As a business owner, getting extra help is a crucial step towards growth. Here’s what you need to do when hiring your first employee.
- Decide between a regular employee vs. contractor
- Get tax ID numbers
- Register with the labor department
- Gather the right forms
- Set up a payroll system
- Create a benefits strategy
- Learn record-keeping best practices
- Notify the new hire reporting agency
- Post required notices
- Create an employee handbook
It’s a great moment when you can finally hire your first employee. You’ve spent lots of time and energy building your business, and you can now afford to delegate tasks and keep growing. But aside from the resume review and interview processes, there are many steps to ensuring you’re prepared to hire and pay workers.
Do it right by following all government guidelines. Here is an overview of steps to take when hiring your business’s first employee.
Decide what kind of employee you need
A good first step is figuring out exactly how much you can pay someone and whether you can provide benefits. Full-time and even part-time employees will be pricier, while independent contractors will work with you on contract and may be more affordable. You can work with them on a project-by-project basis, so you’re only paying for work when you need it—and not paying things like benefits and Medicare and Social Security taxes.
However, contractors will be less under your control, and you may be only one of many clients they work with. Regular employees are a good idea when you need daily tasks covered and are looking to build longer-term relationships.
Whatever avenue you choose, remember each worker classification is treated differently for tax purposes. Avoid misclassifying an employee as an independent contractor with the IRS and make sure you issue W-2 tax forms for regular employees and 1099s for contractors each year.
Get their tax identification numbers
All employers need to apply to get an employer identification number (EIN) from the IRS. You’ll use this number to identify your business on tax documents, including employee tax forms and the tax return. It’s simple to get an EIN. The IRS now has an online application portal, and you will receive an EIN upon verification.
In addition to the EIN, you may need to get tax IDs for your state, so check your local laws.
Register your business with the labor department
Each state has its own labor department where you’ll need to register your business. And if you have enough employees, you’ll have to start paying state unemployment compensation taxes. These taxes fund the state’s unemployment program to pay people when they’re out of a job.
Make sure new employees fill out the right forms
Full- or part-time employees must complete a W-4 tax form (Employee’s Withholding Certificate) and return it to you. This form ensures you withhold the right amount of taxes from their compensation.
They also need to complete Form I-9, Employment Eligibility Verification, which verifies their identity and authorization to work in the United States. You don’t file this form but keep it in your records for at least three years.
Set up payroll procedures
You’ll then need to make sure you set up pay periods, which are usually weekly, biweekly, or monthly. It’s a good practice to enable employees to get direct deposits each pay period, so you don’t have to issue checks. This means you’ll need workers to fill out documentation providing their bank information.
It’s also essential to withhold tax from each paycheck and submit these numbers to the IRS. You can either decide to incorporate an in-house or external service for payroll administration, but it will need to be managed carefully on a regular basis. The IRS Publication 15, Circular E, Employer’s Tax Guide, outlines all the details employers must know when setting up a payroll system. You’ll also need to report payroll taxes quarterly and annually.
As an employer, you must also file IRS Form 940 each year to report federal unemployment tax if you paid $1,500 or more in wages in any quarter in a year when an employee worked for you for any 20 or more weeks.
Create a benefits strategy
It’s hard to be a competitive employer without offering certain benefits, like health and dental insurance and paid time off. Think through exactly what you want to provide, even if you will only have one employee for a while. Then, create a plan for requesting days off and managing their vacation and sick days.
Some benefits are required, which include:
- Leave benefits included in the Family and Medical Leave Act (FMLA): Eligible employees can take unpaid, job-protected family or medical leave.
- Social Security and Medicare taxes: You must pay the same rate as your employees.
- Workers’ Compensation: You have the option of getting workers’ comp through the state, on a self-insured basis, or a third-party commercial carrier.
- Unemployment insurance: Some state workforce agencies require that you register with them to get unemployment insurance.
- Disability insurance is required in California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico.
Implement record-keeping best practices
Start a thorough process for keeping personnel files. Employment documents contain sensitive information, including applications, offer letters, tax forms, benefits information, and other paperwork. Make sure these records are stored securely. Medical records and I-9 Forms should be kept separately in a cabinet that can be locked.
According to the Equal Employment Opportunity Commission (EEOC), employers must keep all personnel records for one year, and they must be kept for a year following the date someone was terminated. You must also keep payroll records for three years, and any documentation about why employees of the opposite sex are paid different wages needs to be kept for at least two years under the Fair Labor Standards Act (FLSA).
Notify your new hire reporting agency
Each state has a new hire reporting system where owners report each person they hire within 20 days. This is done so child support agencies can find parents who owe child support in the National Directory of New Hires.
Post required notices
The U.S. Department of Labor (DOL) and each state’s labor department require that employers post certain notices about employees’ rights in the workplace. The DOL website now has a tool where you can enter your information and discover exactly which posters are required.
Create an employee handbook
A comprehensive employee handbook can be a great way to keep everything organized and outlined. It lists all employer policies, so workers have somewhere to go with many common questions. The handbook should also communicate important company information, including values, and outlines expectations and standards for employees and leadership. This resource may also help legally protect employers from discrimination or unfair treatment claims.
Get business help from Provident CPA and Business Advisors
Running a business involves lots of moving parts, and things get more complicated when you hire your first employee. When you have questions about the tax implications of hiring a regular employee or independent contractor, or you need assistance with your business model, the team at Provident CPA and Business Advisors can help. Contact us today to learn more about our services.