Hiring your first employee in India: the complete checklist for small businesses

Hiring your first employee turns a one-person business into an employer, and that switch brings paperwork: a written offer, identity and bank documents, a professional tax registration in most states, a Shops and Establishments registration or intimation, and a monthly salary slip. PF and ESI usually wait until you cross 20 and 10 people respectively. This checklist walks through every step in the order you will meet it, with a worked first-month payroll.

First decide: employee or contractor?

Before the offer letter, be honest about what you are buying. If the person works fixed hours, at your premises, on your equipment, under your day-to-day direction and only for you, courts and labour officers will treat them as an employee whatever the paper says. If they deliver defined outputs, choose their own hours and tools, and serve other clients too, a contractor arrangement is genuine.

The difference matters for money. An employee gets salary under Section 192 of the Income Tax Act (TDS only when taxable), statutory leave, notice period and, once thresholds are crossed, PF, ESI, bonus and gratuity. A contractor raises an invoice, you deduct TDS under Section 194C or 194J only if you are liable to deduct (see our TDS guide), and they handle their own GST if registered. Calling an employee a "consultant" to skip PF or notice period is the most common mistake we see and the easiest one for an inspector to unwind.

The offer letter: what it must contain

An offer letter is your first legal document with the person, so get the essentials in and keep it short. Include the designation, reporting manager, date of joining, place of work, working hours and weekly off, probation period, notice period during and after probation, the full salary structure (basic, HRA, other allowances, employer PF or ESI contribution if any), leave entitlement, and a line on confidentiality and return of company property. Ask the candidate to sign and return a copy.

Once they join, convert the offer into an appointment letter or make the offer letter double as one by stating that it becomes the appointment letter on joining. The four Labour Codes, brought into force from 21 November 2025, require every employer to issue an appointment letter; state rules are still being notified in phases, so check the latest notification for your state. For salary structure decisions see salary structure: basic, HRA and allowances.

Documents to collect on day one

Collect these before the first payroll, not after. Photocopies are fine; note that you have seen the originals.

Keep everything in one folder per employee, physical or digital. Labour inspectors under the Shops Act and the PF office can ask for the register of employees, wage register and appointment letters at any time.

Registrations your first hire triggers

Shops and Establishments Act

Every state has its own Act. A shop or office with employees must register or intimate the local labour department, usually within 30 to 90 days of opening. Maharashtra, for example, requires only an intimation for establishments with fewer than 10 workers and full registration at 10 or more; Karnataka requires registration within 30 days through the e-Karmika portal. This registration also sets your working hours, weekly off, leave and holiday rules. Read the Shops and Establishments licence guide for state examples.

Professional tax

Professional tax is a state levy, capped at ₹2,500 a year per person under Article 276 of the Constitution. If your state levies it (Maharashtra, Karnataka, West Bengal, Tamil Nadu, Gujarat, Telangana, Andhra Pradesh, Kerala, Madhya Pradesh, Odisha and others do; Delhi, Uttar Pradesh, Haryana and Rajasthan do not), you generally need two things: an employer registration to deduct and deposit PT from salaries (PTRC in Maharashtra) and an enrolment for the business itself (PTEC). In Maharashtra the deduction is ₹200 a month, ₹300 in February, for salary above ₹10,000; in Karnataka ₹200 a month above ₹25,000. See professional tax state-wise guide.

PF and ESI thresholds

The Employees' Provident Funds and Miscellaneous Provisions Act applies once you have 20 or more employees. Contribution is 12% of basic plus DA from the employee and 12% from the employer (8.33% goes to EPS, capped on a wage ceiling of ₹15,000), with ECR and payment by the 15th. Below 20 employees you can register voluntarily, which is worth considering if you want to attract candidates from larger firms.

ESI applies at 10 or more employees (20 in some states) for employees earning wages up to ₹21,000 a month: 0.75% from the employee and 3.25% from the employer, paid by the 15th. The Payment of Gratuity Act applies at 10 employees and pays out after five years of service; the Payment of Bonus Act applies at 20. Our EPF guide for employers and ESI guide for employers cover registration when you get there.

TDS on salary and TAN

If any employee's salary will be taxable after the standard deduction and rebate, you must deduct TDS under Section 192, which needs a TAN (apply in Form 49B). Under the new regime salary up to ₹12,75,000 a year is effectively tax-free, so most first hires need no deduction. Apply for a TAN anyway as soon as one salary crosses the line; you will also need it for the quarterly Form 24Q. See TDS on salary under Section 192.

