Part 7: Payroll and Hiring

Most e-commerce sellers start as solo operators. They handle the buying, the listings, the customer service, the shipping, and the bookkeeping themselves, often while holding down another job. Growth changes that. At some point the business demands more hours than one person has, and the question of bringing on help becomes unavoidable.

That transition, from solo operator to employer, is one of the most consequential compliance steps in the life of an e-commerce business. The moment you pay another person for work performed in your business, a new set of federal and state obligations activates: payroll taxes, withholding, employer filings, and in many cases state registration requirements that have nothing to do with your sales tax or income tax positions. Getting this wrong exposes you to penalties that are immediate, specific, and in some cases personally assessed regardless of your entity structure.

This part covers everything you need to know about hiring in the context of an e-commerce business: the employee versus contractor distinction and why it matters more than most sellers realize, the full mechanics of federal and state payroll taxes, payroll software options, the treatment of overseas contractors and virtual assistants, and the circumstances where a Professional Employer Organization makes sense as an alternative to managing payroll directly.

Hiring Your First Employee: What Changes and What Is Required

Before you pay a single dollar to someone working in your business, several things need to be in place.

Employer Identification Number. If you do not already have an EIN, you need one before you can run payroll. As covered in Part 2, the EIN is obtained from the IRS and serves as your business's federal tax identification number. It is required on every payroll tax form you will file. If you already have an EIN for your business entity, you use the same one for payroll purposes.

State employer registration. Most states require employers to register with the state's labor or revenue department before hiring. This registration is separate from your sales tax registration and your income tax registration. It activates your state payroll tax account and establishes your unemployment insurance account. You should complete this registration before your first payroll run, not after.

Federal Form W-4. Every new employee must complete a Form W-4 before their first paycheck. The W-4 tells you how much federal income tax to withhold from their wages based on their filing status and any adjustments they elect. You must retain it in the employee's file but do not file it with the IRS.

State withholding forms. Most states with income tax have their own equivalent of the W-4, completed by each new employee and used to calculate state income tax withholding.

Form I-9 employment eligibility verification. Federal law requires employers to verify that every new hire is legally authorized to work in the United States. Form I-9 must be completed by both the employer and the employee within three days of the employee's first day of work. You do not file Form I-9 with any government agency, but you must retain it and make it available for inspection if requested. Penalties for I-9 violations are assessed per form and can be significant.

New hire reporting. Federal law requires employers to report new hires to their state's new hire registry within 20 days of the hire date, administered at the state level through each state's new hire reporting program.

Workers' compensation insurance. Most states require employers to carry workers' compensation insurance covering employees against work-related injuries and illnesses. Requirements vary by state. Failure to carry required coverage is a serious violation in most states with significant penalties. Obtain coverage before your first employee's first day.

Employee vs Contractor: The distinction

The classification of a worker as either an employee or an independent contractor is one of the most scrutinized areas of employment tax law, and one where the consequences of misclassification fall almost entirely on the business owner.

The distinction matters because employees and contractors are taxed entirely differently. For employees, the employer withholds federal and state income tax, withholds the employee's share of FICA taxes, pays the employer's matching FICA share, and pays federal unemployment tax. For independent contractors, none of this applies. You pay the contractor's invoice, issue a Form 1099-NEC at year end if payments exceed $600, and the contractor handles their own taxes.

The IRS and most state labor agencies use multi-factor tests to determine classification. The core question is the same in each: how much control does the business exercise over how the work is performed?

• Behavioral control. If you control not just what result the worker achieves but how they achieve it, including when they work, what tools they use, and how they perform specific tasks, these factors point toward employment. A contractor typically works independently, sets their own schedule, uses their own tools, and works for multiple clients.

• Financial control. If the worker is economically dependent on your business, has no opportunity for profit or loss, and is paid a fixed hourly or weekly amount rather than by project, these factors point toward employment.

• Type of relationship. Written contracts describing the relationship as contractor do not determine the classification. What matters is the substance of the relationship. If the work is integral to core business operations and the relationship is ongoing and indefinite, these factors point toward employment regardless of any written agreement.

State tests are often stricter than the federal standard. California's ABC test presumes that a worker is an employee unless the hiring business can demonstrate all three of the following: the worker is free from the business's control, the work is outside the usual course of the business's activities, and the worker is customarily engaged in an independently established trade or occupation of the same nature.

If the IRS or a state agency determines that workers you classified as contractors should have been classified as employees, the business is liable for all unpaid payroll taxes including both the employer and employee shares of FICA, plus interest and penalties. In cases of willful misclassification, criminal penalties are possible.

Federal Payroll Taxes: FICA, FUTA, and Income Tax Withholding

FICA taxes fund Social Security and Medicare. The total FICA rate is 15.3% of wages up to the Social Security wage base (check for the latest rates), split equally between employer and employee at 7.65% each. Above that threshold, Medicare tax continues at 1.45% each. An Additional Medicare Tax of 0.9% applies to employee wages above $200,000 in a calendar year, withheld from the employee only with no employer match.

Federal income tax withholding. You withhold federal income tax from each employee's wages based on their Form W-4 elections and the IRS withholding tables in Publication 15-T. You collect it from employee wages and remit it to the IRS on the employee's behalf.

FUTA. The Federal Unemployment Tax Act imposes a 6% employer-only tax on the first $7,000 of each employee's wages per year. Employers who pay state unemployment tax on time receive a credit of up to 5.4%, reducing the effective federal rate to 0.6% in most states.

Form 941. Employers file this quarterly federal tax return four times per year. Due dates are April 30 for Q1, July 31 for Q2, October 31 for Q3, and January 31 for Q4.

Form 940. Filed annually to report and reconcile FUTA tax, due January 31 of the following year.

