The other day, we looked at a growth strategy with life balance benefits for knowledge businesses that can hire remote fractional offshore resources instead of full-time local employees.
But what if you need a full-time on-site employee as your first employee? Well, the government does not make it easy for you. As an employer, you must adhere to various legal and practical obligations. This includes withholding taxes from employees’ wages and remitting them to the relevant government agencies. Depending on the size and nature of your business, providing benefits such as health insurance, paid time off, and retirement plans may also be necessary. Moreover, maintaining accurate records of employee information, wages, and hours worked is essential for compliance and organizational purposes. Additionally, you must ensure compliance with federal, state, and local employment laws, covering areas such as discrimination, harassment, and workplace safety.
Because hiring W-2 employees is not for the faint of heart, it is important to understand your options. Essentially, you can hire local 1099 subcontractors or W-2 employees. The IRS has a 20-question test to determine if a person can be classified as a 1099 subcontractor, meaning that they are their own firm and, therefore, your business is not responsible for payroll. However, I boil it down to three elements to define if they are an employee:
If you tell them when they have to work, they are an employee.
If you provide them with the tools to perform their work, they are an employee.
If you provide the majority of their annual income, they are an employee.
1099 subcontractors are often used to perform non-core work or provide periodic specialized skills the business needs to produce a deliverable. However, some businesses require full-time employees to perform work on-site, such as in retail or the trades, and as such, cannot hire 1099 subcontractors, which are the subject of this post.
For these microenterprises, representing about a quarter of all registered businesses in the US, hiring their first employee comes with a steep learning curve. When you become an employer, you must adhere to various legal and practical obligations. Below are 12 steps to help you navigate this journey effectively.
1. Assess Your Readiness: Determining your readiness to hire your first employee involves several key considerations. Firstly, assess your business’s financial stability. Ensure your revenue can cover the additional payroll expenses of hiring, such as taxes, insurance, and benefits. Evaluate your workload and operational capacity—are you consistently overwhelmed with tasks? Consider your ability to manage employees effectively and nurture a positive work environment. Ultimately, you may be ready to hire if your finances are stable, if you need additional support, and if you possess the necessary management skills.
2. Understand Legal Obligations: When hiring your first employee, several legal requirements must be met to ensure compliance and protect both your business and your new employee. The following are a few of the main requirements you need to familiarize yourself with before you begin the hiring process:
Employment Eligibility Verification (Form I-9): You are required to verify the identity and employment eligibility of your new hire by completing Form I-9 within three days of their start date.
Tax Filings and Withholdings: You must obtain an Employer Identification Number (EIN) from the IRS for tax purposes. You must withhold federal and state income tax. (Note: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no individual state income tax). You must also withhold Social Security and Medicare taxes from your employee’s wages, match them, make the deposits, and report all these withholdings to the IRS.
State New Hire Reporting: All 50 states require employers to report new hires to their state’s new hire registry within a specified timeframe.
Workers’ Compensation Insurance: All states—except Texas—require you to carry workers’ compensation insurance to cover medical expenses and lost wages for employees injured on the job.
Unemployment Insurance: Employers are generally required to pay federal and state unemployment insurance taxes to fund benefits for employees who lose their jobs through no fault of their own.
Anti-Discrimination Laws: You must ensure compliance with federal and state laws prohibiting discrimination in hiring based on factors such as race, color, religion, sex, national origin, age, disability, or genetic information.
Minimum Wage and Overtime Laws: You must adhere to federal and state minimum wage requirements and pay eligible employees overtime for hours worked beyond 40 in a workweek.
Employee Benefits: While not always required, certain benefits such as health insurance, paid time off, and retirement plans may be mandated by law depending on factors such as the size and nature of your business.
Recordkeeping: You must maintain accurate records of employee information, including payroll records, tax forms, and proof of compliance with employment laws, for a specified period as required by federal and state regulations.
3. Obtain an EIN: To get an Employer Identification Number (EIN), you must complete an online application from the IRS website. You will need to fill out the form with your business details, including your legal name and mailing address, and identify the party responsible for the business. After submitting the application, you will receive your EIN confirmation immediately upon approval. Alternatively, you can opt to apply by mail, fax, or phone using Form SS-4.
4. Craft an Employee Handbook: While private employers are not legally required to have an employee handbook, some states require written policies to comply with certain laws. While not required, having an employee handbook is highly recommended, even for companies with just one or two employees, as they define company policies and procedures to ensure they are consistently applied. Employee handbooks should include the following key elements:
Introduction: Provide an overview of the company’s mission, values, and culture.
Employment Policies: Outline policies related to employment status, including at-will employment, probationary periods, and job classifications.
Code of Conduct: Define expected employee behavior, including professionalism, ethics, and workplace conduct standards.
Equal Employment Opportunity (EEO) Policy: State the company’s commitment to providing equal employment opportunities and prohibiting discrimination and harassment.
Work Schedule and Attendance: Specify work hours, break times, attendance expectations, and procedures for requesting time off or reporting absences.