Minimum wages: check your state notification

Minimum wages are fixed by each state (and by the Centre for central-sphere establishments) by category of employment (shops, hotels, security, etc.), by skill level (unskilled, semi-skilled, skilled, highly skilled) and often by zone (city versus rural). They are revised with a dearness allowance component, typically every six months. There is no single all-India figure; a skilled worker in a Mumbai shop and one in a small Bihar town have different floors.

Look up the current notification on your state labour department's website before you fix a salary, and put the basic plus DA in the offer letter at or above that floor. Paying below minimum wage is an offence, and it also affects PF because the PF office treats the minimum wage as the base that cannot be split into allowances to reduce contribution.

Salary slip, leave, probation and notice period

Salary slip obligation

Wage rules under the Minimum Wages Act and most state Shops Acts require a wage slip to be issued to each employee at or before payment, and the Code on Wages carries this forward. A slip should show the month, paid days, earnings by component, deductions (PT, PF, ESI, TDS, advances) and net pay. Even for one employee, issue it every month; employees need slips for loans, visas and their next job.

Leave

Leave is set by your state Shops Act: typically earned or privilege leave at one day for every 20 days worked (about 15 to 18 days a year), plus casual leave and sick leave in the range of 8 to 12 days each depending on the state, a weekly off, and national holidays on 26 January, 15 August and 2 October plus notified festival holidays. Women employees are entitled to 26 weeks of maternity leave under the Maternity Benefit Act once you have 10 or more employees. Write your policy down; see leave and attendance policy for a small business.

Probation and notice

Probation of three to six months is standard and lets both sides exit on short notice (often 7 to 15 days). After confirmation, a notice period of 30 days is typical for a small business; state Shops Acts generally require at least 30 days' notice or pay in lieu for an employee who has completed a qualifying period, often three months. Keep notice periods symmetrical; a one-sided 90-day clause is hard to enforce and puts off good candidates.

First-month payroll: a worked example

Take a Pune design agency (a proprietorship with no other staff) hiring its first designer on a gross salary of ₹30,000 a month, joining on 6 July 2026. Basic ₹15,000, HRA ₹7,500, other allowances ₹7,500. The agency has fewer than 20 employees, so PF is not mandatory and it decides not to register voluntarily for now; fewer than 10 employees, so ESI does not apply. Maharashtra professional tax applies from the first employee.

July has 31 calendar days and the designer joins on the 6th, so paid days are 26. Prorated gross = ₹30,000 × 26 ÷ 31 = ₹25,161 (rounded). Professional tax in Maharashtra is ₹200 for the month because gross exceeds ₹10,000. Projected annual salary is ₹3,60,000, well below the ₹12,75,000 threshold under the new regime, so no TDS.

Steps for the month: collect the documents above, issue the appointment letter, file the Shops Act intimation, apply for PTRC and PTEC on the Maharashtra GST department's portal, run the payroll, pay the net salary on or before the 7th of August (the Code on Wages sets the 7th as the outer date for monthly wages), issue the salary slip, deposit the ₹200 PT with the PTRC return by the state due date, and record the salary as an expense in your books.

Common mistakes

• Treating a full-time worker as a contractor to avoid statutory obligations. If the relationship looks like employment, it is employment.
• Fixing a "consolidated" salary with no breakup. You lose control over PF wages later and cannot compute HRA exemption for the employee.
• Forgetting professional tax because you have only one employee. In PT states the employer registration is triggered by the first salary.
• Paying salary in cash or from a personal account. Use the business current account and a bank transfer so that the expense is clean for income tax.
• Skipping the salary slip for the first few months "because it is just one person". Slips are a statutory record and an employee's first request when they apply for a loan.
• Not keeping an attendance record. Without one you cannot prove paid days, leave balance or overtime if a dispute arises.
• Missing minimum wage revisions. DA changes twice a year; a salary that complied in April may fall below the floor by October.

How VyaparKit helps

VyaparKit gives you the documents a first hire needs without a full HR system. Draft the offer letter from a template that already carries designation, CTC breakup, probation and notice clauses. Record daily presence on the attendance sheet, run the month on payroll run with PF, ESI and PT computed and an NEFT bank file for payment, and issue a salary slip the employee can download. The free plan covers three slips and one payroll run of up to three employees a month, which is enough for a first hire.

Next steps

• Decide employee or contractor using the table above and document the reasoning.
• Draft and sign the offer letter with salary breakup, probation and notice period.
• Collect PAN, Aadhaar, bank details, UAN and declarations before the first payroll.
• Check your state's Shops Act, professional tax and minimum wage notification this week.
• Run the first payroll by the 7th of the following month and issue a salary slip.