Do You Have Enough Money to Hire Your First Employee?

They may be called small businesses, but their impact is huge. In the United States,  small businesses comprise 64 percent of net new private-sector jobs, covering 42.9 percent of private-sector payroll.

Many small business owners take the leap from a one-man operation to a two-person team because they know that they’ll be able to able to handle extra work that they’re currently turning down, take advantage of a new revenue stream or address current service challenges (e.g. late work submittals, errors in shipping).

Before you post your “help wanted” ad, you need to know when it’s the right time to hire your first employee, what are some applicable labor laws, and how to financially support your new hire. Let’s review best practices for recruiting your first employee.

Establishing Your Hiring Needs

Your first step is to determine whether you need a full-time, part-time, contract or freelance worker. Here are some key criteria to establish the profile of your first employee:

  • Timing of Increase in Business: An individual putting together flower arrangements may be overwhelmed only around key holidays, such as Valentine’s Day and Mother’s Day. Unless you’re experiencing a consistent year-over-year increase, you may be better off hiring and paying a seasonal worker to meet those high-demand periods.
  • Size of Increase in Business: The additional revenue that you’re receiving may be enough to cover an extra pair of hands on a full-time basis and still have leftover gross profit. Just keep an eye on increasing minimum around the country, if it applies to your case. For example, as of May 1, 2015, most businesses in San Francisco, California have to honor a minimum wage of $12.25 per hour, which is scheduled to gradually increase to $15.00 per hour by 2018.
  • Your Managerial Skills: Depending on your managerial experience and available time, you may prefer to rely on a staffing agency to provide a trained contract worker or look for an independent contractor. This may enable you to focus more on running your business and reduce the amount of necessary paperwork, such as tax withholdings that we’ll review later, for hiring an employee.
  • Training: While you have a clear idea of how to run an efficient operation until mind-reading becomes an option, you’ll have to invest time in training your new hire. Even when working with a staffing agency, you need to provide a clear list of tasks for your first employee. Include training costs when doing a cost-benefit analysis of hiring your first employee.
  • Pay: Risk offering too little of a paycheck and you’ll become victim of the old hiring maxim, “If you pay peanuts, you get monkeys!” Offer a salary or hourly rate that is commensurate to the level of expertise that you’re looking for. If you can’t afford that number yet, you may have to wait until business picks up more to hire your first employee.

Interviewing Candidates

When you’re screening your candidates, remember that it is against the law to ask about a job candidate’s age, sexual orientation, marital status, religious affiliation or race. Before you speak to your first candidate, take some time to review:

  • Title VII of the Civil Rights Act of 1964
  • The Age Discrimination in Employment Act of 1967
  • The Americans with Disabilities Act of 1990
  • The Family Medical Leave Act of 1993

For more information on each of these federal laws, visit the sites of the U.S. Department of Labor and the Equal Employment Opportunity Commission.

Also, don’t forget to ask your candidates for professional references. Call up those references and take the time to learn more about your potential employee. Narratives from his past co-workers or employers can provide key insights on whether or not a candidate is right for the job.

Hiring Your First Employee

Once you’ve determined that you need extra help and that you can afford it, you need to meet several legal requirements with federal and state offices:

  • Apply for an employment identification number (EIN) from the IRS by visiting the Internet EIN portal, mailing or faxing your completed Form SS-4 to the appropriate IRS office or calling 267-941-1099 (if you’re an international applicant). You’ll need an EIN for reporting taxes and other documents to the IRS.
  • Within three days of hire, you must complete USCIS Form I-9 to verify your employee’s citizenship or eligibility to work in the U.S. Refer to the USCIS handbook for employers for guidance on how to complete Form I-9. Retain a copy of any I-9 that you fill out for three years.
  • Register with your state’s new hire reporting program within 20 days of the date of your employee’s first day of work. Requirements vary per state, so contact your state’s new hire office for further information.
  • Obtain workers’ compensation insurance coverage through your state’s workers’ compensation insurance program (here is a list of the websites of all state labor offices) or through a commercial carrier. While you can provide workers’ compensation insurance on a self-insure basis, first-time employers may find it easier to use one of the two first options.

Reporting Taxes from Your Employee

Federal and state taxes are major topics when hiring your first employee. There are some important documents that you may need to fill out:

  • Form W-4: You must collect an IRS Form W-4 from your employee so that you can withhold the correct federal income tax from their pay. It’s good practice to ask your employees to refill this form on an annual basis or after a major life event, such as marriage.
  • Form W-2: Every employer that pays $600 or more, including non-cash payments, to an employee must fill out IRS Form W-2 every year. You will report your employee’s annual wages and amount of taxes withheld from her paychecks. If you file using the paper forms, you must file by February 29, 2016. If you e-file, you have until March 31, 2016.
  • State Tax Form (if applicable): Depending on your state, you may be required to withhold state income taxes. While employers in Hawaii have to fill out Form HW-4, most employers in Texas don’t have to withhold state taxes from their employees. Consult your state government website to find information on taxation for employers.
  • Form 941: When you pay wages subject to income, Social Security and Medicare taxes withholding, you must file the Employer’s Quarterly Federal Tax Return, better known as IRS Form 941. You’re only required to file this form on the quarters that you employ workers. If your employee only works during certain months or seasons, remember to check box 16 for the quarters that you do file Form 941.
  • Form 1099-MISC: When hiring a freelancer or independent contractor who you have paid at least $600 during the year, you have to file IRS Form 1099-MISC. You’ll need your recipient’s federal identification number, which can be a Social Security Number (SSN), Taxpayer Identification Number (TIN) or Taxpayer Identification Number for Pending U.S. Adoptions (ATIN).

Consult your accountant for more details on what forms apply to your business and how to fill them out. If you file your own return, remember that federal and state tax laws can change from year to year, so keep yourself informed about the latest requirements in keeping payroll records on employee taxes.

The Bottom Line

A bad hiring decision can cost a company 30 percent of the employee’s annual earnings, according to estimates from the U.S. Department of Labor. Before you hire your first employee, make sure to establish a clear profile of who you’re looking for, take the appropriate time to evaluate candidates and follow federal and state regulations.

Want to dig deeper?