diff --git a/client/modules/IDE/actions/files.js b/client/modules/IDE/actions/files.js
index 5d839465..17b5cf1c 100644
--- a/client/modules/IDE/actions/files.js
+++ b/client/modules/IDE/actions/files.js
@@ -69,14 +69,21 @@ export function getBlobUrl(file) {
 export function createFile(formProps) {
   return (dispatch, getState) => {
     const state = getState();
-    const rootFile = state.files.filter(file => file.name === 'root')[0];
+    const selectedFile = state.files.find(file => file.isSelected);
+    const rootFile = state.files.find(file => file.name === 'root');
+    let parentId;
+    if (selectedFile.fileType === 'folder') {
+      parentId = selectedFile.id;
+    } else {
+      parentId = rootFile.id;
+    }
     if (state.project.id) {
       const postParams = {
         name: createUniqueName(formProps.name, state.files),
         url: formProps.url,
         content: formProps.content || '',
         // TODO pass parent id to API, once there are folders
-        parentId: rootFile.id
+        parentId
       };
       axios.post(`${ROOT_URL}/projects/${state.project.id}/files`, postParams, { withCredentials: true })
         .then(response => {
@@ -86,7 +93,7 @@ export function createFile(formProps) {
           dispatch({
             type: ActionTypes.CREATE_FILE,
             ...response.data,
-            parentId: rootFile.id
+            parentId
           });
           dispatch({
             type: ActionTypes.HIDE_MODAL
@@ -109,7 +116,7 @@ export function createFile(formProps) {
         url: formProps.url,
         content: formProps.content || '',
         // TODO pass parent id from File Tree
-        parentId: rootFile.id
+        parentId
       });
       dispatch({
         type: ActionTypes.HIDE_MODAL
@@ -121,12 +128,20 @@ export function createFile(formProps) {
 export function createFolder(formProps) {
   return (dispatch, getState) => {
     const state = getState();
-    const rootFile = state.files.filter(file => file.name === 'root')[0];
+    const selectedFile = state.files.find(file => file.isSelected);
+    const rootFile = state.files.find(file => file.name === 'root');
+    let parentId;
+    if (selectedFile.fileType === 'folder') {
+      parentId = selectedFile.id;
+    } else {
+      parentId = rootFile.id;
+    }
     if (state.project.id) {
       const postParams = {
         name: createUniqueName(formProps.name, state.files),
         content: '',
-        parentId: rootFile.id,
+        children: [],
+        parentId,
         fileType: 'folder'
       };
       axios.post(`${ROOT_URL}/projects/${state.project.id}/files`, postParams, { withCredentials: true })
@@ -134,7 +149,7 @@ export function createFolder(formProps) {
           dispatch({
             type: ActionTypes.CREATE_FILE,
             ...response.data,
-            parentId: rootFile.id
+            parentId
           });
           dispatch({
             type: ActionTypes.CLOSE_NEW_FOLDER_MODAL
@@ -153,8 +168,9 @@ export function createFolder(formProps) {
         _id: id,
         content: '',
         // TODO pass parent id from File Tree
-        parentId: rootFile.id,
-        fileType: 'folder'
+        parentId,
+        fileType: 'folder',
+        children: []
       });
       dispatch({
         type: ActionTypes.CLOSE_NEW_FOLDER_MODAL
diff --git a/client/modules/IDE/components/FileNode.js b/client/modules/IDE/components/FileNode.js
index 0ddf21f9..c68dda89 100644
--- a/client/modules/IDE/components/FileNode.js
+++ b/client/modules/IDE/components/FileNode.js
@@ -56,6 +56,7 @@ export class FileNode extends React.Component {
 
   render() {
     let itemClass = classNames({
+      'sidebar__root-item': this.props.name === 'root',
       'sidebar__file-item': this.props.name !== 'root',
       'sidebar__file-item--selected': this.props.isSelected,
       'sidebar__file-item--open': this.props.isOptionsOpen,
@@ -71,6 +72,7 @@ export class FileNode extends React.Component {
           if (this.props.name !== 'root') {
             return (
               <div className="file-item__content">
+                <span className="file-item__spacer"></span>
                 {(() => { // eslint-disable-line
                   if (this.props.fileType === 'file') {
                     return (
@@ -157,7 +159,7 @@ export class FileNode extends React.Component {
         {(() => { // eslint-disable-line
           if (this.props.children) {
             return (
-              <ul>
+              <ul className="file-item__children">
                 {this.props.children.map(this.renderChild)}
               </ul>
             );
diff --git a/client/modules/IDE/components/NewFileModal.js b/client/modules/IDE/components/NewFileModal.js
index 0c32293a..784ec2a7 100644
--- a/client/modules/IDE/components/NewFileModal.js
+++ b/client/modules/IDE/components/NewFileModal.js
@@ -1,8 +1,6 @@
 import React, { PropTypes } from 'react';
-import { bindActionCreators } from 'redux';
 import { reduxForm } from 'redux-form';
 import NewFileForm from './NewFileForm';
-import * as FileActions from '../actions/files';
 import classNames from 'classnames';
 import InlineSVG from 'react-inlinesvg';
 const exitUrl = require('../../../images/exit.svg');
@@ -48,14 +46,6 @@ NewFileModal.propTypes = {
   canUploadMedia: PropTypes.bool.isRequired
 };
 
