Business Basics Series: Hiring Employees
What do I need to know and do before hiring employees?
So you have formed your business entity and found some funding. Now, you're ready to hire your first employee. Before you leap into becoming an employer, however, there are certain requirements you should be aware of in order to comply with the law.
For example, you will need to set up payroll to ensure your employees receive their paychecks. To do so, you will take several steps: First, you need to obtain an Employee Identification Number (EIN) from the IRS (you can click here to start the process). Second, you will need to determine whether a state or local tax ID is required where the business is situated. Third, you should decide if you want to hire an employee or an independent contractor (discussed below). Fourth, you will want to make sure that your new employees complete and return all employee forms, including the W-4 form for federal tax withholding, the I-9 form for employment eligibility verification, and any countersigned offer letters or employment agreements, including non-competition and non-solicitation agreements. Finally, you will need to adopt a payroll schedule that includes employee pay dates, tax payment dates, and tax filing deadlines. Lastly, you will need to report payroll taxes as needed on quarterly and annual basis.
If you need more guidance regarding federal tax filing requirements, the Employer's Tax Guide maintained by the IRS is accessible online. You can also outsource the work relating to payroll to companies such as Gusto, Paychecks or QuickBooks.
Once you have payroll set up, you can evaluate which positions you need to fill and figure out a recruiting strategy. There are many options you can take advantage of when advertising job postings, including LinkedIn, Indeed or Craigslist. You will then go through the process of reviewing applications, interviewing candidates, and extending a job offer. Other responsibilities and requirements you may need to comply with include obtaining worker's compensation insurance, posting mandatory workplace posters and the preparation of an employee handbook.
What is the difference between an employee and an independent contractor? Why does it matter?
When considering which type of worker to hire, employee or independent contractor, you will need to consider the degree of control you wish to maintain and the type of relationship you want with your worker. Choosing between an employee and independent contractor can also impact how you withhold taxes.
If you would like to have more control and a more permanent relationship when it comes to your worker, you may want to hire them as an employee. Employees are workers who are paid a regular salary or wages, have a regular work schedule and workplace, and have taxes withheld from their wages. An employer is required to pay payroll taxes on behalf of its employees and employees often expect to receive benefits from their employer. There is also an expectation for a longer term relationship that is to continue once projects are completed.
By contrast, if you would like to take a hands off approach or you need a more flexible and short term relationship, hiring an independent contractor may be a better option. Independent Contractors are workers who are paid for projects, take care of their own taxes, set their own hours and often location for work and generally control how they do their work. There is also no expectation for the work relationship to continue once the project is completed and normally no expectation of benefits.
You will need to file different tax forms depending on whether you hired an employee or independent contractor. If you misclassify your employee as an independent contractor, you may face expensive consequences from the IRS, so it is important that you classify and fill out the tax form for your worker correctly. For all employees, you will need to file a W-4, withhold taxes and pay certain benefits. For all independent contractors that you pay $600 or more, you will need to file a Form W-9 or Form 1099-MISC. You can learn more about how the IRS distinguishes between employees and independent contractors by visiting their website here.
For assistance with hiring employees and independent contractors, be sure to consult an experienced business lawyer. Res Nova Law attorneys can help you with that or we can refer you on if it's not a good fit.