Compensation and Benefits: Detail employee compensation structure, pay frequency, benefits offered, and eligibility criteria.
Leave Policies: Describe policies regarding vacation, sick leave, holidays, bereavement leave, and other types of leave available to employees.
Performance Management: Explain performance evaluation processes, criteria for performance assessments, and opportunities for feedback and development.
Safety and Health: Provide information on workplace safety policies, procedures, and responsibilities to ensure a safe working environment.
Confidentiality and Data Security: Address the handling of confidential information, data security protocols, and employee privacy rights.
Technology and Social Media Use: Outline acceptable use of company technology, email, Internet, and social media policies.
Conflict Resolution and Grievance Procedures: Specify procedures for resolving conflicts, addressing grievances, and reporting concerns.
Employee Benefits: Provide details on available benefits such as health insurance, retirement plans, and other perks.
Termination Policies: Explain grounds for termination, notice requirements, and procedures for exit interviews and final pay.
Acknowledgment: Require employees to sign an acknowledgment form indicating they have read, understood, and agreed to comply with the policies outlined in the handbook.
5. Craft a Job Description: While private employers are not legally required to have written job descriptions, they are helpful tools for both practical and legal reasons. When creating a job description, include these key elements:
Job Title: Clearly state the position’s title.
Job Summary: Provide a brief overview of the role’s responsibilities.
Qualifications: List the required skills, experience, and education.
Responsibilities: Outline specific duties and tasks the employee will perform.
Location and Schedule: Specify where the job is located and the expected work hours.
Salary and Benefits: Indicate the salary range and any benefits offered.
Application Instructions: Explain how candidates should apply and any required documents.
Company Overview: Provide information about your company, its culture, and values.
6. Recruit Candidates: When hiring your first or next employee, you can use several job posting sites to attract qualified candidates. Each platform has its strengths and weaknesses and offers options at different price points. The following is a list of the most popular job posting platforms.
7. Screen Applicants: Screening candidates helps employers ensure that only qualified candidates are extended an offer. While most businesses are good at screening candidates based on technical skills, 89% of failed hires are the result of attitude-related issues such as a lack of coachability, emotional intelligence, motivation, and having the wrong temperament for the business environment. When screening candidates for a job position, follow these steps:
8. Extend a Job Offer: Once you’ve identified the ideal candidate, it is time to present a formal job offer. The job offer should detail the following:
Salary and Benefits: Determine the salary range and benefits package you’re offering for the position.
Start Date: Specify the anticipated start date for the new employee.
Job Title and Responsibilities: Clearly state the job title and outline the main responsibilities and duties associated with the role.
Terms of Employment: Clarify whether the position is full-time or part-time, permanent or temporary, and any other relevant terms of employment.
Offer Letter: Draft an offer letter detailing the above information, including any contingencies or conditions.
Negotiation: Be prepared for potential negotiations regarding salary, benefits, or other terms of employment.
Legal Considerations: Ensure compliance with employment laws and regulations when making the offer.
Communication: Communicate the offer verbally first and then follow up with the offer letter in writing.
Response Deadline: Provide a deadline for the candidate to accept or decline the offer.
Documentation: Keep a record of the offer letter and any correspondence related to the job offer for your records.
9. Complete Paperwork: Once the candidate accepts your offer, you will need to create an employee folder with the following paperwork:
State tax withholding forms for states with state income taxes. (All States except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have state income tax).
Employee Agreement or Offer Letter outlining terms of employment.
10. Establish a Payroll System: The following services handle all aspects of payroll, including calculating pay, withholding taxes, and ensuring that employees get paid on time. Some popular payroll outsourcing services include:
I’m not a fan of the do-it-yourself payroll option. There are so many legal pitfalls for employers, not to mention wasted time, that unless you are a really big company capable of hiring your own payroll administrator, payroll is best left to the experts. Some options include:
Hire a Professional Employer Organization (PEO): A PEO is a firm that provides a service under which an employer can outsource employee management tasks, such as employee benefits, payroll and workers’ compensation, recruiting, risk/safety management, and training and development. ADP TotalSource, Paychex, and TriNet are some of the most popular PEOs. While PEOs provide the greatest number of services, they come with a hefty price. Moreover, the employee actually works for the PEO, and the PEO leases the employee to you with a markup to cover their services.
Hire a Freelance Accountant, Bookkeeper, or Payroll Specialist: They can manage your business’s payroll, tax filings, and other financial tasks. This is the option I most often recommend to small businesses that tend to be more cost-conscious.
Remember, the best option depends on your specific needs and the size of your business. It’s important to do your research and choose the option that best fits your business.
11. Provide Training: Orient the new employee to their role, company policies, and safety procedures to facilitate a smooth transition. Invest time in training to set expectations and equip the employee for success.
12. Maintain Records: Keep meticulous records of employee data and relevant information to ensure compliance with legal requirements. This includes maintaining records of wages, hours worked, benefits, and any disciplinary actions.
By following these steps and understanding your obligations, you can effectively navigate the process of hiring your first employee, setting the stage for the growth and success of your business.
