Knowing how to hire employees may be among the most essential skills small business owners should have. Hiring your first employee is an exciting milestone for a fledgling company.
But before advertising for a new position, make sure you know how to hire your first employee without running afoul of employment laws and regulations, as well as how to onboard them once you've made your decision.
Here's a comprehensive guide to key considerations and preliminary action steps you can take to succeed in hiring your first employee:
Classify employees as exempt and non-exempt
Employers are required to classify positions as exempt or non-exempt based on the employee's job duties and method/amount of compensation. One primary difference between exempt and non-exempt employees is that exempt employees generally receive a salary and are "exempt" from federal rules concerning overtime pay and minimum wage.
Non-exempt employees are often paid on an hourly basis but some may receive a salary instead. These employees must receive at least the existing federal minimum wage rate for the first 40 hours they work each workweek, and be paid overtime (at least 1.5 times their regular rate of pay) for all hours they work over 40. State or local wage and hour laws may also apply and may provide for additional required compensation.
Get your EIN
Before you bring a new employee on board, you need an Employer Identification Number (EIN) from the IRS. The EIN is needed for federal, state, and local jurisdictional (if applicable) reporting of employee information, in addition to many other business needs, including, but not limited to:
- Opening a bank account
- Applying for business licenses
- Filing tax returns
The IRS has simplified the process of getting the EIN, which you can now obtain online.
Obtain workers' compensation insurance
Employers are generally required by law to provide employees with workers' compensation insurance coverage. Insurance can be purchased through a commercial insurance provider, a self-insured basis, or a state workers' compensation insurance program.
This legal requirement not only protects your employee in the event of an on-the-job illness or injury; it can limit how much compensation can be claimed and in some cases, eliminate co-worker liability.
Understand your state's unemployment insurance (SUI) laws
In most cases, employers pay state unemployment compensation taxes, which go into the state's unemployment compensation fund. In some states, employees must also pay this tax. Contact your accountant or payroll provider to be sure you're paying this tax correctly.
Be prepared to withhold taxes
Another IRS obligation is maintaining records of employment taxes for a minimum of four years. This encourages business owners to keep track of key financial aspects of their enterprise, including receipts, deductible expenses and the preparation of tax returns. These are the three types of required withholding taxes:
- Federal income tax withholding. The new employee should give the employer a signed withholding exemption certificate (Form W-4) before starting on the job (or on the first day).
- Federal wage and tax statement. You must file Form W-2 with the federal government, itemizing all wages paid (salary, other forms of compensation, etc.) and taxes withheld for your employee. Form W-2 must be submitted to the Social Security Administration no later than the last day of February each year. More information is available at here.
- State taxes. Employers may be required to withhold state taxes, so be sure to get detailed information from your state and local tax site.
New hire reporting
Employers are required to report a new hire to the appropriate state agency within 20 days (if information is submitted by mail) or twice a month (if information is submitted electronically). This information is used to locate parents who owe child support. Learn more about the specific hire reporting agency in your state at www.acf.hhs.gov.
Form I-9 employment eligibility verification
Employers are required by U.S. Citizenship and Immigration Services (USCIS) to confirm that new employees are eligible to work in this country. The Form I-9 is used to verify an individual's citizenship and eligibility for employment in the U.S. Companies should have employees fill out Section 1 of the form no later than the first day of work for pay. Employers are required to fill out and sign Section 2, Employer Review and Verification, within three business days of the employee's first paid working day. While it isn't necessary to submit Form I-9 to USCIS, employers must retain completed Forms I-9 for all current employees and for three years after the date of hire or one year after the date employment is terminated for former employees, whichever is later.
Know contractor tax-filing requirements
If you choose to hire an independent contractor instead of an employee, it's unlikely you'll have to withhold or pay taxes on payment to the contractor. But it's absolutely necessary to identify this person's contractor status with the IRS to avoid any confusion or misunderstandings down the line. The individual must fill out Form W-9 (Request for Taxpayer Identification Number and Certification) and you'll be responsible for filing Form 1099-MISC, should the taxable compensation for the independent contractor reach or exceed $600 in the course of a year.
All this paperwork may seem overwhelming at first, but once you've taken care of the required forms, you can start reaping the benefits of bringing your employee or independent contractor on board.
Have your onboarding paperwork ready
When your first employee is hired, you want to do everything in your power to make the individual feel at home with your business. Effective employee onboarding is the single most important element in getting the new hire oriented and comfortable, and with helping to ensure that the new hire stays with your company for the foreseeable future.
New employee onboarding paperwork includes:
- Form I-9: Employers are required to confirm new employees' identity and work eligibility. Employees will need to complete Section 1 of Form I-9, which is available on the U.S. Citizenship and Immigration Services website, on or before their first day of work for pay. Employers must complete the form within the first three days of employment.
- Form W-4: Employers must ensure that all employees provide a completed Form W-4 for their federal income tax withholding either before starting their new job, or on their first day.
- New hire reporting: State and federal laws require employers to report information on new and rehired employees to the appropriate agency within 20 days of beginning employment; some states require reporting this data sooner.
Consider hiring an accountant and payroll provider
Many businesses hire an accountant and a payroll services company to assist them with maintaining IRS obligations and correctly processing payroll. These companies can help you file your Form W-2, the federal wage and tax statement, which itemizes all wages paid (salary, other forms of compensation, etc.) and taxes withheld for your employee(s), and must be filed each year. Employers may also be required to withhold state or local taxes.
Develop an employee handbook
With the number of employment laws and regulations continuing to grow, as well as the potential penalties for noncompliance, having an up-to-date employment handbook is just plain smart. Before hiring, consider developing an employee handbook, which can help you mitigate the risk of potential lawsuits.
Create your job posting
Once you're prepared to hire, onboard, and pay an employee, you're ready to create a job posting. Know the answers to these questions as you put the posting together:
- What specific duties and essential functions does the role encompass?
- What skillset, education, or experience does the applicant need to succeed in the role and add value to your business?
- Where will the person work, and during what hours?
- What tools, software, or technology resources will the employee be given to do the job?
- Are there opportunities for advancement?
- What does the total compensation package look like?
The more detailed you are in your description, the more likely it is that you can attract applicants who are qualified, eager, and excited to help your small business succeed.
Certain basic information is often included in a job posting, such as:
- Job title
- Job objective
- Description of the position's scope, responsibilities, and essential functions
- List of tasks to be performed
- Skills and qualifications required (education, experience, licenses, etc.)
Applicants will naturally be curious about the position's salary range and benefits, so consider addressing those details as well.
Learn how to source likely candidates
When hiring your first employee, you can find candidates via prominent online job boards like Monster and Indeed. These sites share your job listing with a wide audience of candidates, but they usually come at a cost and may result in an avalanche of completed applications and resumes, all of which require time-consuming vetting.
Once you've taken these steps, you'll be ready to begin the hiring process. Be prepared with the materials you've gathered when they arrive, and take a moment to explain the paperwork to them before they begin their training.
Go more in-depth on the topic of how to hire employees by downloading our comprehensive guide — it includes specific steps on how to create effective job postings, regular and overtime rates, FLSA regulations, and more.