As a small business owner, you wear all the hats when it comes to completing your day-to-day tasks. Between providing products and services, billing customers, and managing your books, you have little time to do anything but work on your business.
At some point, your workload might become too much to handle alone. You will need to hire an employee to help you get tasks done and meet your startup goals.
The need to hire is a good sign for your business, but it can also be overwhelming. If you don’t know what you’re doing, the list of first-time employer tasks you need to complete might seem endless. To get started, use this guide for hiring the first employee at your startup.
How to hire the first employee at your startup
To hire an employee, you must post a job advertisement and screen applicants. Make sure your job description is clear, accurate, and enticing to job seekers. Conduct interviews with the applicants who best match the job requirements.
Once you’ve found the best-fitting candidate, extend a job offer. If the candidate accepts the offer, you’ve hired your first employee.
While finding the right candidate is a time-consuming process, it’s only one step in becoming an employer. To bring on your new employee legally, follow the steps below.
Step 1: Register for employer accounts
To employ workers, you need to have several account numbers and insurance policies. Make sure you record your account numbers, passwords, and information related to registrations in a safe place. Before your new employee begins work, have these accounts in place:
A business license, registration, or permit allows you to conduct business in your state. Every state has different rules for business licenses. Check with your state’s business license office for your requirements.
Employer Identification Number (EIN)
The government identifies your business on tax forms by looking at your Employee Identification Number, or EIN. You can apply for an EIN for free through the IRS.
Electronic Federal Tax Payment System (EFTPS) Account
You can use the EFTPS to pay all your federal tax payments. Tax payments include your employer taxes and employee withholdings.
State Unemployment Tax Authority (SUTA) Account
Your SUTA account makes it possible for you to pay your state unemployment insurance taxes. As an employer, you must pay SUTA taxes according to your state’s rates and taxable wage base.
New Hire Reporting System Account
You must report new hires to your state. Use your state’s new hire reporting system to report your new employee.
Workers’ Compensation Insurance
Some employers need to be covered by workers’ compensation. This insurance covers wages and medical benefits if an employee is injured at work. Each state has its own requirements.
Step 2: Decide how you’ll do payroll
Becoming an employer comes with a lot of new decisions. Before your first employee begins work, set up a program for processing payroll. The more organized you are at this stage, the easier it will to run payroll later on.
Who will run payroll?
If you start with a small number of employees, you can run payroll yourself. You could also hire an in-house payroll professional or payroll service to run payroll for you.
How will you record and process payroll?
Some small business owners run payroll with a simple software solution. You can use online payroll software that allows you to run payroll from anywhere with an internet connection. You might also choose to install desktop software to your computer or do payroll by hand.
How will you onboard your new employee?
Your first hire will need to learn the ins and outs of your business to work proficiently. Decide training procedures, tasks the employee will do, and performance metrics.
Step 3: Fill out paperwork
You must file paperwork for your first employee at your startup. Make sure you fill out these new employee forms immediately after hiring the worker.
New Hire Report
Use your new hire reporting system account to report the new employee to the state where the employee works. The report usually consists of basic information about the employee, like their name, address, and contact information, as well as information about the position, like their start date and pay rate.
The employee will fill out Form W-4 for federal tax withholding. Keep this document on file. Use the form to fill out their annual wage and tax statement. You might also need to fill out a withholding form for the employee’s state.
Form I-9 is used to make sure an employee is eligible to work in the United States. The employee fills out Part 1 of the form, and you fill out Part 2. Keep the form with your payroll records.
Step 4: Deposit taxes
As an employer, you must pay payroll taxes on your employee’s wages. You also need to withhold and deposit taxes from your employee’s pay. You will remit federal taxes, and your state or locality might require tax remittances.
Income tax: Federal income tax helps fund government programs. You must withhold income tax from employee wages based on the allowances marked on Form W-4, how much the employee earns, and their marital status. The more allowances an employee claims, the less tax is withheld from their paychecks.
Medicare tax: Medicare tax funds federal, medical-related programs. You will withhold 1.45% of employee wages. You must also pay a matching 1.45% of employee wages.
Social Security tax: Social Security tax funds programs that help retirees, widows/widowers, healthcare programs, and people with disabilities. For Social Security tax, withhold 6.2% of employee wages and pay a matching 6.2% of employee wages. There is a wage base for Social Security taxes. You don’t have to withhold or pay Social Security taxes after the wage base is met.
FUTA tax: FUTA tax funds the federal government’s oversight of each state’s unemployment program. You might be required to pay FUTA taxes quarterly. Pay FUTA tax at 6% of the employee’s first $7,000 in wages.
SUTA tax: SUTA tax funds each state’s unemployment program. Every state has a different SUTA rate and SUTA wage base, so you will need to check with your state to find out how much you must pay. Use your State Unemployment Tax Act account to pay SUTA tax quarterly.
State and local income tax: You might need to withhold income taxes for your state or locality. Check with your state and local government agencies for your specific requirements.
Step 5: File reports
You must report payroll information to the government using several forms. To avoid penalties, fill out the forms accurately and on time.
Use Form 941 to report federal income taxes withheld. Also, use the form for the employee and employer shares of Social Security and Medicare taxes. You need to send Form 941 to the IRS every quarter, even if you do not have taxes to report.
Use Form 940 to report the FUTA tax payments you made. You must file this form if you paid at least $1,500 in wages to any employee during the year or had any employee work 20 or more weeks throughout the year. The 20 weeks don’t need to be consecutive. Form 940 is due to the IRS once a year.
Use Form W-2 to report employee wages and taxes withheld. Form W-2 is due to the Social Security Administration once a year. You will also send copies to the employee, the state (if applicable), and keep one copy for your records. Send Form W-3 with Form W-2, which summarizes all your Forms W-2.
Use Form 1095-B if you offer employee self-insured health plans. This means that you operate under your own insurance and pay all employee health claims. Form 1095-B is due once a year to the IRS.
Hiring your first employee at your startup
Hiring your first employee is an exciting milestone for your small business. It means that your business has grown enough that a one-person operation no longer meets demands.
Make sure you’re ready before hiring your first employee. Prepare ahead of time so bringing on the new worker will be a smooth transition. Don’t forget to calculate the cost of an employee and add it to your business budget.
Amanda Cameron is a content writer for Patriot Software, a provider of SaaS payroll and accounting software for small business. At Patriot, she explains difficult small business payroll, accounting, and recruitment strategy topics.