What are the requirements for hiring my first employee?
It's a question I get asked a often. As someone who has had well over 300 employees over the span of almost 30 years, it's safe to say I have had my share of experiences with staffing. If your first person is a subcontractor and not an employee, the following won't apply to you, and you should take a look at my article "Hiring a Subcontractor, What You Need To Know For Insurance."
If you've never given much thought to your human resource department (you likely haven't even thought about "human resources", and just wanted to "get some help to grow"), once you hire someone, you're now wearing the VP of Human Resources hat along with all the other hats you wear on a daily basis. It's often described to me as both exciting and daunting at the same time.
The state and federal government can be a burden in some areas, and a help in others. Unfortunately for many new employers, it's a surprise for them to find that many people in the public consider it a privilege to have a business that employees people, and not their original thought of that it's the employer that's providing the privilege. Moreover, many of the same people that look at employers with suspicion are those in government. When examining the plethora of employer rules and mandates, it becomes increasingly clear that it can become incredibly expensive to have a cavalier attitude towards deadlines, reporting, and insurance coverage.
Because of the complexity in what may at first glance appear rather straight forward and simple, I highly recommend you enlist the aid and help of a appropriate consultant, attorney, accountant/bookkeeper, and/or qualified insurance agent to assist your navigation through the process. If you're strategic in seeking help, you can position your business well with little or no cost, and have the comfort of knowing you're in full compliance.
Ok, for the disclaimer…..Because the rules can vary widely from jurisdiction to jurisdiction, it should be noted that my emphasis is based largely on states I work in and your particular area may have unique requirements not discussed here.
Regardless if you're operating a corporation, LLC, or sole proprietorship, you should have an Employee Identification Number (EIN, or FEIN with the F short for Federal). If you're not sure what an EIN is, think of it as the "Social Security" number for a business. It even (currently) has nine digits, the same as a Social Security number, albeit its format is XX-XXXXXXX compared to XXX-XX-XXXX. It's used to identify your business for many things beyond being an employer. If you're reading this, you likely have one, albeit if not, they're free and easy to get.
1. Obtaining an EIN number makes our list as the first thing because we'll assume your entity status has already been selected. If not, you may wish to consider a separate entity (LLC, Corporation, LLP, etc…) If you click our category on starting a business, you will find articles that describe how to obtain a separate entity in many states, and how to get a free EIN number from the IRS. Also, if you would like some help obtaining an EIN number, give us a call and we'll be happy to assist you.
2. Look for Federal and state tax credits that may be available to you. Many tax credits must be applied for BEFORE you hire. That's why I list it here as a requirement even though it's not technically required, you are often required to complete the process to get the credit. Losing a credit is similar to paying a fine in the sense you're left with less than you would have otherwise. Hiring unemployed veterans not only feels great, it's fantastic for your balance sheet also.
3. Gather the forms that are required. These include an IRS W-4 Federal Income Tax Withholding worksheet and its state compariable if your state requires a seperate form, an IRS Form I-9 to verify employment eligibility, and other documents that may be required depending on the nature of the person you're hiring and their job requirements.
4. IRS form I-9 will provide instructions on how to verify employees
5. Get an Unemployment Insurance Account Number (UIAN). Unemployment Insurance sounds like something you may get from an insurance agent, albeit usually, employers purchase it from the state. There is a possible federal option, albeit the rates tend to be higher for most businesses, so they select the state option. You will get assigned a starting rate depending on the employment involved. Employees that are fired or layed off may be elegible for benefits depending on the reason they're released and the duration. As an employer, you'll want to become very familar with the rules and regulations involving unemployment because not having a system in place to release employees may subject your business to paying someone to more or less watch TV all day until their benefits are exhausted.
6. Get Workers' Compensation Insurance. This is usually purchased from an insurance agency such as 1 Reason Insurance and we'll be happy to discuss your options. Each state has rules on what and when employees must be covered. Most states make it mandatory for most employees. Owners and top officers are rarely covered though, and you'll want to discuss the pros and cons of your own coverage. Depending on your policy, a large deposit may be required, albeit we have several pay-as-you-go workers' comp plans.
7. Setup your payroll processing software or service. 1 Reason offers payroll solutions that can include a do it yourself (most common for employers that have an understanding of payroll), and a hands-free version. One thing I don't recommend is trying to figure it all out on your own when starting out. You will spend lots more time than you first imagine and you're likely to get dinged with fines and late fees by the state and/or the IRS which will negate any savings you may have wanted by doing it on your own. New employers should expect to spend the first year or two outsourcing payroll, and then evaluate if it's something you want to tackel.
8. Post required notices on workers' rights. If you've ever read and looked at the posters directed towards employees in a company break room, you may have wondered why they're there. Employers are required to place certain notifications in a conspicuous area and break rooms generally fit the bill. Because of how often rights change (often dozens of times per year), it's nearly impossible for many employers to keep up without hiring someone to keep track. Most businesses that I know update about once a year. I'm not suggesting that's ok, albeit we can all likely agree at some point an employer must decide on how much is "enough" when it comes to government compliance.
9. Create a structured and consistent hiring and firing procedure. In the litigtious nation we live in, you don't actually have to do something wrong to get sued. Furthermore, with so many rules and laws, you could break a law without trying. There's a whole host of questions that are off the table when interviewing, and hiring who you may believe is the best candidate for a position may not satisfy federal and state laws on what your motivation for hiring someone is.
10. Decide what types of benefits and pay you're going to offer candidates. For many smaller businesses that are hiring their first employee, it may or may not be as easy as you think. Just because you're a small business doesn't mean you're not competing with larger employers looking to hire the very best and are willing to pay a premium. As a general rule, I've found that paying more in salary lowers other costs such as turnover and costs associated with having a staff. Finding the balance between how much you can afford to pay, how much a given skillset is worth, and attracting talent is a skill that few truly master and almost all employers attempt to improve upon. Something to note on the same subject as well that may drive the point home.
Often convience stores have a more significant problem with internal theft (think employees) compared to external theft (customers). I find it sad and disappointing that someone entrusted to work at your business will stick a knife in your back, albeit the reality is that many will. Often they will "justify" (in their own minds) their theft because they're not being paid "what they're worth." It's clearly not a valid argument, however, if you can attract higher quality people that are less likely to steal, the final expense may be lower with higher pay.