November 1, 2014

Hiring Your First Employee: 10 Regulatory Steps

Is your business ready to make its first hire? Finding and hiring the right employee is a critical step in the process. However, there are a few other steps you’ll need to take to ensure you meet the legal, regulatory and tax obligations of being a new employer.

firery handshake

To help simplify the process, here’s a checklist of the 10 things you’ll need to do once the right candidate has accepted your job offer:

1. Apply for an Employee Identification Number

Many businesses operate without an Employer Identification Number (or EIN), but if you hire employees, you’re going to need one. Think of it as the social security number equivalent for employers. An EIN is used to report the taxes you withhold on behalf of employees. You can apply for an EIN online from the IRS.

2. Set Up Withholding Taxes

Either on or before the date of employment, you’ll need to give your employee a copy of IRS Form W-4. Have your employee complete it and hand it back to you so that you can withhold the correct federal income tax from their pay. To help you figure out what you should be withholding, refer to the IRS’ Employer’s Tax Guide (PDF document also known as “Circular E”). If state income tax applies in your state, you’ll also need your employee to complete a state withholding form or certificate. Most states do have income tax, although some don’t, including Texas, Alaska and Nevada. The IRS has links to state taxation agencies.

3. Verify That Your Employee is Eligible to Work in the U.S.

To ensure your workforce is legal, you are required to verify their legal right to work in the United States within three days of the hire date. Do this by examining acceptable forms of ID and completing the Employment Eligibility Verification Form (I-9), and then verify the data on the form with  the U.S. Citizenship and Immigration Services’ E-Verify online tool. You don’t need to file the form; just keep it on file for three years after the hire date, and one year after a termination date.

4. Register With Your State’s New Hire Reporting Program

Within 20 days of the hire date, you must report all new hires to a state directory. You’ll find links to more information about how to report new hires on your state’s government website.

5. Obtain Workers’ Compensation Insurance

Any business with employees may be required to carry worker’s compensation insurance. Check with your state, because some require it if you have only one employee while others make it a requirement if you have four or more employees. The insurance is available through commercial carriers, on a self-insured basis, or through your state’s program and is considered a cost of doing business.

6. Register for Unemployment Insurance Tax

Again, something to check with your state; some require that you pay unemployment insurance tax and some don’t.

7. Check Whether You Need to Obtain Disability Insurance

Again, this is state-dependent.  Some states require employers to provide partial wage replacement insurance to eligible employees for non-work related sickness or injury.

8. Display Workplace Posters

Check with the Department of Labor’s “Poster Advisor” online tool to see if labor laws require that you display certain posters that explain employee rights, etc.

9. Filing Taxes as an Employer

It’s a good idea to talk to your accountant or tax advisor about your new tax obligations. Typically, you’ll need to report income tax withholding, social security, and Medicare taxes each quarter on the IRS Form 941. If you paid wages of $1,500 or more in any quarter or had an employee on the payroll for any 20 weeks of the year, you’ll also need to file an Employer’s Annual Federal Unemployment (FUTA) return.

To see what applies to you, read the IRS Employer’s Tax Guide (PDF).

10. Be a Responsible Employer for the Long Term

Once your employee is on board, make sure you maintain good employee records, pay close attention to workplace health and safety laws, and understand what benefits you must establish by law. Each of these links points to useful government guides and tools that can help you stay compliant.

Handshake Photo via Shutterstock

14 Comments ▼
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14 Reactions

  1. Great list, I just wish it weren’t so long.

  2. If you want to skip a lot of those steps above, you could always investigate the option of a teleworking employee. We’ve recently launched a high-tech recruitment company that matches businesses with qualified North American expats living abroad in places like Mexico. Saves businesses 50 per cent. And pretty much all those steps above are not necessary to do – including payment of Obamacare!

    • Nicola – be careful here – just because a worker does their work virtually, they could still be classified as a regular employee and the employer would need to follow all those steps. Now, if you are speaking about a PEO (Professional Employer Organization), that could account for the lower costs you are stating. In that case, there could be a co-employment situation and costs (like benefits and insurance) could be reduced.

      • Thanks Margaret – although because we’re basically a high-tech, innovative temp agency, we look after these kinds of things so that the employer doesn’t have to. And in the case of our employees, who are expats living abroad in places like Mexico, American businesses don’t have to pay benefits at all. It’s because our North American expats are living overseas, in countries with lower costs of living, that the saving of 50% comes about.

  3. I am hoping to hire my first employee within the next three months so this article is just what I need.

  4. A superb list. Would look better though if made into an infographic.

  5. Thanks for these steps. It’s very good to know, and reliable because it is coming from the SBA!

    – Anita

  6. This is what I have been looking for. Thanks for putting this together.

    Ken

  7. One more CRITICAL item: Remember the background check (read felon/sexual predator)!

    • @Joe,
      While I certainly agree one should conduct ciminal background checs, and some industries (day care, skilled nursing facilities, to name a couple) are mandated by law to do so, I would also like to remind everyone that some States forbid discriminatory hiring practices based on criminal records. Furthermore, I am personally a believer in second chances. I just assisted a lovely gentleman with career transition services; he has a felony record for armed robbery but he served his entire sentence and learned valuable skills while incarcerated. He did his time and should have every opportunity to re-join society and contribute his skills. What does he wish to do with his life now? Work to keep at-risk teens from repeating his mistakes. He’s been accepted into an honors program in social work. Thanks for giving it a second thought, Joe.

  8. Thank you – this is very helpful. Hiring employees can be an administrative burden especially for a small business with no existing HR competency. What are the options for a small business to outsource some or all of these steps, e.g. by engaging a temp agency? I am starting up a small business and will need to employ temporary staff on a seasonal basis. I will be employing 10 – 20 staff for up to one week at a time and no more than 3 or 4 times a year. This is for an event business, positions will be in custromer services and staff will not need any specific skills. I am debating whether to outsource the staffing or manage the entire process myself.

  9. Interesting. I am an American citizen. How does this work if I want to move to Canada and start a business that operates accross boarders? Also, is there a website dedicated to grants, etc to help with business upstart?

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