Hiring your first employee as a contractor in California is a major milestone — and a major compliance responsibility. California has some of the most complex employment laws in the country, and getting things wrong from the start can cost you thousands in fines, back taxes, and legal fees. This guide walks you through every step of hiring your first employee as a licensed contractor in California, from registering with the state to setting up payroll correctly in QuickBooks.
Step 1: Make Sure They’re Really an Employee (Not a Contractor)
Before anything else, make sure you’re correctly classifying this person. California AB5 made it harder than almost anywhere else in the country to classify workers as independent contractors. Under California’s ABC test, a worker is presumed to be an employee unless the hiring business can prove all three of these conditions: (A) the worker is free from the control and direction of the business in connection with the work, (B) the worker performs work outside the usual course of the business’s activities, and (C) the worker is customarily engaged in an independently established trade.
For most contractors, workers who are doing the same trade work as your company — painting, plumbing, HVAC, framing — and who work regularly for you, fail the ABC test and must be treated as employees. Misclassification exposes you to back payroll taxes, penalties from the EDD and IRS, retroactive workers’ comp liability, and potential lawsuits. When in doubt, consult an employment attorney.
Step 2: Register as an Employer in California
Once you’re ready to hire your first employee, you need to register with several agencies.
IRS — Employer Identification Number (EIN)
If you don’t already have an EIN, get one immediately at irs.gov/ein. It’s free and takes about 10 minutes online. This is your federal tax ID for payroll purposes.
California EDD — Employer Registration
Register with the California Employment Development Department (EDD) as a new employer at edd.ca.gov. You’ll receive a California employer payroll tax account number, which you need to make state payroll tax deposits and file quarterly payroll returns. You must register within 15 days of paying wages of $100 or more in a calendar quarter.
Update Your CSLB License
If your CSLB license was issued as a sole owner or RMO without employees, you may need to update your license status. More importantly, the CSLB requires that licensed contractors with employees carry workers’ compensation insurance and maintain a certificate of insurance on file.
Step 3: Get Workers’ Compensation Insurance — Immediately
California requires workers’ compensation insurance for any business with at least one employee. You must have coverage in place before your employee’s first day of work — not after. Workers’ comp covers medical expenses and lost wages for employees injured on the job. Failing to carry it is a misdemeanor in California and can result in a stop-order that shuts down your business operations, plus significant fines and personal liability for any workplace injuries.
Contact a licensed insurance broker who specializes in construction workers’ comp. Rates are based on your payroll and the job classification of your employees — roofing, framing, and electrical carry higher rates than painting or cleaning. Keep detailed payroll records to avoid large year-end audit adjustments.
Step 4: Complete Required Hiring Paperwork
Every new employee must complete several forms before starting work. The federal W-4 (Employee’s Withholding Certificate) determines how much federal income tax to withhold. The California DE 4 (Employee’s Withholding Allowance Certificate) determines state income tax withholding. The federal I-9 (Employment Eligibility Verification) verifies the employee’s identity and right to work in the United States — you must examine original documents in person. California also requires employers to provide new hires with required notices, including the DE 2515 (Disability Insurance Pamphlet), the DE 2511 (Paid Family Leave Pamphlet), and the DFEH-185 (Sexual Harassment Pamphlet).
Step 5: Set Up Payroll
QuickBooks Payroll is the most practical payroll solution for small contractors — it integrates directly with your bookkeeping, calculates all federal and state withholding automatically, and handles payroll tax deposits. Set up the employee’s pay rate, pay schedule (weekly, bi-weekly, or semi-monthly), and withholding from their W-4 and DE 4. QuickBooks will calculate federal income tax, Social Security, Medicare, California income tax, California SDI (State Disability Insurance), and your employer share of payroll taxes.
As an employer, you pay: the employer share of FICA (Social Security 6.2% + Medicare 1.45%), Federal Unemployment Tax (FUTA — 6% on first $7,000 of wages, usually reduced to 0.6% with FUTA credit), California UI (Unemployment Insurance — varies, but typically 1.5–6.2% on first $7,000 of wages), and California ETT (Employment Training Tax — 0.1% on first $7,000 of wages).
Step 6: Report New Hires to the State
California requires employers to report all new hires to the EDD within 20 days of their first day of work. You can do this through QuickBooks Payroll (it automates this) or directly through the EDD’s e-services portal. This is used to locate parents who owe child support and to detect unemployment insurance fraud.
Step 7: Post Required Workplace Notices
California employers must post several notices in a location where employees can see them. These include the California Minimum Wage notice, Workers’ Compensation rights poster, No Smoking sign, California OSHA Safety and Health Protection on the Job poster, and several others. You can obtain these free from the California Department of Industrial Relations and the EDD. If your employees work primarily in the field, you should provide these notices in digital form as well.
The True Cost of an Employee in California
Before hiring, understand the true cost. If you’re paying an employee $25/hour, your actual cost is significantly higher. On top of wages, you pay employer payroll taxes (FICA, FUTA, SUI, ETT) — roughly 10–12% of wages — plus workers’ comp (which can be 5–20% of wages in construction depending on trade), plus any benefits. A $25/hour employee typically costs the employer $30–$35/hour all-in. Factor this into your job cost estimates and bidding before you hire.
Frequently Asked Questions
Can I pay my first employee in cash in California?
Legally, you can pay wages in cash, but you must still withhold and remit all required taxes, provide pay stubs, maintain payroll records, and report the wages on W-2s at year end. “Paying cash off the books” is tax fraud and labor law violation with serious criminal and civil consequences. Always run legitimate payroll through QuickBooks or a payroll service.
What is California’s minimum wage for contractors?
California’s statewide minimum wage is currently $16/hour (as of 2024), but local minimums in cities like Los Angeles ($17.28/hour) can be higher. On public works projects, you must pay the applicable prevailing wage rates, which are significantly higher. Always check the DIR website for current prevailing wage determinations for your county and trade.
Do I need to provide paid sick leave in California?
Yes. California’s Healthy Workplaces, Healthy Families Act requires employers to provide at least 5 days (40 hours) of paid sick leave per year to employees who work 30 or more days in California. This must be tracked and administered correctly.
For more information, see our guide on setting up payroll for your business.
For more information, see our guide on workers compensation insurance.
For more information, see our guide on CSLB license and financial record requirements.
For more information, see our guide on business insurance for California contractors.
Let Bookkeeping Champs Handle Your Contractor Payroll
Setting up payroll correctly from day one is critical — and complex. Bookkeeping Champs helps contractors in Los Angeles, Ventura County, and the San Fernando Valley set up QuickBooks Payroll, register with state agencies, manage payroll tax deposits, and maintain clean employee records. Call (818) 679-4451 to get started on the right foot.
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