TL;DR

If you’re hiring in more than one state, go with a PEO as opposed to running your own payroll. You’ll thank us later. My go-to recommendation is Justworks and I’m happy to refer you in to make sure you get taken care of.

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Hiring your first employees

Making a first hire is an exciting time - but it also usually means you are now Googling¹ “how to pay first employee” or texting other founder friends to see what they did. You may also just be putting yourself on payroll for the first time after raising money (congrats!).

First things first: make sure you know whether someone is a contractor (or “1099”) vs. an employee (“W-2”). There are lots of guides out there on this but it boils down to:

• if they are spending all of their working time with you

• you are control of what they work on

• you are in control of when they work

…then that’s an employee, not a contractor.

How to pay your employees

Generally, you’ll get two recommendations: PEOs or payroll providers. Often folks don’t even realize the difference between these two when they are talking about them.

A PEO, which stands for professional employer organization, essentially acts as a co-employer for your business. They take over responsibilities like payroll processing, some benefits admin, state compliance filings, workers comp, and W-2 preparation.

Direct payroll, on the other hand, means they process your payroll but you are still responsible for running payroll each period, and for doing any required state registrations and reporting on your end.

When to use direct payroll

Basically the only situation in which we will recommend that someone use direct payroll is if they know they are only ever hiring in one state for the foreseeable future.

Our recommendation: Gusto. It’s cheap, effective, and their customer support has been helpful for clients that are using it. Plus, they have a cute mascot. Starts at $40/month plus $6/ppm

Avoid old-school systems like ADP or Paychex. We have found them harder to use and support more difficult to access.

When to use a PEO

If you are going to be hiring in multiple states, PEO is the way to go. Trust us - you do not want to be managing the various state filing and annual reports that you’ll need to.

As for which PEO to use - there are a lot of options. The challenge that you’ll run into as a startup is that most won’t work with companies under 5 employees.

Eventually, you’ll outgrow a PEO making financial sense (probably around the same time you hire a full-time HR person in-house). At that point it will make sense to run your own payroll since you, the founder, won’t be the one running it.

Our recommendation: Justworks. They’ll work with businesses as small as 1 owner and 1 employee. Their pricing is transparent, support is effective, and they are specialized in working with startups and small businesses. As a bonus, they’ll also process contractor payments for free & file your 1099s for you. It’s $59/ppm for the basic PEO, and $109/ppm if you want to access their group health insurance.

But what’s an ASO?

Some places will try to sell you on an “ASO” model (administrative services organization). In our experience, this is the worst of both worlds - you’re still on the hook technically for things like state filings, but the service is filing them for you. This means if they make a mistake, you’re still liable as the sole employer.

1  Or actually…probably asking ChatGPT. OpenAI should have thought more carefully about how verb-able their name was.

2  Note: The Gusto link is an affiliate link and if I refer you to Justworks I do get a small bonus - but I only go seek out partnerships with products that I a) have used b) believe in.