When you launch a business, you may need one or more employees to help you operate. Or maybe you’ve been in business and have handled every aspect on your own, but now want help. Your first employee may be you if your business is incorporated and you provide services. Having an employee—even yourself—means various tax and regulatory responsibilities. Here’s what to know when hiring your first employee.
Get ready to become an employer by obtaining an Employer Identification Number (EIN). You get this from the IRS and can do it easily online. You’ll also need a state unemployment number under which you’ll pay state unemployment insurance (SUI), which is essentially a tax you pay to your state. The state will assign you a rate for your SUI.
Finding the right employee can be challenging, especially in this tight labor market. Forget the old want ads. Today, you find good employees primarily through word of mouth, such as a referral from someone you know, or a job search website, such as Indeed, LinkedIn Jobs, ZipRecruiter, or other sites. Some sites are geared to specific qualifications (e.g., programmers). Check for fees on all sites.
When you conduct an interview—in person or virtually—be sure you know what you can and cannot ask. The EEOC has a list of questions you can’t ask.
It's always a good idea to do a background check to verify that the job candidate’s claims are solid. Be sure to check state laws regarding what you can and cannot ask and other requirements. For example, if you’re hiring a bookkeeper—a person who will likely write checks and see bank statements—you might want to do a credit check, which can only be done with the applicant’s consent. If the worker is going to be driving on company business, verify the applicant’s driver’s license and driving history.
Have employees complete all necessary forms and documents. Retain this and other employment-related forms and documents for a minimum of 4 years. Here are some examples of materials a newly hired employee needs to sign.
- Form I-9. This form verifies that your new employee is legally eligible to work in the U.S.
- Form W-4. This form lets you know withholding requirements (e.g., tax filing status) for the employees.
- Form 8850. This form is submitted to your state force agency to determine whether your new worker is in a “targeted group” so that you qualify for the work opportunity tax credit.
- Nondisclosure agreement. If you want to be sure your employee keeps confidential any company information—price lists, customers, etc.—use this agreement.
Setting up insurance and payroll
You must have workers’ compensation insurance (in Texas it’s optional) to cover job-related injuries and illness. If you’re the only employee, you may be able to claim exemption from coverage. Check with your state labor department to determine coverage obligations.
Get your payroll processes set up so you can:
- Figure and withhold federal (and where applicable, state and local) income taxes and the employee’s share of FICA
- Deposit payroll taxes with the U.S. Treasury and your state
- File timely employment tax returns. Usually, this is quarterly.
Work with a pro—a accountant or payroll company—to be sure you are handling employment taxes correctly. The cost of professional help is much less than penalties for mistakes you could easily handling payroll on your own.
Lawrence Bossidy, former COO of General Electric said: “Nothing we do is more important than hiring and developing people. At the end of the day, you bet on people, not on strategies.” When you’re ready to hire your first employee, do it right!