Hiring an employee is one of the most important things that a small business owner will do, but few have experience doing it.
Below is a list to help you consistently obtain better results. If you are new to hiring employees, or only have had family employees, start here:
Obtain a Federal ID number
Before hiring an employee, you can ask a CPA or attorney to register with the IRS for you. But doing it yourself is pretty straight forward. The IRS allows an online application (click here for online IRS application). It is one of the easier things the IRS has setup. You will need to know the information about your corporation, LLC, or partnership including the month and state it was formed.
Additionally, at least one individual has to enter their Social Security number as a responsible party.
Lastly, you will need to know how your entity is taxed (e.g. S-Corp.). If you’re not sure, check with your tax preparer. You will receive an EIN (Employer identification Number) in letter form immediately online after the application is complete. A paper application is also available if you prefer (Form SS-4).
Consider a Separate Checking Account
There are two major reasons you want to do this before hiring an employee. One is fraud protection. Invariably, your employees are going to obtain this number, and limiting the amount that is in the account limits the potential damage. Bank fraud, electronic and check fraud, is growing. The cost of a separate account is cheap insurance.
The second reason is to separate your payroll taxes. Keeping your payroll taxes current is the number one thing you can do to increase your chance of business success. The IRS and state do not play nice when collecting these taxes. Their penalties are confiscatory, and they will attempt to collect them from you personally. It’s easiest to separate the payroll taxes with each payroll into a separate account.
Know Your Payroll Filing Requirements
You can view the IRS requirements in detail here, but most business owners fall into the monthly pay, quarterly file category. The IRS also collects the Federal Unemployment Tax (FUTA), which is generally due quarterly, and reported annually.
Lastly, W2 forms must be given to employees by Jan. 31 of the subsequent year, and filed with the Social Security Administration by the end of February. It is a good idea to reconcile the information you have sent to the IRS throughout the year with the W2s you send to the SSA, because the IRS will. They usually don’t get around to it for a year, so save yourself the nasty surprise.
All federal payments must be made vie Electronic Federal Tax Payment System (EFTPS), and you have to register, so don’t wait until the payment is due. States generally have their own income tax withholding as well as unemployment tax. Additionally, some cities collect income tax. Make sure you check all of your state and local requirements. Here is a good place to start.
All of this sound a little overwhelming? I agree. That’s why approximately 60 percent of small business owners outsource the processing of payroll. It is much cheaper than paying late penalties.
This varies by state, but it’s safe to assume if you have existing employees (including family members) or are going to hire an employee, then you need worker’s compensation. Worker’s compensation systems are set up to pay for medical expenses and damages for employees injured at work. Again it varies by state, but if you don’t carry worker’s compensation you are subject to a fine by the state even if no one has been injured. Here is a list of each state’s website for worker’s compensation.
Create a New Hire Packet
Although you may only hire one or two employees a year, having the documents in one place will make sure you don’t miss anything when you do.
For each employee, you must have an IRS form W-4 and a UCIS form I-9. Optional items that will vary by employer include: Employment Application (see below), Offer Letter (see below), Background Check Release (see below), Drug Testing Release (see below), Employee Handbook Acknowledgement, Benefits Enrollment Forms (e.g. insurance, 401k), Direct Deposit Authorization Form, Company Equipment Agreement.
Does your company already have employees? Then you’ll want to check out these helpful tips:
When to Hire
Most small business owners I’ve dealt with aren’t hiring an employee with a plan.
Just like you have a marketing plan or a financial plan, a business owner should have at least a basic hiring or staffing plan. Start with a basic organizational chart for your existing team (even if that is only four people). Identify where you will need to add people over the next two years based upon your overall business plan, and add these to your organizational chart as “pending”. Link these pending hires to a trigger, such as number of customers or revenue dollars. This makes the decision rational as opposed to just reactionary to temporary events.
Whom to Hire
I’m a huge advocate of the book “Who” by Geoff Smart and Randy Street. Before you consider hiring an employee, you must actually decide who it is you need.
