Hiring Employees for Your Small Business
What is an employee?An employee is someone hired by an employer to do a specific job in exchange for wages and other benefits. An employee is not the same as a contractor. Employees are generally paid through a payroll system, their taxes are withheld from their paycheck, and often time benefits are included.
Should I hire employees or independent contractors?Many, if not most new business start by hiring independent contractors. Hiring someone as a contractor allows you to assess their abilities without agreeing to a long-term commitment. New businesses may also hire independent contractors to avoid many of the complexities of hiring employees, and the additional cost. However, an independent contractor by definition is someone who works on their own terms to achieve an agreed upon task. If as an employer you need more control over how the task is done, when the work must happen, and what tools are used, you will want to hire an employee for the position.
How to hire employeesMuch of hiring employees involves standard protocol – finding candidates, having interviews, doing a background check. The SBA provides some useful tips on writing effective job descriptions. Aside from these basics, you’ll need to make sure possible employees are eligible to work in the U.S.
Make sure your employees are eligible to work in the USFederal law requires employers to verify an employee’s eligibility to work in the United States.
- Employees must complete Form I-9 no later than the first day of employment.
- Employers can only request documentation specified on the I-9 form.
- Employers do not need to submit the I-9 form with the federal government. However, they are required to keep I-9 Forms on file for three years after the date of hire, or one year after the date of the employee’s termination, whichever is later.
Obtain Workers’ Compensation Insurance
What is Workers Compensation Insurance?Workers compensation is a type of insurance that employers purchase in order to provide coverage for employees who may suffer from a job-related illness, disability or injury.
Its main purpose is to ensure that employees receive the assistance they need in case of an injury and that employers are covered from legal complaints as a result of that injury. If an employee collects and receives workers compensation, he or she cannot file a case against the employer.
Is Workers Compensation Insurance Required?The insurance is mandated by the state, although different regulations may exist from one state to the next.
Click here to learn more about workers compensation.
Report New Hires to the State
New hire reporting is a legal requirement for any employer. This is mostly for tax purposes, but it also helps to prevent unemployment insurance and welfare fraud.
Who is considered a “New Hire”?
A new hire is an employee that has never worked for the company before the date of their current hire.
A rehire is an employee who has previously worked for the company and had terminated their employment, but is returning. State guidelines for the minimum span of time to qualify as a rehire will vary, but 60 days is the most typical.
Most states penalize employers who fail to report new employees within the window of time allowed for reporting.
What do I need to report new hires?
New hire reporting methods differ from state to state, but the information requested tends to be the same. This includes:
- social security number
- date of hire
How do I report new hires?
Much new hire reporting can be done online, which eases and streamlines the process. Visit the SBA’s New Hire Reporting Article to find your state’s online reporting center
You need to have many systems in check before your employees start work. This includes setting up payroll, withholding taxes, and possibly putting together an employee handbook.
Withhold Employee Income Taxes
Employers are required to withhold both federal and state taxes from their employees paycheck. We highly recommend hiring an accountant or payroll service to take care of this for you.
W-4 Federal Tax Form
The Federal Government requires employees to fill out a W-4 (“Federal Withholding Income Tax form” also known as the “Employee’s Withholding Allowance Certificate”).
The W-4 form should be filled out by the employee before receiving their first paycheck. If you have chosen to use a payroll service, a copy of the W-4 should be sent to your service provider, and the original should be kept for you records.
W-2 Federal Tax Form
The W-2 Form (” Federal Wage and Tax Statement”), is sent by employers to both their employees and to the Internal Revenue Service (IRS) at the end of each year. This form specifies how much was withheld from the employee’s wages. Low wages or very few employees do not exempt businesses from sending W-2′s.
Your employees must receive their W-2 forms by January 31st of the following year. A copy must also be dispatched to the IRS, this can be done online or by mail.
For IRS compliance, many records (ie. forms W-2 and W-4) are required to be kept for a period of at least 4 years. When it comes to tax disagreements, the burden of proof usually lies on the owner of the business.
State Tax Withholding
The rules guiding state withholding tax vary widely. Some states such as Nevada and Wyoming have no state withholding taxes, however the majority of states do. Find specific state tax withholding forms by using the link provided below. Make sure you read the instructions carefully, some forms listed are Tax exemption forms.
We strongly suggest you get an accountant. Chances are you don’t have the time or experience to manage your company’s taxes. Having an accountant will help ensure that your taxes are done correctly, while also allowing you more time to focus on your company.
Pay Employees at the correct time
Every state has different requirements when it comes to how often you need to pay your employees. This may be as often as weekly or as infrequently as monthly.
The US Department of Labor provides guidelines for each state:
Put up Workplace Compliance Posters
Depending on the type of industry you are in you may be required to post posters and/or notices in the workplace. These posts can range from Discriminatory laws to “Employees must wash hands.”