Congrats! You’re ready to take your business to the next level by hiring your first employee. Human Resources is typically the department that owns the onboarding process and facilitates and leads the data-collection process for new hires. But what if you don’t have an HR department yet? Then you’ll need to either outsource these onboarding tasks to an HR advisor or oversee the hiring process yourself.
Even if you do have the help of an external consultant or internal HR department, it’s wise to research the tax and legal requirements you must adhere to before hiring and retaining employees. Moreover, be sure to have the following steps in place so that your business is compliant with state, local and federal regulations.
1. Get an Employee Identification Number (EIN)
An EIN is a nine-digit number assigned by the IRS that identifies you as a business entity and allows you to legally hire employees. Start by visiting the IRS website, since the IRS encourages companies to apply for an employee ID number online. If online access is limited, however, you also have the option to submit an EIN application by fax, mail or phone. The How to Apply for an EIN page has further instructions and contact information on where and how to submit an EIN application.
If you are also applying for business licenses and do not yet have an EIN number, you can apply for one through QuickBooks Licenses.
2. Verify Employee Work Eligibility
Although you don’t have to submit this form to the federal government, U.S. Citizenship and Immigration Services (USCIS) requires all employers to verify an individual’s eligibility to work in the United States by completing IRS Form I-9. The last page of Form I-9 specifies what documentation new hires must present to employers to attest to their employment authorization, regardless if they’re a citizen or noncitizen. Use I-9 Central if you need assistance with electronically verifying employees’ identity and employment authorization.
3. Satisfy Federal and State Tax Reporting Requirements
To be compliant with federal and state regulations, you must properly classify your workers as employees or independent contractors. Whether you decide to hire employees, contractors or both, your decision will determine the amount of unemployment taxes you pay. For example, if you hire an independent contractor, freelancer or consultant:
- The individual will be responsible for reporting and paying her own Social Security and income taxes.
- You’ll need to pay taxes on independent contractors (see Form 1099 on the IRS website) you hire, either quarterly or annually, to the federal government.
If you decide to hire either part-time and/or full-time employees:
- The employee must fill out IRS Form W-4, Employee’s Withholding Allowance Certificate, to indicate the number of allowances he or she is claiming for tax purposes.
- As an employer, you’re responsible for withholding certain taxes—based on the number of allowances the employee claims on his or her Form W-4—from your employee’s paycheck. These include federal income, Social Security and Medicare taxes, as well as Federal Unemployment Taxes. You may also be required to withhold state and local income taxes, depending on your state’s laws.
- As an employer, you’re also responsible for reporting the amount of wages paid and taxes withheld for each employee using a Form W-2.
If you’re unsure of what amount to withhold from your employee’s wage payment, the IRS provides further guidance in Publication 15, Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide. Additionally, setting up a payroll system like QuickBooks Payroll can help you accurately track employee records on tax withholdings and payments. Consult your accountant or a payroll service provider on the best arrangement for setting up your company’s tax payments.
4. Report New Hires to Your State Directory
One of the key provisions of the Personal Responsibility and Work Opportunity Reconciliation Act is that all employers must report new-hire data to their state’s directory within 20 days after the date of hire (however, some states also accept reporting by the first regularly scheduled payroll date if after the 20-day deadline).
See the Small Business Administration’s website for a list of New Hire Reporting Centers in each state, or visit the Administration for Children & Families New Hire Reporting page for the latest reporting requirements for new hires and rehired employees.
5. Obtain Workers’ Compensation Insurance
As an employer, you’re also required to obtain workers’ compensation insurance for employees who may get injured on the job. Workers’ compensation laws across states differ slightly in details, such as benefit rates and the procedural rules governing employers, employees and insurance firms. Services like QuickBooks Workers’ Comp Payment Service are easy ways to implement, manage and pay workers’ compensation.
6. Post Required Notices on Worker Rights
With the exception of Texas, every U.S. state requires the majority of employers to display up-to-date posters highlighting federal and state workers’ rights in a conspicuous area in the workplace. These workers’ rights are constantly evolving and can change up to 70 times a year, meaning the posters need to be updated at the same rate of the laws. While it’s tough to stay up-to-date with all the changes to workers’ rights, services like QuickBooks Poster Compliance Services can automate the system; for a one-time fee, the service will create and send updated labor-law posters whenever laws are enacted or amended.
While several government agencies mandate that offices and other workplaces post required notices on workers’ rights, some employers aren’t covered by each of the Department of Labor’s statutes, and thus, they may not be required to post specific notices. Refer to the U.S. Department of Labor’s Poster Advisor page for notices on workers’ rights, as well as for help figuring out which posters you need to display in your workplace. The Department of Labor also has a helpful chart that outlines poster requirements for different types of small businesses and employers.
Don’t Be Afraid to Ask for Help
All of these steps are necessary for complying with the Equal Employment Opportunity and Fair Labor Standards Acts, as well as federal laws that protect employee rights and ensure your compliance with IRS reporting requirements. However, navigating through all of the legal rules and tax procedures on your own can be overwhelming and intimidating. Remember to enlist a qualified accountant to help you file the necessary paperwork, and keep proper records in accordance to federal and state regulations. Also, don’t hesitate to contact professional associations like the Society for Human Resource Management for advice from a certified HR professional.