Hiring Your First Employee in Vermont: The Payroll Setup

Going from no employees to one employee is a bigger administrative step than going from one to ten. Most of the work below is one-time setup, and most of it has to be done before the first payroll rather than after it.

This is the sequence, not a complete compliance guide. Confirm current requirements with the agencies linked above.

Before the first payday

Get a federal Employer Identification Number. If you have been operating as a sole proprietor using your Social Security number, you will need an EIN to report employment taxes. It is obtained directly from the IRS at no cost.

Register with the Vermont Department of Taxes for withholding. Vermont income tax withholding requires its own registration, separate from your federal EIN. You will be assigned a filing frequency, which determines how often you remit.

Register with the Vermont Department of Labor for unemployment insurance. You will receive an experience rate that affects your cost per employee. New employers are assigned a starting rate.

Arrange workers' compensation coverage. Vermont requires employers to carry workers' compensation insurance. This is purchased through an insurance carrier or agent, not through a tax agency, and it should be in place before anyone starts work.

Paperwork from the employee

Collect these on or before the first day.

• Form I-9, verifying identity and authorization to work. There are timing rules for when sections must be completed, and it is kept in your records rather than filed anywhere.
• Form W-4, for federal income tax withholding.
• Form W-4VT, for Vermont income tax withholding. Vermont has its own form, and an employee's Vermont withholding may differ from their federal election.
• Direct deposit authorization, if you are paying electronically.

Report the new hire

Vermont, like every state, requires new hires to be reported to a state directory within a set period after the start date. This supports child support enforcement and is administered through the Vermont Office of Child Support. It is a short filing, and it is easy to overlook because it is separate from every tax registration above.

Decisions to make before you run payroll

Pay frequency. Weekly, biweekly, semimonthly or monthly. This is harder to change later than it looks, because employees budget around it.

Classification. Whether the person is an employee or an independent contractor is determined by the nature of the working relationship, not by preference or by what the paperwork is called. Misclassification is expensive to unwind, and the federal and Vermont tests are worth reading before deciding.

Exempt or non-exempt. Whether the role is eligible for overtime depends on duties and salary level, not on job title or on whether the person is paid a salary.

Pay date mechanics. Decide how far the pay period closes ahead of the pay date. Same-day closing leaves no room to review anything.

Ongoing obligations once you have started

• Deposit federal payroll taxes on your assigned schedule. The schedule is determined by your prior liability, and missing it triggers penalties that scale with lateness.
• Remit Vermont withholding on your assigned frequency.
• File quarterly federal and Vermont returns.
• Pay unemployment insurance contributions quarterly.
• Issue W-2s after year end, and file copies with the relevant agencies.
• Keep payroll records for the required retention periods.

Where the responsibility sits

A payroll provider can carry out most of the recurring work above, and a managed service will. But under an ordinary payroll service arrangement the employer generally remains responsible for its payroll tax obligations. Worth knowing at the outset, rather than discovering it during a disagreement.