If your business has grown to the point where can’t get it all done yourself, you may need to hire employees. Even if you’re the sole proprietor of your business, you don’t have to be the sole provider of all of its services. Whether you need clerical help, manufacturing help or sales personnel, you want to be careful and thorough, not only in hiring the right person to do the job, but in fulfilling your requirements as an employer.
The IRS details the 10 steps you need to follow to be in compliance with federal and state regulations. In-depth information can be found in the IRS Employer’s Tax Guide.
1. Obtain an Employer Identification Number (EIN)
Before you can hire any employees, you must have your EIN, or Federal Tax Tax ID, from the IRS. You will need this when reporting information about employees to state agencies. You can apply for an EIN online or contact the IRS directly at 800-829-4933.
2. Set up Records for Withholding Taxes
Keep records of employment taxes for at least four years. Prepare your financial statements, track deductible expenses, make sure receipts can be substantiated, prepare your tax returns, and maintain paperwork to corroborate items reported on tax returns.
**Every employee must have a signed withholding exemption certificate (Federal Income Tax Withholding Form W-4) on file on or before the date of employment. The employer must submit Form W-4 to the IRS.
**On an annual basis, employers must report wages paid and taxes withheld for each employee to the federal government, using Form W-2, Wage and Tax Statement.
**As an employer, you must send Copy A of the W-2 Form to the Social Security Administration by the last day of February (or last day of March, if you file electronically) to report the wages and taxes of your employees for the previous calendar year. You should also send copies of W-2 forms to your employees by January 31 of the year following the reporting period.
**Know whether you are required to withhold state income taxes.
3. Employee Eligibility Verification (Form I-9)
Employers are required to verify an employee’s eligibility to work in the United States. Within 3 days of hiring an employee, employers must examine acceptable forms of documentation and complete an I-9 (Employee Eligibility Form). Employers can only request documentation specified on the I-9 form, and may be subject to discrimination lawsuits if they ask for other documents.
Though the I-9 is not filed with the federal government, employers are required to keep it on file for 3 years after the date of hire or 1 year after the date the employee’s employment is terminated. Forms, instructions and a guide to immigration regulations can be found on the IRS web site.
4. New Hire Reporting Program
To comply with The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, employers must report newly hired and re-hired employees to a state directory within 20 days of their hire or rehire date.
5. Obtain Workers’ Compensation Insurance
Businesses with employees are required to carry Workers’ Compensation Insurance coverage through a commercial carrier, on a self-insured basis, or through the state Workers’ Compensation Insurance program.
6. Unemployment Insurance Tax Registration
Under certain conditions, your business may be required to pay unemployment insurance taxes. To do so, you must register your business with your state’s workforce agency.
7. Disability Insurance
In some states, employers must provide partial wage replacement insurance coverage to eligible employees in instances of non-work related sickness or injury. Currently, the following states require employers to purchase disability insurance: California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island.
8. Post Required Notices
Prominently display specific posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. These are available, free of charge, from federal and state labor agencies.
9. File Your Taxes
Generally, employers who pay wages subject to income tax withholding, social security, and Medicare taxes must file a quarterly tax return – IRS Form 941. Small businesses with an annual income tax liability of $1,000 or less may file IRS Form 944, Employer’s Annual Federal Tax Return, instead.
IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, is required if you paid wages of $1,500 or more in any calendar quarter or had one or more employees work for you in any 20 or more different weeks of the year.
10. Get Organized and Stay Informed
Fulfilling your tax and reporting obligations, providing benefits, and keeping employees informed about your company’s policies will help you to maintain a legal and ethical working environment and contribute to the success of your business. Additionally, you should set up a good system for keeping records, ensure you establish safe practices in the workplace, and be familiar with standard benefits, fair opportunity laws and labor standards for employees.