You've hit a milestone. Your business is growing, and it's time to hire your first employee. Unfortunately, that's not as simple as it sounds. There are a number of a legal requirements and practical considerations you'll need to consider before you start the hiring process. Here are some of the most important ones.
Before you hire employees, your business must have an employer identification number (EIN) to put on tax returns and other official documents provided to the Internal Revenue Service (IRS). The EIN is like your business's social security number. It identifies you to the IRS. You can apply for an EIN with the IRS online.
Independent contractors (ICs) are self-employed workers. They typically work more flexibly and have more control over how and when they complete the work they're given than traditional employees. In many cases, ICs provide services that are unrelated to your core business. For example, you might hire a bookkeeper to manage your accounts so that you can focus on your core business.
ICs usually aren't entitled to benefits such as unemployment insurance and aren't covered by minimum wage and overtime laws. Hiring an IC can be cheaper than hiring a full-time employee, but be careful: many states are cracking down on employers who misclassify employees as ICs. (Learn more about the employee versus independent contractor distinction.
Some states assign state or local tax ID numbers automatically, and some require companies to apply for them. If you aren't sure if you need a state or local tax ID number, contact your state's tax authority for more information. In general, if you live in a state or locality with income tax, it's highly likely that you'll need a state or local tax ID number.
Most businesses are required to contribute to their state's unemployment compensation fund. The fund provides temporary wage replacement for employees who lose their jobs. The U.S. Department of Labor provides a comprehensive list of state labor departments here.
In most states, virtually all businesses (even those with only one employee) are required to have workers' compensation insurance. Workers' comp provides wage replacement, medical care, and other benefits to workers who are injured on the job.
As an employer, you're required to withhold your employees' federal income taxes, Medicare and Medicaid taxes, and Social Security taxes and remit them to the IRS on a quarterly basis. IRS Publication 15, the Employer's Tax Guide, provides comprehensive guidance on employers' federal tax obligations.
If your state or locality imposes income or other taxes on payroll, you'll have to withhold and pay these taxes for your employees. Hiring a payroll company to handle these tasks for you can be a worthwhile investment.
Every state has a new hire reporting agency that tracks new employees for purposes of intercepting income to cover unpaid child support payments. You must provide the following information:
Before your employee starts work, you'll need to post federal and state labor notices in the workplace. The labor notices describe your employees' workplace rights, such as family medical leave and minimum wage rules.
The Department of Labor provides the FirstStep Poster Advisor to assist businesses in determining which federal labor notices they need. You may also need state labor notices. If you don't know your state's requirements, check with state department of labor.
Nearly every employer is required to comply with the safety requirements of the Occupational Safety and Health (OSH) Act. The law requires that you provide a workplace free from recognized hazards, maintain detailed safety and accident records, and notify government inspectors of serious workplace accidents. You can consult OSHA's website for much more information on your health and safety responsibilities.
While an employee handbook might not be essential for only one or two employees, it's still good practice to adopt one. An employee handbook is a contract between you and your employees. The handbook should describe your business policies, including that all employees are "at-will" and can be fired at any time for any lawful reason. The handbook can also cover employee benefits such as sick days, paid time off, and holidays, as well as company policies on discrimination and sexual harassment.
Most employees will expect you to provide a benefit plan covering some combination of medical, dental, disability, and life insurance coverage. Retirement benefits such as a 401(k) are also common. Your business will need to engage with vendors to provide options for your employees.
Your employee's personnel file should contain all of their onboarding documents, such as applications, offers, signed contracts, Form W-4 (discussed below), and benefit plan forms. Over time, these files might also include documents relating to employee performance, from disciplinary notices to achievement awards. You also need to retain copies of the Form I-9 in a secure format. And if your business receives employee medical records, these should be kept in a separate secured file.
Once your company reaches a certain size, a human resources department can manage your employees' personnel files.
IRS Form W-4, the Employee's Withholding Certificate, authorizes your business to withhold taxes on behalf of your employee. It also lets your business know how much to withhold based on the number of allowances the employee is claiming for tax purposes.
You don’t need to file Form W-4 with the IRS. If an employee wants to change their allowances, they will need to complete a new W-4.
The U.S. Citizenship and Immigration Services (USCIS) requires employees to complete the Form I-9 to verify they're authorized to work in the United States. The employee must verify they're a citizen, possess a green card, or are authorized under one of the work visas. Like the W-4, you don't need to file this with the government. You're required to hold onto the I-9 for at least three years and to make it available for inspection by USCIS investigators.