Starting your own business is an exciting endeavor that requires, initiative, discipline and the ability to answer to naysayers without letting it steer you off course. When you feel that your business is ready to bring on its first employee, it can be a milestone worth celebrating but it can also be intimidating. You may wonder, “What information am I required to collect from an employee? What notices or information am I obligated to provide? What are the rules around paying workers?”
As a payroll company, we see a lot of entrepreneurs, franchisees and new business owners hiring employees for the very first time and much of the process revolves around issuing that first paycheck. So we’ve had opportunities to share resources with clients that help them successfully navigate through the process. Here we’ve outlined the basic steps to onboarding your first employee. We hope you find it helpful.
Each new employee must complete an I-9 to verify work eligibility in the U.S. Form I-9, the Employment Eligibility Verification, is used to establish identity and work authorization in the United States. As an employer, you are required to have employees complete the form no later than the first day of work (although not before the employee has accepted the job offer) and then review and verify the forms of identification. Typically this includes reviewing the employee’s driver’s license and Social Security card, but the full list of documents accepted can be found in the form instructions. The completed I-9 does not need to be submitted to any government agency, but it must be kept on file, separate from your personnel files, for as long as the individual remains employed with your company and up to either three years following the hire date or one year following the termination date, whichever is later. Forms I-9 must also be made available to U.S. government officials for inspection as requested.
It is important to note that many states have passed legislation making the use of E-Verify services mandatory for certain businesses. E-Verify is a free online service in which employers enter information from the completed I-9 to instantly verify a worker’s Social Security number and employment eligibly. This must be completed no later than the end of the third day of employment.
Have your new employee complete a W-4 so you know the amount of federal income tax to withhold. IRS Form W-4, Employee’s Withholding Allowance Certificate, is required to determine the amount of income tax to withhold effective with the first paycheck issued. The form walks the employee through the process of determining the number of personal allowances s/he will claim with the options to withhold an additional amount from each paycheck or claim an exemption from withholding. It’s a good idea as an employer to ask your employees to submit a new W-4 once a year to keep income tax withholding as accurate as possible. If for some reason you are not able to get a completed W-4 from your new employee, the IRS advises to withhold as single with no allowances. Keep the original W-4s on file and available to provide them to the IRS if requested.
Complete your state’s version of the W-4 to accurately withhold state income tax. In addition to withholding federal income taxes from an employee’s paycheck, employers in most states are required to also withhold state income tax. Only seven states, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, do not have a state income tax. Additionally, New Hampshire and Tennessee only require withholding on investment income and dividends. If you live in one of the remaining 41 states you’ll need to have your employee complete your state’s version of the W-4. The Bureau of Labor Statistics has a complete list of state tax withholding forms. Additionally many states have local county, city or school district taxes that require withholding as well.
See Also: New Hire Packet Essentials
Report your new hire to the state. Employers must report newly hired employees to their state’s new hire reporting center within 20 days of the hire date. This requirement was the result of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 which bolstered the enforcement of child support orders. Typically you’ll be required to report your employee’s name, address, Social Security number and hire date along with your business’ employer identification number, company name and address. (If you don’t yet have an employer identification number you can apply quickly online.) See the U.S. Small Business Administration new hire reporting page for links to each state’s new hire reporting entity.
Determine if you need workers’ compensation insurance to protect your employees and your business. So now that you have your first employee, you may be required to obtain workers’ compensation insurance. Workers’ comp covers injuries or illness that an employee has suffered while on the job, providing medical and wage payments to the employee. It can also provide protection to employers by limiting their liability. Rules regarding which employers are required to purchase worker’s compensation insurance vary from state-to-state but often it is based on number of employees. The NFIB has an overview of state workers’ comp rules for employers with links to the appropriate state agency website. Leading workers’ compensation insurance providers like Travelers, Liberty Mutual, The Hartford, American International Group (AIG), and Zurich can be sources of information as well.
Five states and Puerto Rico also require employers to provide disability insurance: California, Hawaii, New Jersey, New York, and Rhode Island.
Meet minimum wage and overtime pay requirements each payday. The Fair Labor Standards Act (FLSA) establishes a federal minimum wage, currently $7.25 per hour. State minimum wage rates may be higher than federal and there are local minimum wage laws in cities like Chicago, Seattle, San Francisco, Oakland and Los Angeles to be aware of. Calculate pay using the higher applicable rate for your business location.
