Your small business venture is taking off and you're in the process of hiring your first employee. The first of this two-part series examined key new hire considerations, including how to craft the right job description, understanding the difference between exempt and non-exempt employees and using interview techniques that help identify the best candidate for the job.
Now that you've covered the basics and hired your first employee, it's time to address the unglamorous, but mandatory paperwork needed to comply with applicable state and federal requirements, including the following:
EIN. Before you bring your new employee on board, get an Employer Identification Number (EIN) from the U.S. Internal Revenue Service. This number is needed for reporting information about your employee for Federal and various state agency reporting, and is also applicable to other business needs, including:
•Opening a bank account
•Applying for business licenses
•Filing a tax return
The IRS has simplified the process of getting the EIN. Now you can obtain one online.
Withholding Taxes. Another IRS obligation is maintaining records of employment taxes for a minimum of four years. This isn't as burdensome as it sounds, since it also 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 withholding taxes required:
Federal income tax withholding – The new employee should give his or her new boss 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 www.SSA.gov/employer.
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 by the Personal Responsibility and Work Opportunity Reconciliation Act 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. You are required by U.S. Citizenship and Immigration Services (USCIS) to confirm that your new employee is 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.
Workers' Compensation Insurance. Employers are required by law to provide employees with workers' compensation insurance coverage, either through a commercial insurance provider, or a self-insured basis or through 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.
State Unemployment Insurance. 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.
Contractor tax filing requirements. If you've chosen 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 of 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 onboard.