Smart and Street suggest writing a Scorecard for the position, which details the employee’s mission, their outcomes, and the skills necessary to achieve. This is a critical step that should not be skipped. Hiring the wrong person is worse than not hiring at all. Smart and Street also outline a superb interview process that will give you consistently better results.
Use an application for everyone. That includes current employees that might be applying, too. Consistent documentation will keep you out of trouble with discrimination cases.
Ideally, the application will incorporate releases to do background searches, but third-party background check companies often require their own forms. There are some questions you can’t ask, so it is best to use a form that has been reviewed by someone with HR experience in your state. Click here for sample forms. If your industry or situation is unusual, complicated, or if you want extra assurance, contact a local lawyer.
Small businesses generally don’t do background checks on their employees unless they must, like a transportation company. Background checks are inexpensive insurance, though.
We had a convicted felon apply and accept a job pending background check. She quit before the results came back. I had no idea what was going through her head, but it saved us a lot of pain.
It is not a bad idea to make it your policy to do background checks on a periodic basis, like annually for all employees.
If you ask for them on the application when hiring an employee, check them. Many owners assume that an applicant wouldn’t put down a bad reference, and generally they’re right. But sometimes they do, and it allows you to confirm whether they have the skills you identified in the Scorecard development.
References also might reveal things not picked up on in the candidate interview.
Many owners have a drug testing policy for applicants and current employees for safety reasons. But it is not a bad policy to have, in general.
Again, the key is to consistently apply the policy. Generally, it’s best to include everyone to keep from discrimination claims. Although it may seem obvious, you have to stick to your policy. No exceptions!
Some business owners don’t like having policies, stating that “this is a small business, and the policies aren’t necessary.” Eventually you will put yourself in a bad situation. Having a policy makes the decision simple.
You’ve identified the necessary skills through the Scorecard. You’ve interviewed the candidate and their references. It appears that the applicant has the right stuff.
Take the guess work out of the equation: test the skills that you can. There are many online sources to inexpensively assess a candidate’s skills, from software to phone skills and customer service. If it is a technical skill, consider a third-party certification. Many organizations offer its members certifications (Bookkeeping, Administrative Assistant) or check with your local vocational school.
If you’re set on a candidate but they lack the certification, hire them for a probationary period to give them to time to obtain it.
Usually this is a simple thing, but can save you headaches down the road. A proper offer letter should reference or include the job description, start date, pay rate, benefits, and their employment status. Include if an employee is considered “at will” if those laws apply in your state.
It is not necessary to list all of the employee benefits, rather reference the employee handbook (and make sure they sign a separate acknowledgement that they’ve received and read it). Generally most small business owners have “at will” employees and don’t have a guaranteed term of employment.
Require the employee to sign the offer letter positively accepting the terms in the letter. Lastly, if you’re unsure about anything you want to include in the offer letter, consult a local attorney that has experience in employment matters.
Often overlooked by small business owners is whether a candidate fits with your company’s culture.
I’ve seen many employees that matched all of the necessary skills and experience on a Scorecard that didn’t work out because they couldn’t work with the existing team. One of the best tools I’ve found is the Kolbe Index. This measures a person’s Conative Thinking (i.e. your gut reaction).
Personally, I’ve found it invaluable in determining whether someone is suited for a position, and in helping everyone communicate and collaborate better. Take the evaluation yourself, and see if it doesn’t reveal something interesting.
New Hire Reporting
All employers are required to report new hires to their state no later than 20 days from hiring an employee.
Optional reporting includes Social Security number validation with the Social Security Administration. Generally, if the SSA can’t match the Social Security number to the name, they will send you a letter asking you to verify. There is no penalty to the employer for this. It’sjust a hassle.
Another optional program is to verify the information collected on form I-9 electronically with the US Customers and Immigration. This program, called e-Verify, is voluntary as of 2015.
Hiring Photo via Shutterstock