HR for US startups: the essentials
Reviewed by Mellow Editorial Team, HR & payroll content team
Most US startups can get HR right from the start by focusing on four areas: classification, payroll compliance, documentation, and employment law basics. Get these right early and you avoid the costly corrections that come from building on a shaky foundation.
Classify workers correctly before you hire
The first HR decision you make — employee or contractor — carries more legal weight than almost any other. Misclassifying an employee as an independent contractor exposes you to back taxes, penalties, and potential lawsuits.
The IRS and the Department of Labor each apply their own tests, but both center on a similar question: how much control do you have over how the work is done? If you set the hours, direct the methods, supply the tools, and the person works exclusively for you, the IRS is likely to treat them as an employee regardless of what your contract says.
Contractors get a Form 1099-NEC at year-end if you pay them $600 or more. Employees get a Form W-2. Using the wrong form is not a paperwork technicality — it signals to the IRS that you may have the underlying classification wrong.
Set up payroll properly from day one
US payroll is more complex than most founders expect. Here is what you are required to withhold and remit for every W-2 employee:
Federal income tax. Employees complete a Form W-4 to tell you their withholding preferences. You use that information alongside the IRS withholding tables to calculate the correct amount. Federal income tax is progressive, running from 10% to 37% across brackets.
FICA taxes. Social Security is withheld at 6.2% of wages up to the annual wage base, and Medicare at 1.45% with no cap. You match both as the employer. High earners also owe an Additional Medicare Tax of 0.9%, though that portion is the employee's obligation only — you withhold it but do not match it.
State and local taxes. These vary significantly. Texas, Florida, and Washington have no state income tax. California, New York, and most other states do, and some cities add their own layer on top. You need to withhold based on where the employee works, not where your company is incorporated.
On the reporting side: Form 941 goes to the IRS quarterly, summarizing wages paid and taxes withheld. Form W-2 must reach both the employee and the Social Security Administration by January 31 each year.
Running payroll manually is feasible when you have two or three employees. Once you have a distributed team across multiple states, payroll software or a managed service is usually the more reliable path.
Document employment terms clearly
Employment in the US is generally at-will, meaning either party can end the relationship at any time for any lawful reason. That default protects employers, but it does not mean you should skip written agreements.
At a minimum, give every employee a written offer letter that covers: role and responsibilities, compensation, pay schedule, and any equity terms. If you use equity compensation, have a lawyer review the documents — the tax treatment of stock options is nuanced and getting it wrong creates problems for both you and the employee.
An employee handbook is worth building early, even if it starts small. It should cover your leave policy (remembering that there is no federal requirement for paid annual leave or paid sick leave, though many states and cities impose their own rules), your anti-harassment policy, and how performance issues are handled.
Keep records. The FLSA requires you to retain payroll records for at least three years. Documentation of performance conversations and disciplinary steps protects you if a termination is later disputed.
Understand the employment laws that apply to you
Federal law imposes different obligations depending on how many employees you have. Title VII, the ADA, and the ADEA — the core anti-discrimination statutes — generally apply once you reach 15 employees for most provisions. FMLA (unpaid family and medical leave of up to 12 weeks) applies at 50 employees.
Below those thresholds you have more flexibility, but you are still bound by the Fair Labor Standards Act from your first hire. The FLSA governs minimum wage, overtime pay, and child labor rules, and it applies regardless of company size.
State laws frequently set higher bars. California prohibits most non-compete clauses entirely, for instance. New York, Illinois, and several other states have their own paid leave mandates, mini-WARN acts, and wage theft prevention requirements. Always check the law in every state where an employee is located — not just where you are headquartered.
Benefits: what you must offer versus what you should
There is no federal mandate to offer health insurance, retirement plans, or paid time off. The Affordable Care Act does require employers with 50 or more full-time equivalent employees to offer qualifying health coverage, but most early-stage startups fall well below that threshold.
That said, benefits are your main lever for competing on compensation when you cannot match larger company salaries. Health insurance, a 401(k) with a modest employer match, and a clear PTO policy are the baseline candidates expect. If you are hiring across multiple states, platforms that handle payroll and benefits administration across different jurisdictions save significant administrative time.
Equity aside, the total compensation package — including benefits — is what most candidates compare when weighing offers. Being clear and transparent about what you offer, and what you do not, builds trust from the first conversation.
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