February 26, 2019
Hiring the first employee is a major milestone for any business. It’s a sure-fire sign that the business is not only viable, but profitable and looking to grow. After-all, one person can only do so much—regardless of how productive or hard-working they might be. Adding new employees, especially the first employee, is a sign that the business is healthy and looking to scale-up operations.
However, onboarding that first worker isn’t exactly simple. Of course, whenever you hire any new employee, you want to ensure they are qualified, legitimate, and a good fit for your business. But what about the legal requirements for hiring a paid worker?
For the majority of entrepreneurs, the first hire is the hardest largely because of the technicalities associated with employment in the United States. Things like workers compensation insurance, employee payroll, employment rights, health insurance, and state/federal taxes must all be considered before hiring the first worker. Furthermore, failure to account for these requirements can lead to back-payments and putative legal fees.
This sounds daunting, but there is good news: a legal professional with experience in employment law can help with most of these “compliance-type” requirements. Additionally, once the first employee is hired, subsequent employees will be easier to on-board. In other words, the first hire requires a lot of “set-up” in terms of payroll, tax documentation, etc., but subsequent hires will be relatively painless. Nonetheless, here are five key things to consider before hiring your first employee.
1. What Type of Work are you Looking to Hire?
Among your first considerations should be the type of worker you’re looking to hire. Part-time help, or full-time? Do you want a paid employee, or does an independent contractor better suit your business model? If you have a full-time paid employee, will they be salaried or paid hourly? What about seasonal employment, or freelance work?
These distinctions may seem trivial, but they have massive legal and tax implications. This is especially true with the distinction between company employees and independent contractors. In general, if you think the new position will have regular hours, direct supervision, and a typical ‘boss-to-worker’ relationship, it is likely not a contractor position. Contractors tend to have more autonomy and control over their own work. Misclassification of employees and contractors is among the most common mistakes for new businesses and can have major legal implications if done with malign intent. The IRS provides a guide to help make this important determination.
2. Key Filings and Documentation
Employers looking to hire their first worker assume there will be mountains of paperwork and documents to file. Unfortunately, they assume correctly. The exact forms may depend on state and local regulations; however the federal documentation is rather standard. Federal IRS forms include:
- File IRS form SS-4 to Obtain your Employer Identification Number (EIN)
- IRS form W-4 and W-2 to be Completed by New Hire
- IRS form I-9 (Employment Eligibility Verification) for Each New Employee
- On a Yearly-Bases, IRS form 940 for Federal Unemployment Tax
- On a Quarterly-Basis, IRS form 941 Employer’s Quarterly Federal Tax Returns
Of course, there are state-mandates to follow as well. Most states require new employers to register with the state’s labor department (in order to pay state unemployment compensation taxes). Additionally, any new workers must be reported to the state directory. An employment attorney will help clarify these local and state-specific mandates, as they can get rather complicated when in conjunction with the federal laws.
3. Taxes and Setting-Up your Payroll Accordingly
Setting-up a new payroll and identifying the correct tax documentation is among the most burdensome aspects of hiring a first employee. Obviously, you'll need to withhold a portion of each pay-check and deposit it with the IRS. You’ll likely have to withhold certain state taxes as well. These filings will eventually be sent to federal and state tax authorities, so they must be accurate, and they must be complete. Unfortunately, federal officials offer no grace-period for employers new to the hiring process. As soon as a new employee is hired-on (which begins once the W-2 paperwork is filed), taxes are required to be withheld.
For this reason, many professionals suggest hiring a payroll service for larger businesses. For smaller operations, a qualified attorney would work just as well. The risk is simply too great; employers are given little time to understand the state and federal tax codes, and inaccurate filings will usually lead to large financial hits for the business.
4. Wage and Hour Laws: Do Your Research
Wage and hour laws can be tricky because (again) they differ depending on state jurisdiction. Most federal regulations are outlined in The Fair Labor Standards Act (FLSA). Here are a few of its main provisions:
- Federal Minimum Wage
- Federal Overtime Rates
- Child Labor Regulations
- Some Anti-Discrimination Mandates
Importantly, some of the mandates in the FLSA only apply to employers with 5 or more employees, so the precise rules may change as your business grows. To further complicate things, certain rules in the FLSA only apply to particular workers (for example independent contractors, exempt workers, non-exempt workers, seasonal employment, etc.).
Like federal laws, state and regional regulations also depend on the number of employees you have, and they type of worker they are. These mandates vary widely depending not only on your state, but also your city (more technically, the county your city is in). An attorney should be contacted to help review state and local employment regulations, as well as those outlined in the FLSA.
5. Insurance Considerations
Lastly, there are three types of insurance that new employers must account for: workers compensation insurance, unemployment insurance, and healthcare insurance. Workers compensation is required in almost all states (although, depending on the state, there are some exceptions for very small businesses). In essence, it protects workers that suffer on-the-job injuries. The second type of insurance is unemployment insurance; it applies to most employers regardless of state or municipality. Unlike workers compensation and unemployment insurance, healthcare insurance is considered a benefit offered by the employer (and thus usually isn’t required by any state or federal regulations). However, if you choose to offer healthcare benefits to your new workers, you must complete and file the required paperwork. This holds true for other types of employee benefits, such as 401k plans, pensions, and dental insurance as well.
Conclusion
Taking all these steps will make running your business much, much easier. It will also make your life easier in the unfortunate event that you need to let a problem employee go. For more information on preparing for employee terminations, read on to learn about the 5 key steps to take before firing someone.
