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.

Key takeaways:

• 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.

Working in more than one state? You might need to file multiple tax returns.

Key takeaways:

• You need to file multiple state tax returns if you live in one state and work in another, moved states and employers, or received income property from a place you own in another state.
• A non-resident is someone who received income from a state but didn’t live there.
• Two states may have reciprocity agreements, which allow you not to file more than one return.
  
• However, even if the state you worked in doesn’t have an income tax, you still need to report the income on your home state return.

Many Americans are working remotely now, at least part of the time, and that means some have tax questions about working in more than one state. Other individuals work in one state regularly and live in another. Depending on your situation and your state’s tax laws, you may need to file more than one state tax return. Note that this situation doesn’t impact federal tax returns, only state returns.

Let’s walk through when you would file multiple tax returns and key considerations when working in various locations. 

When to file multiple state tax returns

Taxes can get complicated quickly if you have multiple streams of income coming in or if you have to report business expenses on your tax return. Things get even more complex when you have worked in more than one state, though you may not always have to deal with multiple returns. 

There are a few scenarios that require filing more than one state tax return:

• You moved during the applicable tax year: If you worked in two different states in a year because of a move and both states withheld income taxes, you must file two separate returns. Even if you worked remotely, you would still be considered a part-year resident in each.
• You work in a different state than where you live: Earning income in one state and residing in another may mean you need to file two tax returns, though you won’t have to pay taxes in both states unless you actually earned income in both. Reference the section below on reciprocity agreements, as well.
• You own income-generating property in another state: If you own a property in another state and received income from this property, you may need to file a separate state tax return for that income. 
• You’re self-employed/own a business: Owning a business and working in more than one state means you’ll have to file multiple tax returns and may need to pay state income taxes in more than one place.

Note that if you work remotely for a company located in a different state than you, you usually don’t need to file two returns—only in the state where you worked.

What is a non-resident?

So, if your situation sounds like one of those above, you may need to file multiple state returns. In these cases, most states require you to file a “non-resident” state tax return where you worked but didn’t live that year. A non-resident is someone who received income from within a state but did not live there at all during the specific tax year. 

However, each state has its own laws about determining residency status. Some require that you be physically present in the state for a certain number of days to be considered a resident. Others require that non-residents who earn income in a state file a separate schedule to report income there.

Reciprocity agreements

Make sure you check the reciprocity tax agreements for the states you’re living and working in. These agreements allow residents of other states to work there without having to file a non-resident tax return. States located next to one another often have these arrangements since people can cross over and work in the neighboring state more easily. The agreement basically says that you don’t have to file both returns as long as your employer withholds income tax in that other state.

Note that it might be a good idea to file a state tax return in the place where you worked, even if you don’t have to pay taxes there. This ensures you’ll get a refund if your employer withheld taxes from your income regardless of the reciprocity agreement.

You should never have to pay taxes twice on the same income, even if you work and live in states without reciprocity agreements. However, if you do, your home state will likely be able to provide a tax credit or adjustment for taxes you paid in other states.

What if my state doesn’t impose income tax?

It could also be the case that you work in a state without income tax. This list includes these nine states:

• Alaska
• Florida 
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Note that New Hampshire and Wyoming don’t tax earned income, but they do tax investment income. So even though you don’t have to pay income tax in these states, you still must report your earned income on your tax return for the home state and a federal tax return.

Consult with a tax expert about your state returns

Because we’re talking about state taxes here, remember that each state has its own set of tax laws. But generally, taxpayers have to file multiple state tax returns if they worked in more than one state. Reciprocity agreements may help you limit the returns you have to file, and you should never be paying state taxes twice on the same income. Working in multiple states doesn’t impact your federal tax return.

The Provident CPA and Business Advisors team helps taxpayers and small business owners pay the least amount of tax legally possible while devising comprehensive strategies. Reach out to our team today to get started.