Your first employee changes your legal status in a way that hiring a freelancer doesn't. You're now an employer, which means you're responsible for deducting tax from someone else's money and remitting it correctly and for a set of registrations that arrive at different headcounts.
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The good news is that at one employee, most of the heavy obligations don't apply yet. The important thing is knowing which ones do, which ones are coming, and what you have to set up before the first payslip.
What Applies at One Employee
TAN, and TDS on salary
You need a TAN (Tax Deduction and Collection Account Number) to deduct and deposit TDS. This is separate from your PAN. Apply before your first salary payment.
There is no employer-side threshold for salary TDS. A company with one employee has the same obligation as one with fifty thousand. What determines whether you deduct is the employee's income, not your size.
The trigger is whether their estimated annual salary exceeds the basic exemption limit. Under the new regime, which is the default, that's ₹400,000. Under the old regime it's ₹250,000 for those below 60.
So your first hire at ₹25,000 a month, ₹3 lakh a year, likely attracts no TDS under the default regime. Your first hire at ₹80,000 a month certainly does.
Practical point: even where no TDS is due, having the TAN before you need it is easier than applying under time pressure when your second hire pushes someone over the limit.
Professional Tax, if your state levies it
PT is a state tax, and the trigger is one salaried employee in the state, not a headcount.
Whether it applies depends entirely on where the employee physically works. Delhi, Haryana, Uttar Pradesh, Rajasthan, Punjab, Uttarakhand, and Goa don't levy PT at all. Roughly 21 states and union territories do.
If your state levies it, you need two registrations: PTEC for the company's own liability, and PTRC for deducting from employees.
And note that this follows the employee's location, not your registration. A Delhi-registered company whose first hire works from Bengaluru has Karnataka PT obligations.
Shop and Establishment registration
State-level, generally required once you have employees. Check your state's rule.
A written employment contract
Not software, but foundational. Appointment letter with role, salary structure, notice period, and terms. The absence of this is what turns routine disagreements into disputes.
What Doesn't Apply Yet, But Will
Knowing the thresholds ahead of time is what prevents the expensive version of this.
ESI: 10 or more employees in most states, covering employees earning up to ₹21,000 a month.
Provident Fund: 20 or more employees, with a ₹15,000 monthly ceiling on basic plus DA for mandatory coverage. Below 20, registration is voluntary.
Two things that catch first-time employers:
The count includes contractual and part-time workers, counted on any day during the year, not just permanent staff. Founders who count only full-timers sometimes cross a threshold without realizing it.
If you've read that PF applies at 10 employees, that's wrong. The Ministry of Labor and Employment explicitly denied those reports. It remains 20.
The timing that creates retrospective liability
This is the part worth internalizing now, at one employee, because it's cheap to prepare for and expensive to discover.
Registration is due within 30 days of crossing a threshold. Miss it and you're in violation from day 31. Critically, the obligation to contribute starts from the day you crossed, not the day you registered. Late registration means retrospective dues, plus interest and damages.
So the useful habit from employee one: know your headcount, including contractors and part-timers, and know that 10 and 20 are the numbers.
Setting Up the Salary Structure
The decision that has the longest tail, made when nobody's paying attention.
Why the basic component matters
PF computes on basic plus DA, not gross. Using Payroll & Benefits Software makes it easier to configure salary structures correctly while managing PF, ESI, tax deductions, and employee benefits from the beginning. So how you split the salary determines the PF liability once PF applies.
A ₹50,000 monthly salary structured as ₹20,000 basic and ₹30,000 allowances produces different PF from the same ₹50,000 structured as ₹35,000 basic. Both are the same cost to you today, for one employee, with no PF. They diverge sharply at twenty employees.
Under the labor codes, the revised wage definition is widely discussed as requiring basic pay to be at least 50% of total remuneration. Structures built around a small basic to minimize PF are exactly what that provision targets.
Practical advice: structure it properly from the first hire. Restructuring salaries later, once people are used to a take-home number, is a conversation nobody wants.
A workable structure
Basic (a meaningful proportion of gross), HRA, and any allowances you actually intend, rather than a long tail of components invented to reduce the base.
Keep it simple. Every component you add is a component you'll configure in every system forever.
