• Gusto for your first hire.
• Rippling once you add complexity.
• Justworks if you don’t want to think about HR.
• Deel if your team is global.
  
  

Payroll isn’t glamorous, but neither is infrastructure. You only notice it when it breaks. Fixing it early is one of those surprisingly high-leverage founder decisions - one that keeps paying off long after you’ve forgotten you made it.

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