The FLSA also establishes federal overtime pay rules: nonexempt employees receive overtime pay for hours worked over 40 hours in a workweek paid at a minimum of 1.5 times the regular rate of pay. Many states have a 40 hours-a-week rule while others have a different weekly threshold, a daily threshold, and/or rules based on employee count or other factors. Visit your state’s labor department website for specifics.
Give your new employee a break. While the federal government doesn’t require breaks, it does require any breaks of 5 to 20 minutes to be paid time and to be separate from meal breaks. Meal breaks are not paid and rules are determined by state statute. See the Department of Labor’s list of state meal period requirements.
Post required federal and state notices in a high-traffic area. Now that you have an employee, you are required to post certain federal and state notices in your workplace in a location highly visible to workers. The most common required posters include federal minimum wage, Family Medical Leave Act (for those with 50+ employees) and Occupational Safety and Health Act (OSHA) job safety. The exact posters you are required to display will vary based on your business and state and since the posters change frequently it can be helpful to pay for a labor poster service. Though if you are willing to keep up with changes, you can print the notices free online. Just be aware of poster and font size requirements as some must be larger than the typical 8.5” x 11” printout. The Department of Labor’s FirstStep Poster Advisor service walks users through a series of questions and returns a list of required posters.
Check to see if you are required to provide paid sick time to your new employee. Although it has been argued in our nation’s capital, there is currently no federal requirement for employers to offer paid sick leave to employees. But a growing number of states and cities have enacted paid sick leave laws, the latest of which are California and Massachusetts. Those states’ sick leave laws went into effect July 1, 2015. Connecticut is the only other state with a paid sick leave law. Oregon’s paid sick leave bill was signed into law last month and will go into effect January 1, 2016. Additionally, several cities also have their own laws that are currently in effect or will begin soon, including Seattle, Tacoma, Portland, Eugene, San Francisco, Oakland, San Diego, Washington D.C., Philadelphia, New York City as well as nine cities in New Jersey and one Maryland county. Also watch out for progress in Chicago where voters approved a sick leave referendum earlier this year.
Determine your benefits under the Affordable Care Act. While the large majority of Affordable Care Act (ACA) provisions are applicable to larger employers with 50 or more full-time employees, there are some ACA provisions that apply to small businesses. You may be eligible to purchase affordable insurance through SHOP, the Small Business Health Options Program. Additionally, you may be eligible for a small business tax credit if you have 24 or fewer full-time employees with average annual wages under $50,000 and cover 50% or more of your employees’ health insurance premium cost. Note, if you provide any health coverage to your employee, you will report that amount on the employee’s W-2 at year end.
File and pay your taxes. Yes, you already pay business taxes. But now that you’re an employer, you’re responsible for paying payroll taxes, too, as well as withholding and paying taxes on behalf of your new employee. These taxes are based on the employee’s wages, less any pretax deductions, and are collected and then remitted either monthly or semiweekly.
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You’ll need to register with your state’s labor board to file and pay the employer-only state unemployment tax. File IRS form 941, Employer’s Quarterly Federal Tax Return, and deposit federal unemployment taxes quarterly by April 30, July 31, October 31 and January 31. You are also required to file IRS form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, by January 31 each year along with form W-3 and forms W-2 for each of your employees.
Payroll calculations and taxes can get quite complicated, especially when it comes to local taxes and changes that happen on a regular basis. For most small business owners, it makes sense to use an online service that calculates, pays and files taxes on your behalf or to have a trusted CPA handle payroll for the business.
Get policy and consent forms signed. It is important to make your new employee aware of your company’s rules and policies from his or her first day. If you will conduct background checks, drug screenings, or anything that requires employee participation, you must notify the employee before s/he begins work. This is also a good time to present any policy forms that the employee must fill out to work for your business such as an acknowledgement of the receipt of harassment, discrimination or technology policies or an employee handbook.
Ensure a safe work environment and have a plan in place for emergencies. OSHA requires you to create a safe workplace for all employees. That may seem obvious, but there can be hidden dangers in any environment and you’ll want to walk through your work area with fresh eyes to catch any tripping hazards or other unsafe conditions and quickly remove the danger.
It’s also important to address proper procedures in the unlikely event of an emergency such as fire, natural disaster, injured person or even an equipment failure or malfunction. Be sure your employee has access to an emergency plan to keep individuals safe and emergency phone numbers to request assistance. Additionally, you should capture emergency contact information from your employee on their first day so you can call on behalf of your employee if s/he is injured or becomes ill.
Resources for new employers. The U.S. Small Business Administration has a number of resources for new employers, including information on background checks, job descriptions and hiring independent contractors. For more information on employer taxes we recommend IRS Publication 15, Employer’s Tax Guide.