Small Business Hiring Advice
How to Hire Your First Employee
Hiring the first employee for a small business is a blessing and a curse. On the one hand, you're about to get some much needed assistance. On the other hand, you've signed up for a few new management and administration headaches.
You've been working on your own for a while, and things are going pretty well.
Business is picking up, the word of mouth you have been praying for is kicking in, and you begin to think the small ad you've been running for the last six months may actually be worth it. Instead of spending 70 percent of your time marketing yourself and your business, you are now working 50-60 hours a week, with the majority of it being billable hours. Hallelujah!
Just when you thought your ship came in, the 50-60 hours turns into 70 hours or more a week. Most of it is still billable, but that is of little solace when you realize you don't have a life. That look you're getting from your spouse can't be good, and the kids seem to have grown up since you last played with them. It may be time to hire some help.
Hiring an employee is a big step and a big responsibility, with both tangible and intangible factors to consider. There are numerous good sources of information on hiring the right person, writing a job description, conducting interviews, etc. This article does not go into those important issues. Instead it will lay out the actual requirements and procedures you must do to comply with state and federal regulations for employers.
The first thing you need to do is obtain an Employer Identification Number (EIN), often called a tax ID number, from the IRS using form SS-4. You will already have this number if you have incorporated or formed a partnership. Sole proprietors do not need an EIN until they are hiring; before that they use their Social Security number as their tax ID number.
Next you need to write a job description determining necessary skills, education and experience. Can you afford to hire somebody with those qualifications? You must remember to include all costs of a new employee, not just the hourly wage. A general rule of thumb is to add 10 percent to the hourly wage plus the cost of workers' compensation. This only covers taxes incurred by an employer when hiring. If you are going to be a "good" employer, offering benefits, vacation, sick days and the like, be prepared to pay the hourly wage plus 25 to 40 percent. You might want an accountant to help you with the estimating so you don't hire someone you can't afford, have to let them go, and have your account charged when they collect unemployment.
Now that you know you can afford to hire, it's time to find the right person for the job. The first step is spreading the word through classifieds, word-of-mouth, employment agencies, N.H. Employment Security, schools, associations, etc. Once you have screened applications or resumes and interviewed top candidates, remember to check references carefully. After a suitable person accepts the job offer, you need to have them fill out INS Form I-9 and IRS Form W-4. The INS form verifies that the employee is not an illegal alien. It can be obtained online at the US Citizenship and Immigration Services website or from the U.S. Department of Labor at 1-800-870-3676 and needs to be kept in your personnel records. The IRS form W-4 provides the employee's complete name, address and Social Security number. It also tells you how much income tax to withhold using the IRS publication "Circular E." All IRS forms and publications can be obtained by calling 1-800-829-FORM or from their new, user-friendly IRS small business site.
There are three basic financial federal requirements of an employer: income tax, FICA taxes and federal unemployment tax (FUTA). As the employer, you must withhold and deposit the correct amount of the employee's federal income tax. This is calculated on wages and other compensation using the W-4 and Circular E. You also are responsible for withholding and depositing the employee's share of the FICA taxes and paying and depositing the employer's share of the FICA taxes. Both the employee and the employer each pay 6.2 percent of employee wages up to $76,200 for Social Security and 1.45 percent, with no limit, for Medicare. For example, if an employee earns $500 a week, that results in a FICA tax liability of $76.50. Of that, $76.50, $38.25 is withheld from the employee, and $38.25 is paid by you. Depositing requirements vary with amounts due; if you owe less than $1,000 combined income and FICA taxes per quarter, you can make payments quarterly with your IRS Form 941. Otherwise, use the federal tax deposit coupons (Form 8109) and deposit at the bank. Rule of thumb: the more you owe, the sooner it is due.
Paying Employees - the Process
You may pay employees daily, weekly, biweekly, semi-monthly, quarterly, semi-annually, or annually. By far the most common method is weekly or biweekly. Any method other than weekly must be approved by the state.
Calculate gross pay (hours times rate of pay) - remember overtime - check with Employment Security for laws concerning when overtime needs to be paid.
Use tax tables in circular E to calculate federal tax withheld, using length of pay period, filing status, and exemptions
Calculate Social Security and Medicare Taxes Using Circular E instructions. Deduct these taxes from the gross to figure net pay. Write a check for the net amount.
40 hours @ $8.00 per hour: 320.00
5 hours OT @ 12.00 per hour: 60.00 (OT is time and a half)
Total gross pay: 380.00
Federal tax: 49.00 (weekly pay period, single taxpayer, no exempt.)
Social security tax: 23.56 (6.2% of gross)
Medicare tax: 5.51 (1.45% of gross)
Net pay: 301.93
The employer share of Social Security and Medicare matches employee amount. Employer share must be deposited with withheld Federal and Social Security & Medicare taxes.
Federal Unemployment Tax (FUTA) is another direct cost to you as an employer. You are liable for FUTA if you pay wages of at least $1,500 a quarter or have at least one employee in each of 20 different weeks. FUTA is a flat rate tax on the first $7,000 of wages per employee. The base rate is a hefty 6.2 percent, but if you pay your state unemployment tax on time, the federal rate drops to 0.8 percent. So pay your state unemployment taxes on time! As a general rule, FUTA is paid quarterly, but the associated tax return, IRS Form 940, is filed annually. Other federal requirements to remember are distributing IRS Form W-2s to all employees by January 31 for the preceding year. You also must file all W-2s and the summary form W-3 to the Social Security Administration by February 28.
Now that you are on track with federal requirements, it is time to look at what your state requires of its employers. Your first step should be to call your local Employment Security office to get a state employer number and have the necessary forms sent to you. These forms may include a new hire reporting form, which must be filed after you hire your new employee, quarterly employer tax and wage reports and the annual employer status report form. You also will be required to pay state unemployment tax. State unemployment is a cost to the employer, and payments are made quarterly.
Another cost to employers is that of workers' compensation insurance. Required in many states, it is obtained through private insurance companies/agents. The rates vary dramatically based mostly on job description, but it can be a substantial cost and needs to be figured into the cost of hiring.
Some states have their own unique requirements as well. In New Hampshire, for example, if you have five or more employees, you also must have a safety program in place, including a "joint loss committee." Those employing 10 or more also must have a written plan, and need to file a "safety Summary Plan" with the state Department of Labor every other year.
Other important issues to keep in mind as you hire for the first time involve compliance with all state and federal labor laws, including non-discrimination, minimum wage, etc. Make sure that you obtain and put up the necessary posters relating to unemployment, workers' compensation, protective legislation (pay periods), whistleblower's protection, wage, polygraph protection, OSHA, EEOC (if you do federal contacting/subcontracting) and FMLA (if you have 50 or more employees).
You also must maintain complete payroll records and good personnel records, carefully documenting all performance reviews and any disciplinary actions.
Finding, hiring and keeping good employees are crucial to the success of any business. If you follow the steps outlined above, you will be well on your way to growing your business, while complying with state and federal regulations. Both the IRS and many states offer periodic workshops on hiring and other business and employment tax issues.
Article reprinted with permission from the NH SBDC. The author, Jeanine Ulaskiewicz, is Assistant State Director of the NH SBDC.
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