Start Off Right – Hiring Your First Employee
Before you leap…
Determine the Correct Worker Classification
Think about whether it’s appropriate to hire an employee or an independent contractor. Consider how much control you
want to have over the method and means by which the work is performed. Become familiar with how federal and state
agencies define employees versus independent contractors. Choose carefully since mis-classification can result in
significant issues regarding labor regulations, tax penalties and insurance coverage.
Budget for Payroll Tax Expenses
Factor in payroll tax expenses to your cost of hiring an employee using a “gross plus” method. This accounts for
employer-paid taxes such as Social Security, Medicare, federal unemployment and state unemployment tax
contributions paid by the employer. Also consider the costs associated with insurance and paid time off requirements
which can affect the overall cost of employment.
Now you’re ready…
Obtain Employment Tax Identification Numbers
Think of these ID numbers as accounts that are set up with the federal and state tax agencies under which you pay and
reconcile payroll taxes.
Federal Employer Identification Number
If your business was formed as a corporation, partnership or LLC you probably already have an FEIN. If not, you’ll need
to apply for one using IRS Form SS-4, which can be completed online, by phone, fax or mail. Online and phone
applications result in immediate assignment of a number with a confirmation sent by mail. Faxed applications receive a
response in approximately four days, and mail applications in about four weeks.
State Employer Identification Numbers
Corporate registration and employment tax registration are two distinct requirements. If you had no employees when
you formed your business it’s unlikely that you registered for employment tax ID numbers. You’ll need to register with
the taxation agencies in the states in which you employ people. Most states have both a state income tax and an unemployment tax.
There are 41 states which impose an income tax that employers are required to withhold from
employee wages. Employers must register for an account and ID number under which they will deposit
and reconcile amounts withheld from employees.
All states maintain an unemployment compensation system which is funded primarily by employers,
although a limited number of states also require employee contributions that are collected and
deposited by employers. The tax is calculated through an employer tax rate applied to a taxable wage
base. As a new employer you will be assigned a “new employer” rate that varies by state and sometimes
by industry. The amount of taxable wages per employee and therefore subject to tax also varies from
state to state, and can change from year to year.
Workers’ Compensation Insurance
Many states require that an employer carry workers’ compensation insurance, which is a kind of “no fault”
insurance program that covers medical treatment, wage replacement and permanent disability compensation to
employee who suffer job-related injuries. Each state defines which employers and/or employees must to covered.
Workers’ compensation is generally written by private insurance carriers although premium rates are set by each state
based on the classification of the work performed. Insurance companies are also allowed to include a service fee and
consider the claim history of an employer. Workers’ comp insurance coverage (where required) should be in place
before your employees start.
The premiums for traditional workers’ comp policies are paid up front for an annual policy period, based the
premium rate determined by the job classifications and a reasonable estimate of the annual payroll gross. At the end of
the policy period the insurer will complete an audit of the actual payroll gross which will typically result in either a
refund or additional amount due. Many companies can take advantage of a pay-as-you-go policy, which allows for the
calculation of the insurance cost and premium payment on a real-time basis per payroll, eliminating the full up-front
payment and large variations as a result of the audit. Your insurance agent, carrier or payroll processing company can
advise you if such a pay-as-you-go option is available.
Short Term Disability Insurance
Short term disability insurance covers non-job related illness and injury. Currently five states require that
employers pay and/or remit employee contributions to a short term disability program. These programs can be either
managed by a state agency or purchased from a private carrier. Those states are California, Hawaii, New Jersey, New
York and Rhode Island.
Paid Family/Sick Leave
A growing number of states and localities have instituted paid family leave and/or paid sick leave that is
managed through employers. The requirements vary in regard to which employers are subject to the regulations, who is
covered, and whether there is an employee contribution to the plans.
Collect Employee Information
You’ll need to collect some information from your employee before you allow them to start work and pay them.
Determine Eligibility to Work
In order to work in the U.S. a person must provide documents that verify their identity and establish employment
eligibility. Employers need to use Form I-9 to accomplish this. Form I-9 lists the acceptable documents that can be used, and must be signed by the employee. The completed form must be retained by the employer for a specific amount of time.
Make a Copy of the Social Security Card
After hiring an employee, but before they report for work, you should ask them to provide a Social Security card and
make a copy for the personnel file. Record the employee’s name for payroll purposes exactly as it appears on the card.
Collect Withholding Allowance Forms
In order for you to correctly calculate withholding tax you’ll need the employee to complete Form W-4. The form must
be completed and signed by the employee. If the employee fails to provide a completed form, you must withhold tax as
if the employee is single with no allowances. Some states also has a state-specific allowance form for their own income
tax withholding, while others allow the employer to work with the federal W-4 form.
File a New Hire Report
New hires must be reported to the state of employment. The data to be reported generally includes the employer’s
name, address and FEIN, and the employee’s name address, Social Security number, date of hire and date of birth. You
can file a hard copy form or online at the states’ websites.
Become Familiar with Wage & Hour Compliance
Federal and state laws both regulate aspects of how employees are paid. You must consider both sets of regulations
when dealing with those aspects that are covered by both. Generally, the employer must apply the regulations that are
most beneficial to the employees. Elements of the regulations include, but are not limited to:
Minimum wage
Overtime compensation
Deductions from pay
Form of payment
Frequency of payments
Recordkeeping requirements
Covered employees/employers
Exemptions