Forms W-2 and W-3. At year end, furnish each employee a Form W-2 by January 31 and file copies with the Social Security Administration along with Form W-3.

State Payroll Taxes and Unemployment Insurance

Beyond federal obligations, most states impose their own payroll requirements requiring separate registration, filings, and remittances.

State income tax withholding is required in all states with an income tax. Nine states have no state income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

State unemployment insurance (SUTA) is an employer-only tax. New employers are assigned a standard new employer rate that adjusts over time based on claims experience. Taxable wage bases and rates vary significantly by state. SUTA returns are filed quarterly in most states.

Several states require participation in a state disability insurance program, including California, Hawaii, New Jersey, New York, and Rhode Island.

Remote employee nexus. When you hire an employee who lives and works in a different state from your business, you typically create payroll tax nexus in that state. You must register as an employer there, withhold that state's income tax, and pay that state's unemployment taxes. Each new remote hire in a new state is a multi-step compliance event, not simply an HR decision.

Payroll Software Options: Gusto, ADP, and Rippling

Gusto is the most widely used payroll platform among small and mid-sized businesses and generally the first choice for e-commerce sellers. It automates federal and state payroll tax calculations, makes tax deposits on your behalf, files Form 941 and Form 940, generates W-2s at year end, and handles state employer registration in new states. For one to five employees the total monthly cost is typically $80 to $200 depending on plan tier. It integrates directly with QuickBooks Online and Xero.

ADP Run is comparable in functionality to Gusto for basic payroll and is better suited to businesses with more robust HR needs or complex multi-state payroll situations.

Rippling combines payroll, benefits, HR, device management, and app provisioning in a single platform. For businesses scaling quickly across multiple states, the integrated approach reduces tool sprawl. It is more expensive than Gusto at comparable employee counts but offers more per dollar at higher headcounts.

For most e-commerce sellers hiring their first one to five employees, Gusto is the practical starting point.

Form 1099-NEC for Contractors

When you pay an independent contractor $600 or more in a calendar year for services performed in the course of your business, you must issue a Form 1099-NEC by January 31 of the following year and file a copy with the IRS along with Form 1096. The $600 threshold is cumulative across the year. Corporations are generally exempt from 1099-NEC reporting except for legal services.

Before making your first payment to any contractor, obtain a completed Form W-9. Attempting to collect this information after the fact from contractors who are no longer engaged is inefficient and often impossible. Failure to file required 1099-NECs generates penalties per form depending on how late the filing is.

Hiring Virtual Assistants Overseas

Many e-commerce sellers rely on virtual assistants based outside the United States for product research, listing optimization, customer service, and administrative support. When you pay a foreign individual for services performed entirely outside the United States, those payments are generally not subject to US payroll taxes and do not require a Form 1099-NEC.

You should obtain a completed Form W-8BEN from each foreign individual contractor before making payments. The W-8BEN certifies the contractor's foreign status and documents the basis on which US tax was not withheld. W-8BEN-E if this is an entity.

Engaging foreign workers as contractors does not automatically make them contractors under the labor laws of their home country. Countries with strong labor protection frameworks may classify an ongoing, directed working relationship as employment regardless of what your contract says. For substantial ongoing engagements in any specific country, local legal advice is more reliable than general guidance.

Professional Employer Organizations: When They Make Sense

A PEO enters into a co-employment arrangement with your business, becoming the employer of record for payroll and benefits purposes while you retain operational control. The PEO handles payroll processing, tax filings, benefits administration, workers' compensation, and HR compliance.

PEOs are most relevant when you are hiring in multiple states rapidly. A PEO already registered in those states can onboard your employees without requiring you to register as a foreign employer in each new state individually. PEOs also provide access to better benefits packages at lower cost by pooling employees across multiple client businesses.

PEO costs are typically 2 to 4 percent of total payroll or a flat per-employee monthly fee. For fewer than five employees in one or two states, Gusto is almost always more cost-effective. As headcount grows across multiple states, the PEO model becomes worth serious evaluation.

Getting Payroll Right from the Start

Payroll is an area where errors compound quickly and penalties arrive before you have time to correct the underlying mistake. A missed deposit deadline generates a penalty the moment it is late. A misclassified worker generates liability for every pay period the misclassification persists.

The employers who avoid serious payroll problems are the ones who treat each new hire as a compliance event, not just an operational one. New employee means new W-4, new I-9, new hire reporting, state registration if it is a new state, workers' compensation coverage, and payroll software configured correctly before the first paycheck runs. Doing these steps in order, before payroll starts rather than after a problem surfaces, is what separates a clean payroll record from an expensive remediation.

Antravia Advisory provides payroll setup guidance, multi-state employer registration support, and contractor versus employee classification analysis for e-commerce sellers. If you are hiring for the first time or expanding into new states, contact our team before the first paycheck runs.

Part 8: International E-Commerce Sellers Selling Into the US — continues next.

About Antravia Advisory

Antravia Advisory is a US-based tax and accounting advisory firm headquartered in Winter Park, Florida, operating nationally and internationally.

We advise international businesses entering the United States and complex US companies operating across multiple states, entities, and revenue structures. Our work spans advanced tax strategy, multi-state sales tax oversight, cross-border structuring, and high-level accounting architecture for e-commerce brands, subscription and SaaS businesses, platform-based models, and multi-entity groups.

We work with founders and leadership teams who require technical precision, structural clarity, and financial frameworks built for scale, capital events, and long-term resilience.

Disclaimer:
Content published by Antravia is provided for informational purposes only and reflects research, industry analysis, and our professional perspective. It does not constitute legal, tax, or accounting advice. Regulations vary by jurisdiction, and individual circumstances differ. Readers should seek advice from a qualified professional before making decisions that could affect their business.

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