Hiring your first employee is a major milestone for any small business owner. It’s a sign of growth, momentum, and confidence in your business’s future. In fact, according to the U.S. Small Business Administration, more than 80% of small businesses have no employees at all.[1] That means you’re not just growing — you’re stepping into a special group of business owners ready to lead and build something bigger.
But before you jump into job postings and interviews, it’s important to understand the financial ramifications of hiring a new employee. From payroll setup and taxes to cash flow planning and employee benefits, preparing your business for that first hire ensures you build a strong foundation for future growth.
You're about to face a series of new financial responsibilities that might catch new employers off guard. Being financially prepared may help ensure a smooth transition and avoid an expensive misstep. This article outlines what you need to know before hiring that first employee, so you'll be more likely to set up your team — and your business — for long-term success.
Hiring Is a Financial Milestone
When you hire that first employee, you’re doing more than adding a line item to your budget. This is a significant turning point for your business and for you as the business leader.
First, from an emotional perspective, you'll no longer be a solo entrepreneur. Once you find the right person to hire, you’ll be responsible for that person’s income and livelihood. That’s a significant responsibility.
Then, from a financial standpoint, adding an employee to your payroll impacts nearly every aspect of your business. As you manage cash flow, insurance considerations, and the operational budget, these decisions will no longer only affect you. Now, you’ll also be making decisions that also impact your employee(s).
So, before you extend an offer, it’s equally as important to review your financial preparedness as it is to ensure you’ve found the right candidate.
Total Cost of an Employee: More Than Just a Salary
New employers often underestimate how much hiring an employee actually costs. Salary is only one part of the equation. Once you factor in payroll taxes, insurance, benefits, and onboarding costs, the financial commitment increases significantly.
Additional costs of hiring an employee include:
- Employer payroll taxes (Social Security, Medicare, federal and state unemployment insurance).
- Workers' compensation insurance is required in most states.[2] Costs vary based on industry and risk level.
- Benefits like health insurance, retirement contributions, paid time off, and other perks.
- Onboarding costs include time and resources spent on training, background checks, etc.
- So, a new employee with a $50,000 annual salary may possibly cost the business $60,000 to $65,000.
Underestimating the financial commitment of hiring a new employee can derail your budget and place a heavy strain on your cash flow. However, you're more likely to avoid this problem by conducting a thorough cost analysis before making your hiring decisions.
Cash Flow Planning Before You Hire
Before you spend time posting a job description, take a serious look at your monthly and annual cash flow. Ask yourself if the business can consistently support a full-time salary.
It’s easy to feel confident during high-revenue months, but that confidence can fade quickly when income slows. If your business experiences fluctuating income, be sure to consider your slowest months and how a new employee would impact cash flow. Missing a payroll deadline isn’t just bad for morale — it may damage trust, impact retention, and result in compliance issues or penalties.
That’s why it’s important to plan ahead so that uneven revenue doesn’t get in the way of meeting your payroll obligations.
- Analyze both average and worst-case scenarios before extending a job offer.
- Create a 12-month forecast that accounts for fluctuations in revenue, and model how a new employee’s salary, taxes, and potential benefits would impact your monthly operating budget.
Another way to protect your business during those lean revenue months is to create an emergency fund that holds a few months’ worth of payroll costs. This way, even if revenue dips, you'll be in a better position to meet your obligations without disrupting operations and compromising the trust of your team.
Setting Up Payroll
Managing payroll on your own might seem like a simple, cost-saving option, but it often leads to increased risk and potential errors. Mistakes related to tax withholding or filing deadlines may lead to costly penalties from the IRS and your state.
By automating payroll, businesses are more likely to minimize risk, ensure compliance, and focus more time and energy on growing the business. Whether you use a full-service payroll provider, install payroll software, or choose a bank-integrated payroll system, each option is designed to streamline tax calculations, employee payments, and compliance management. Many bank-integrated payroll systems also include features like direct deposit, detailed reporting, and reminders for quarterly tax filings.
Choosing the Right Business Bank Accounts for Payroll
When you hire an employee, you’re legally responsible for paying them the right amount on time and handling taxes correctly. That means your payroll process needs to be accurate, reliable, and well-organized from the start.
One of the easiest ways to ensure accuracy is to open a payroll bank account. By separating payroll transactions from general business expenses, you’ll be able to:
- Easily track payroll transactions without sorting through unrelated purchases.
- Avoid accidental spending of funds meant to pay employees or payroll taxes.
- Ensure timely payments by setting up automatic transfers to the payroll account ahead of each pay cycle.
Look for banking solutions that:
- Support direct deposit and automate tax withholding.
- Automate recurring transfers to easily move funds from operating to payroll accounts.
- Generate reports that simplify quarterly tax filings and year-end documentation, making it easier for your business to achieve and maintain compliance.
The above features may help ease your administrative burden and improve transparency, which may be especially helpful during tax season or in the event of an audit.
When (and How) To Think About Benefits from a Financial Perspective
Employee benefits have the power to give your business a competitive edge, but they also increase your financial responsibilities.
Not all businesses will offer their employees the same benefits. Standard benefits are those that employees commonly expect, like health insurance. On the other hand, strategic benefits, like flexible hours or remote work options, may help attract top talent.
Don’t feel pressured to offer every benefit right away. Start by prioritizing financially sustainable standard benefits to stay competitive. When the time is right, consider strategic add-ons that support your goals and appeal to your ideal employee. A good rule of thumb is to aim to provide long-term value without overextending too early.
Consider which offerings align with your budget and what matters most to your potential hires. For instance, if you're hiring skilled workers, retirement contributions or an HSA-compatible health plan could help you attract talent without overextending your budget.
Many banks and financial partners offer products like HSAs, SEP IRAs, or payroll-integrated retirement accounts, which make managing these benefits easier.
Conclusion: Financial Readiness Unlocks Growth
This is a big step. Hiring your first employee means your business is growing. Take a moment to acknowledge the success you’ve achieved. With this success comes new responsibilities. We hope that this article will help you move forward with confidence.
From understanding the true cost of employment to setting up payroll systems and evaluating benefits, each decision you make now lays the foundation for your business’s long-term stability.
As your team expands, ongoing financial planning and regular check-ins with your banking partners become even more important. Whether you’re navigating payroll for the first time or looking to scale with confidence, PNC is here not just with banking accounts and tools — but as a strategic partner that can help your business thrive. Learn more about how PNC Small Business solutions can support your journey.
