Hiring Your First Employee: What You Need To Know

Congratulations!  Your business has grown to a point where you no longer can manage the day-to-day operations by yourself and you need to add resources to your team in order to leverage the time, skills and talents of someone else to achieve growth in your business.

Before hiring your first employee, there are four things you should consider:

  1. Know your numbers.

Before you take the plunge to bring on an employee, you should have a good view of the financial health of your business and set a budget for your new employee that the business can easily maintain.  As you determine your employee budget make sure to calculate total compensation to include wages, employee and employer taxes and benefit costs that you will offer and workers comp insurance.

  1. Define The Position.

Assess the business needs that your employee will meet.  Create a detailed job description and set expectations for the success of the employee in the job description so there is no room for guessing.  Make this a formal document that the employee agrees to at the onset of employment.

  1. Will You Be Hiring an Employee or a Contractor?

Understanding the legal definition of an employee versus a contractor is extremely important.  Just because you do not want to pay employer taxes does not mean you can classify them as a contractor.  So then what does the IRS say the difference is between the two?  The basic idea comes down to control – do you control all aspects of the job including work site, work hours, how they do the job, tools and equipment needed to the job and is the individual only working for you?  If you answer yes to these questions, then you are hiring an employee.  If you are not sure make sure to check the IRS rules on this here.

  1. Does your legal entity structure support employees?

Is the legal structure of your business setup in a way that you can actually pay employees?  If you are a sole proprietor, do you have an EIN?  If not, you will need to file for an assumed business name in your state plus request an EIN from the IRS.  If you are unsure how to proceed, seek out the help of a professional to assist you.

Once you have determined to hire an employee and you have a plan to move forward, let’s talk about setting up your system.  There are 11 elements to your system.  The first 5 elements are one-time setups that will need to be in place before you hire.  The remaining 6 elements will address setting up your ongoing processes for hiring, paying and retaining employees.  It’s important to start off on the right foot by making sure you follow all of the legal rules that will now apply to you as an employer.

  1. Make sure you have an EIN

We addressed this in the things to consider above.  If you already have an EIN then you are ready to move forward.  If not, you must file IRS form SS-4.  You can apply on the IRS website here.  If you are not comfortable doing this on your own, seek out a trusted legal or accounting professional to help you. 

  1. Register with your State

Once you hire employees, you will need to pay state unemployment insurance taxes as well as state income tax withholdings.  The unemployment insurance payments will go to your state’s unemployment compensation fund, which provides short-term relief to workers who lose their jobs.  You may go to the Department of Labor’s website for a list of state unemployment insurance tax agencies.  Check with your state’s tax agency to find out if your state requires income tax withholdings.  If you are required to withhold a portion of each employee’s income, you will need to obtain a withholding permit from your state’s tax agency.

  1. Get worker’s compensation insurance

Workers’ comp insurance is required in the vast majority of states with a few exceptions for very small employers.  You should obtain workers’ comp coverage to protect your workers who might suffer on-the-job injuries.  Some states requre you to go through your state’s worker’s comp provider.  Otherwise, most reputable insurance companies can provide this coverage for you.

  1. Choose and setup a payroll system to calculate wages and taxes

We recommend that you choose an online payroll provider or partner with your trusted accounting professional to setup your payroll system which will calculate employee pay, taxes and deductions for you and file all necessary reports on your behalf.

  1. Setup any employee benefits you will offer

As the employer you can choose to offer benefits to your employees.  Such benefits may include health, dental, vision, life and disability insurance as well as a retirement savings plan.  You may choose what you offer and when you will offer it.  If you choose to offer any of these benefits from the beginning you will need to partner with a provider who can assist you in determining the right plans to offer your employees and help you with any setup and administration of the plan.

  1. Create onboarding process

Each new employee should have a structured welcoming into your organization.  While there are many ways to do this, we will focus here on creating a streamlined approach to documenting their employment.  

Make sure that each new employee completes an I-9 form which verifies employment eligibility required by the U.S. Citizenship and Immigration Services.  These forms do not need to be filed with any agency but you are required to keep them in your files for three years and make them available for inspection by officials of Immigration and Customs Enforcement (also know as ICE.)  You can obtain this form online at www.uscis.gov.  Important to note is that the I-9 forms should be kept in a separate file for all employees and not in each employee’s individual personnel file.

Other forms to be completed include the IRS W-4 for federal income tax withholdings, your state’s W-4 if your state has a separate form, any benefit enrollment forms and any background checks to be completed before hire.

  1. Report each new employee to your state’s new hire reporting agency

The new hire reporting program requires employers to report information on all new employees for the purpose of locating parents who owe child support.  Each state has different new hire reporting agencies.  You can find the name and address of your state’s new hire reporting agency by visiting the State New Hire Reporting page at the Administration for Children & Families website www.acf.hhs.gov.

  1. Post all required employee notices

As an employer, you are required to provide certain information to your employees on resources they can use to know their rights as an employee.  For information regarding required federal posters visit the Department of Labor where the “Poster Advisor” will help you determine which posters you must display in your workplace.  Additionally, you must comply with any state poster requirements.  A list of state departments of labor can be found on the federal Department of Labor’s website.

  1. File all tax filings on time – bi-weekly, semi-monthly, monthly, quarterly, annually

When you register with each entity you are required to submit filings to, you will be given filing deadlines for each entity.  Make sure to meet all filing requirements.  No one wants to pay fines and penalties to government agencies!  This is where partnering with an online payroll provider or trusted accountant will provide peace of mind and save costly mistakes of not filing on time.

  1. Create an employee handbook

Although not required, a best practice is to have a handbook describing your business’s employee policies and making it clear that employment is at will unless an employee has signed a written employment contract.  Having an employee handbook will ensure that all your employees know what is expected and what to expect from you.

  1. Setup personnel files for all job-related documents

Each employee that you hire should have an individual file created in which you keep all job-related documents such as job applications or resumes, employment offers or contracts, IRS Form W-4, State Form W-4 (if required), new hire forms, performance evaluations/writeups, benefit enrollment forms.  These files can be kept digitally or physically.  If you keep the files in physical form, they should be in a locked cabinet for confidentiality.  Keep medical records and employee Form I-9’s in a separate file.

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