What You Actually Need Before the First Payslip
From you:
- TAN
- PT registration (PTEC and PTRC), if your state levies it
- Shop and Establishment registration, per your state
- A bank account you can pay salary from
From the employee:
- PAN, mandatory
- Many businesses use HR software to collect employee documents, manage onboarding, and securely maintain records required before the first payroll cycle.
- Bank account details
- Aadhaar
- Previous employment details if they joined mid-year, historically via Form 12B, because their previous income affects their annual tax computation
- Tax regime declaration in writing
- UAN, if they have one from previous employment
That regime declaration deserves emphasis. The new regime is the default. If the employee says nothing, you compute under the new regime. Get it in writing at the start of the financial year, from everyone, always.
Do You Need Payroll Software for One Employee?
Honestly, no. One employee is a spreadsheet and a bank transfer.
Where the honest answer changes:
Two to five employees: still manageable manually, but the payslip and record-keeping start to consume time you'd rather spend elsewhere. Free tiers exist that cover payroll, leave, and compliance for up to around 10 employees. There's no reason not to use one.
Approaching 10: now you want software, because ESI arrives at 10 and you don't want to be configuring a new system while also registering for a new statute in a 30-day window.
The general principle: set it up slightly before you need it. The software that tracks headcount and flags an approaching threshold turns a compliance risk into a calendar reminder. Pairing payroll with Compliance Management Software also helps businesses monitor statutory registrations, filing deadlines, and employee-count thresholds as they grow. A spreadsheet warns you about nothing.
The Monthly Rhythm
Once you're running:
- Salary paid on your stated date
- TDS deposited by the 7th of the following month, where applicable
- PT deposited per your state's calendar, monthly in most states, half-yearly in Tamil Nadu and Kerala
- Payslip issued, showing the full breakdown of earnings and deductions
Quarterly, you file TDS returns: Q1 by 31 July, Q2 by 31 October, Q3 by 31 January, and Q4 by 31 May.
Annually, file Form 16 by 15 June for anyone you deducted TDS from.
Note that from 1 April 2026, salary TDS is governed by Section 392 of the Income Tax Act, 2025, replacing Section 192 of the 1961 Act, and Form 138 replaces Form 24Q for salary returns. The computation method is unchanged; the references aren't.
The Mistakes First-Time Employers Make
Treating an employee like a contractor. If you've been paying someone as a freelancer and they've become full-time, exclusive, and working your hours with your equipment, the arrangement is employment regardless of the invoice. Misclassification means retrospective PF at 12% on both sides, interest at 12% a year, and damages up to 25%.
Structuring salary to minimize a base. It works until PF applies, then it doesn't, and the labor codes' wage definition targets exactly this.
No written contract. The most preventable problem on this list.
No regime declaration. Assume old regime, deduct accordingly, and the whole year's computation is wrong.
Not getting PAN at onboarding. Without a valid PAN, higher-rate TDS applies, and you can't retroactively fix a deduction you should have made.
Missing the state question. Your first remote hire in another state brings that state's rules with them.
Discovering the threshold late. The 30-day window is short, and liability runs from the crossing date.
Your Setup Checklist
Before the offer:
- Decide the salary structure, with a real basic component
- Confirm which state the person will physically work from
Before the first payslip:
- TAN obtained
- PT registrations, if applicable in that state
- Shop and Establishment registration
- Signed appointment letter
- PAN, bank details, Aadhaar collected
- Written regime declaration
- Previous employment details, if a mid-year joiner
Monthly:
- Pay salary, issue payslip
- Deposit TDS by the 7th
- Deposit PT per state calendar
Ongoing:
- Track headcount including contractors and part-timers
- Watch for 10 (ESI) and 20 (PF)
Conclusion
For one employee, your obligations are narrower than the internet suggests: TAN and salary TDS, professional tax if your state levies it, shop and establishment registration, and a written contract. ESI arrives at 10 employees and PF at 20, and both count contractors and part-timers. The decision with the longest consequence is the salary structure. PF computes on basic plus DA, so a small basic saves nothing today and costs a restructuring conversation later, particularly with the labor codes' wage definition pointing the other way. Build it properly from the start. Get the tax regime declaration in writing, because the new regime is the default and assuming otherwise means a year of wrong computation. Get PAN before the first payment. And track your headcount against 10 and 20. Registration is due within 30 days of crossing, and liability runs from the day you crossed, not the day you noticed.
