Hiring your first employee is a significant undertaking for your small business. It is important to follow all applicable rules and regulations from the very onset, and there are even steps you may take before hiring to help the process operate smoothly. Here is a list of suggested steps for hiring your first employee.
STEP 1: Obtain a federal Employer Identification Number (“EIN”). Before hiring your first employee, you must obtain an EIN from the IRS. The EIN is sometimes referred to as your Employer Tax ID or as the Form SS-4. Fortunately, obtaining an EIN is easy. Apply for an EIN on the IRS website. If you think you already have an EIN, but you don’t know the number, you can contact the IRS at 1-800-829-4933 to retrieve it.
STEP 2: Set up a system for recordkeeping and tax withholding. Did you know that, according to the IRS, you need to keep records of employment taxes for at least four years? Keeping good records is absolutely imperative when it comes to hiring employees. Bad recordkeeping is one of the most common ways that small businesses get into hot water with the IRS and the Department of Labor.
In recordkeeping, you should also include a method of tracking withholding taxes for your new employees. There are three types of withholding taxes you need for your small business: federal income tax withholding (Form W-4), the federal wage and tax statement (Form W-2), and state tax withholding. Colorado does have a state income tax.
Creating (and maintaining) a good recordkeeping system can be very difficult on your own. However, there are a number of different resources that may assist you. Really think about just how much help you will need in your recordkeeping. Many accounting and recordkeeping software programs, such as QuickBooks and Quicken, have withholding functionalities built in. Additionally, many payroll service companies, including ADT and Paychex, offer recordkeeping and withholding services and assistance.
STEP 3: Do your homework before you hire. Now you are ready to find your new employee. Do not hire on a whim! Recruit quality people; perform background checks; use written employment contracts; develop and follow a comprehensive employee manual; and develop and follow appropriate employee exit procedures.
STEP 4: Form I-9. Federal law requires employers to verify every employee’s eligibility to work in the United States. Within 3 days of hire (yes, it’s really only 3 days), the employer must complete Form I-9. You do not need to submit the I-9 to any government agency, but you must keep it on file for three years after the date of hire or one year after the date of the employee’s termination, whichever is later.
STEP 5: New Hire Reporting. All employers are required to report newly hired and re-hired employees to a state directory within 20 days of their hire or rehire date. You can visit Colorado’s New Hire website here.
STEP 6: Obtain Workers’ Compensation Insurance. All businesses with employees are required to carry workers’ compensation insurance coverage through a commercial carrier, on a self-insured basis or through their state’s Workers’ Compensation Insurance program. This applies even if you are in a low-risk industry.
STEP 7: Posters. Employers are required to display certain posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. It is common, however, for private companies to try and sell you overpriced posters. You do not need to spend a lot of money on your posters! Visit the Department of Labor’s website for more information and to print out posters in a number of different languages.
STEP 8: File your taxes. Keeping thorough records (see Step 2, above) is not enough. You need to timely file your taxes. Generally, employers who pay wages subject to income tax withholding, Social Security and Medicare taxes must file IRS Form 941(the Employer’s Quarterly Federal Tax Return). For more information, talk to your CPA.
STEP 9: Stay informed. Employment law is complex, and it is always evolving. Furthermore, different federal and state employment laws may begin to apply to you as your business grows and changes. For instance, some regulations only apply to companies with 50 or more employees, while other regulations are industry-specific. In other words, as a small business owner and an employer, you must stay informed about various employment regulations.
The law is always changing. We cannot guarantee that the information provided herein is current and accurate. Every situation is different. Do not refrain from seeking legal advice from a lawyer because of anything contained in this blog. Consult an attorney for individual legal advice regarding your own situation.