HR for a business with 1–10 employees in the United States
Reviewed by Mellow Editorial Team, HR & payroll content team
Small businesses with one to ten employees face the same core HR and payroll obligations as large corporations — the main difference is that you handle them with far fewer people and far less margin for error.
Get the employment relationship right from day one
Before you pay anyone, decide whether they are an employee or an independent contractor. The IRS and the Department of Labor both have tests for this. The core question is control: if you direct how, when, and where the work is done, the worker is almost certainly an employee. Misclassifying an employee as a contractor creates back tax liability, penalties, and potential lawsuits.
For employees, collect a signed Form W-4 before the first paycheck. This tells you how much federal income tax to withhold. Federal income tax is progressive, running from 10% to 37% across brackets. The W-4 captures filing status and any adjustments the employee wants to make.
Also complete Form I-9 for every new hire to verify work authorization. Keep it on file — you do not send it anywhere, but it must be available if the government audits you.
Most states require you to report new hires to a state agency, usually within 20 days of the start date. Check your state's requirements.
Understand what you must take out of every paycheck
FICA taxes apply to every paycheck. Social Security is 6.2% of the employee's wages up to the annual wage base. Medicare is 1.45% with no cap. You withhold these from the employee's pay and match them dollar for dollar as the employer. High-earning employees also owe a 0.9% Additional Medicare surcharge once their wages cross the applicable threshold — you withhold that too, but you do not match it.
State income tax varies widely. Texas, Florida, and Washington have no state income tax. Most other states do, with their own withholding forms and remittance schedules. If you operate in one of those states, register with the state tax authority and set up withholding before the first paycheck.
Federal payroll deposits go to the IRS on a schedule determined by your total tax liability — most small employers start as monthly depositors. File Form 941 each quarter to reconcile what you withheld and deposited. By January 31 each year, issue a Form W-2 to each employee and submit copies to the Social Security Administration. If you use contractors, issue a Form 1099-NEC to any contractor paid $600 or more during the year, by the same January 31 deadline.
Write down your basic policies
You are not legally required to have an employee handbook at one to ten employees, but putting basic policies in writing protects you and sets expectations clearly. At minimum, document:
- Pay schedule — how often employees are paid and the method
- Time off — federal law mandates no paid vacation or paid sick leave, but many states and cities do require paid sick leave, so check local rules before promising anything
- At-will employment — employment in the United States is generally at-will, meaning either party can end the relationship at any time for any lawful reason; stating this in writing avoids confusion
- Anti-harassment and anti-discrimination — federal law prohibits discrimination based on protected characteristics regardless of company size in many cases; a clear written policy reduces risk
Keep policies simple. A two-page document is better than a 40-page handbook nobody reads.
Know which federal laws apply at your size
Not every federal employment law kicks in immediately. The Family and Medical Leave Act, for example, applies only to employers with 50 or more employees. Title VII of the Civil Rights Act covers employers with 15 or more. But some laws apply from the first employee — the Fair Labor Standards Act (which governs minimum wage and overtime) and FICA obligations begin on day one.
State law often goes further. Several states extend discrimination protections to smaller employers and require things like paid family leave or short-term disability insurance. California, in particular, has extensive employment law, including a prohibition on most non-compete clauses. Know the rules for every state where your employees physically work, not just where your business is incorporated.
Build a simple, repeatable payroll process
At one to ten employees, payroll errors hurt proportionally more than at a larger company. A missed deposit or a misclassified worker can be a significant financial event for a small business.
Most small employers use payroll software or a payroll service to handle calculations, deposits, and filings automatically. If you run payroll manually, build a checklist: collect hours, apply the correct withholding, calculate employer taxes, run the deposit, and update your records. Run the same checklist every pay period.
Keep payroll records for at least three years — longer in many states. The IRS can audit payroll tax returns, and records are your first line of defense.
If you expand beyond the US or want to understand how Mellow runs payroll across six countries on one platform, the compliance picture gets more complex, but the underlying discipline is the same: know the rules before you pay someone.
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