-function mapStateToProps() {
-  return {};
-}
-
-function mapDispatchToProps(dispatch) {
-  return bindActionCreators(FileActions, dispatch);
-}
-
 function validate(formProps) {
   const errors = {};
 
@@ -73,4 +63,4 @@ export default reduxForm({
   form: 'new-file',
   fields: ['name'],
   validate
-}, mapStateToProps, mapDispatchToProps)(NewFileModal);
+})(NewFileModal);
diff --git a/client/modules/IDE/pages/IDEView.js b/client/modules/IDE/pages/IDEView.js
index 2a0bceef..4d8274c7 100644
--- a/client/modules/IDE/pages/IDEView.js
+++ b/client/modules/IDE/pages/IDEView.js
@@ -258,6 +258,7 @@ class IDEView extends React.Component {
               <NewFileModal
                 canUploadMedia={this.props.user.authenticated}
                 closeModal={this.props.closeNewFileModal}
+                createFile={this.props.createFile}
               />
             );
           }
@@ -393,7 +394,8 @@ IDEView.propTypes = {
   closeProjectOptions: PropTypes.func.isRequired,
   newFolder: PropTypes.func.isRequired,
   closeNewFolderModal: PropTypes.func.isRequired,
-  createFolder: PropTypes.func.isRequired
+  createFolder: PropTypes.func.isRequired,
+  createFile: PropTypes.func.isRequired,
 };
 
 function mapStateToProps(state) {
diff --git a/client/modules/IDE/reducers/files.js b/client/modules/IDE/reducers/files.js
index 1bc4a369..7fd7353a 100644
--- a/client/modules/IDE/reducers/files.js
+++ b/client/modules/IDE/reducers/files.js
@@ -111,6 +111,7 @@ const files = (state, action) => {
             _id: action._id,
             content: action.content,
             url: action.url,
+            children: action.children,
             fileType: action.fileType || 'file' }];
       }
     case ActionTypes.SHOW_FILE_OPTIONS:
diff --git a/client/styles/components/_sidebar.scss b/client/styles/components/_sidebar.scss
index 103bb3c7..05b36de2 100644
--- a/client/styles/components/_sidebar.scss
+++ b/client/styles/components/_sidebar.scss
@@ -35,25 +35,49 @@
   }
 }
 
+.sidebar__root-item {
+  position: relative;
+}
+
 .sidebar__file-item {
   font-size: #{16 / $base-font-size}rem;
-  padding: #{8 / $base-font-size}rem #{20 / $base-font-size}rem;
+  padding: #{8 / $base-font-size}rem 0;
   color: $light-inactive-text-color;
   cursor: pointer;
   &--selected {
     background-color: $ide-border-color;
   }
-  &:hover .sidebar__file-item-name {
+  &:hover > .file-item__content .sidebar__file-item-name {
     color: $light-primary-text-color;
   }
-  &:hover .sidebar__file-item-icon g {
+  &:hover > .file-item__content .sidebar__file-item-icon g {
     fill: $light-primary-text-color;
   }
 }
 
+// to indent each row in the file tree
+// not sure how to do this in a better way
+// it won't work if the file tree is too nested
+.file-item__spacer {
+  .sidebar__file-item & {
+    width: #{20 / $base-font-size}rem;
+    .sidebar__file-item & {
+      width: #{40 / $base-font-size}rem;
+      .sidebar__file-item & {
+        width: #{60 / $base-font-size}rem;
+        .sidebar__file-item & {
+          width: #{80 / $base-font-size}rem;
+          .sidebar__file-item & {
+            width: #{100 / $base-font-size}rem;
+          }
+        }
+      }
+    }
+  }
+}
+
 .file-item__content {
   display: flex;
-  // justify-content: space-between;
   position: relative;
 }
 
@@ -66,9 +90,9 @@
 .sidebar__file-item-show-options {
   @extend %icon;
   display: none;
-  margin-left: auto;
-  margin-right: 0;
-  .sidebar__file-item--selected & {
+  position: absolute;
+  right: #{20 / $base-font-size}rem;
+  .sidebar__file-item--selected > .file-item__content & {
     display: inline-block;
   }
 }
@@ -84,7 +108,7 @@
   padding: #{8 / $base-font-size}rem #{16 / $base-font-size}rem;
   background-color: $light-modal-background-color;
   z-index: 100;
-  .sidebar__file-item--open & {
+  .sidebar__file-item--open > .file-item__content & {
     display: block;
   }
 }