What do I need to hire an employee? (Employee Series overview)
First of all, congratulations on hiring your first employee! This is a big step for your business, and we’re here for you.
Hiring an employee is different from paying an independent contractor because there are more compliance rules to follow. But there are also great benefits to working with an employee instead of an independent contractor, such as the level of control you have and offering benefits to the fantastic help that you’ve found.
We know this can seem like a daunting task full of unknowns, but we are here to help guide you through the process (and hopefully make these next steps a bit easier).
There are 5 things we'll cover here:
Insurance
Cost to your business
Of course, there are probably many more avenues to discuss when hiring an employee, but these are going to be the top 5 immediate items that you will need to either take care of or want to know when starting the employee payroll process for your company.
In this article, we’ll provide a high level overview of 5 things that will help you learn what you need to know about how to hire employees, and then we’ll do a deep-dive into each of them in separate blogs.
Opening Government Accounts
The basics:
Make sure you have an EIN
Set up records for withholding federal and state taxes
Open an unemployment account
In order to process and submit proper payroll for your company and employees, you’ll need to make sure you have accounts set up with a number of government jurisdictions.
While everyone has federal tax withholding, your location will determine whether you also have state tax withholding, unemployment tax withholding, and local tax withholding.
It’s important to know ahead of time what you’ll need to report and withhold for your employee when it’s tax time, so we believe researching this information is critical.
If you’re hiring a remote employee and they live and work in a different state than your company, you’ll have to look at the state where they reside. If they cross state lines to work for you, you’ll need to research specific rules to see if there are any reciprocity agreements between the two states.
We dive deeper into this topic in our blog that focuses on helping you set up your government accounts.
Legal Compliance/HR
The basics:
Minimum wage
Age requirements
Overtime pay
Exempt status
Sick leave
All states have their own Department of Labor that manages the workforce on a state level. Some of these will defer to the US Department of Labor for some rules. The US Department of Labor imposes minimum wage laws, age requirements for working, overtime and break rules, as well as state mandated sick time.
Each state (and even different cities) has different laws, so it’s important to know the laws where your employees are working.
Note: these laws are usually based on where your employee is working, not where they live or where your company is located.
We go into more depth in our blog that focuses on legal compliance and HR items.
Insurance
There are a number of different types of insurance options when it comes to owning a business, but the one you need to know about when hiring employees is called Workers Compensation insurance. Purchasing Workers Compensation (work comp) insurance is required in all states except Texas.
This insurance covers workplace injuries for your employees and is based on the amount you pay them.
Again, depending on where you and your employee are located, you can either shop around to get the best rate, or you will be part of your state’s mandatory state fund (North Dakota, Ohio, Washington, and Wyoming require this).
You can get quotes online, or you can contact your current insurance broker or your business insurance for quotes.
Payroll Software
Let’s just say this plainly: you want to use a payroll software.
We know that it costs extra money each month, but it also takes an incredible amount of time and energy to process payroll manually, make sure it is error-free, paid and filed on time, and up-to-date on all of the compliance. It’s worth it to pay for a software that keeps track of everything for you.
Many software options are also much more affordable for small businesses these days. The software will help you:
Calculate the withholding taxes properly for each employee.
It can often send those withholdings off to the proper government jurisdiction and file any returns required.
Direct deposit the paychecks to your employees and provide paystubs that include legally mandated information.
As a bonus, time off policy tracking is often included in many of these standard subscriptions.
You can also pay for additional services that can include time tracking, HR support, health insurance and retirement deductions and remittances, as well as local jurisdiction reporting.
We go into more depth on this topic in our payroll software options blog post.
Cost to Your Business
It goes without saying that having employees costs money. But the benefit to having employees is that hopefully they will help your business generate more money than you have to pay to employ them, they can help your company grow, and they can take work off of your shoulders.
Our clients often ask, “Can I afford to hire an employee?”
While we can’t officially answer that question for you, we can help you identify the potential costs so you’re aware of everything that’s involved.
We’ve walked through most of the potential costs of having an employee – taxes that your company will need to pay, workers compensation insurance, and payroll software fees. If you’d like someone such as your accountant or bookkeeper to process your employees’ payroll for you, that will be an additional cost to keep in mind.
There are many things you need to hire an employee, and we hope that this series will help you feel confident in your next steps on your business journey! Please check out the other articles in this series, linked throughout.
We wish you the best in your next steps!
No assurance is given that the information provided in this blog is comprehensive in its coverage or that it’s suitable in dealing with each individual’s particular situation. This blog article exists to provide general information only and does not constitute tax or legal advice, and cannot be used or substituted for tax or legal advice. Savvy Bird Consulting, LLC is not responsible for the implementation or outcomes this material may have.