Updated January 2020
Question: I’m growing and am thinking about hiring my first employee. What should I do?
When growing a business, entrepreneurs typically reach a point in the process where they must consider the prospect of adding staff. There are several important things to consider when hiring employees, which include: labor laws, compensation structure, fringe benefit programs, and workers’ compensation. Payroll taxes, workers’ compensation, and certain other employment matters are the same for full-time and part-time employees.
Also, businesses on limited budgets often hire experienced workers from temporary employment agencies to avoid the administrative requirements and tax reporting associated with direct employees. This approach can also give companies flexibility in controlling their costs until they can afford full-time employees. Here are some suggestions for a business looking to hire its first employee.
Hiring checklists and tools
When hiring a new employee, you should have the worker complete a job application and sign consent forms before performing any background check or drug test, as required for your business. You should provide the worker with a copy of your Employee Handbook and have the worker sign a form that acknowledges he or she received it. You should also have the worker complete USCIS Form I-9, Employment Eligibility Verification, Federal Form W-4 and a state W-4 form if applicable. You can review discussions about hiring employees, hiring tools, tax forms, tax withholdings, and related information on our website and on websites like the following:
Labor Law Posting Requirements
With certain exceptions, most states require employers with any employees to obtain workers’ compensation insurance.
You can sample employment applications and background check/drug test consent forms that you can modify for your business at the following websites:
Background Check/Drug Test Consent Forms
Employment verification & tax compliance
After hiring the employee, you should have the employee complete USCIS Form I-9, Employment Eligibility Verification Form, and Federal Form W-4. Form I-9 is used by all employers to verify an employee’s identity and eligibility to work in the United States. Federal Form W-4 is used by employers to withhold the correct amounts of federal and state income tax from an employee’s wages.
Form I-9 must be completed within 3 days of hiring an employee. Employers are required to retain completed I-9 forms for audit purposes. You can obtain tax information and forms at the following websites:
Regardless of how the business is structured, when a business hires employees and pays wages it must comply with a host of federal, state and, in some cases, local payroll or employment tax regulations and requirements. To develop a better understanding of an employer’s federal payroll tax obligations, you should review IRS Publication 15, Circular E, Employer’s Tax Guide and related information which you can find at the following websites:
You should also review employment tax information for your state tax commission and employment security commission’s website.
Generally, employers must comply with the employment tax registration, withholding, depositing and reporting requirements in each state where their employees perform personal services. You can review some of the forms at the following websites:
Note: Certain employers can use Form 944 which is filed on an annual basis rather than filing quarterly on Form 941. You can review the following IRS information to determine if your business qualifies to use Form 944. However, you should not file Form 944 until instructed to do so by the IRS:
In terms of year-end tax reporting for employees, a business must provide each employee with a copy of Form W-2 for the preceding calendar year by January 31st and submit copies of Forms W-2 along with Form W-3 and Transmittal of Wage and Tax Statements to the Social Security Administration (SSA) by February 28th. However, you have until March 31st to submit Forms W-2 and W-3 to the SSA if you submit the forms electronically. State requirements vary, but typically, copies of Form W-2 must also be submitted to state taxing authorities along with any required state withholding tax reconciliation return or transmittal form by February 28th. Paper Forms W-2 and W-3 must be submitted to the SSA using machine readable (optically scanned) forms that you can order directly from the IRS at 1-800-TAX-FORM (1-800-829-3676). You can locate Forms W-2 and W-3 and filing instructions at the following websites:
Failure to withhold, deposit and report the proper employment taxes can result in severe penalties. While you can research the employment tax withholding, depositing and reporting requirements yourself, you may find it beneficial to review your particular circumstances with a local accountant or CPA who can help you determine the specific requirements for your particular operations and setup tax payment schedules and prepare returns.
Some employers with limited resources and a lack of accounting expertise find outside payroll services economical and efficient for payroll processing and paying employment taxes.
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