When you hire an employee, you take on several legal and tax obligations. It's essential to understand these to ensure you’re complying with the law and protecting both your business and your employees. Below are the key steps for compliance:
An Employer Identification Number (EIN) is a unique number assigned to your business by the IRS for tax purposes. You need an EIN if:
You have employees.
Your business is a corporation or partnership.
If you don’t already have one, you can apply for an EIN online through the IRS website. This number is used to report employee wages, withholdings, and other tax-related activities.
Before hiring, ensure you classify your worker correctly. Misclassifying an employee as an independent contractor can lead to significant penalties.
Employee: If you control how, when, and where the work is done, the worker is likely an employee.
Independent Contractor: If the worker is independent, sets their own schedule, and operates their own business, they may be considered an independent contractor.
After you’ve obtained your EIN, you must register for federal and state taxes, including:
Federal Income Tax: You must withhold federal income tax from your employee’s paycheck.
Social Security and Medicare Taxes (FICA): As an employer, you’re responsible for withholding these taxes from your employee’s paycheck and matching the employee’s contribution.
Federal Unemployment Tax (FUTA): Employers must pay FUTA tax to fund unemployment benefits, but employees do not contribute to this tax.
State Income Tax: Depending on your state, you may also need to withhold state income tax from your employee’s wages.
State Unemployment Insurance (SUI): Most states require employers to pay into their state unemployment insurance programs.
Once you’ve registered for taxes, you must establish a payroll system to manage employee compensation and withholdings. This includes:
Withholding Federal and State Taxes: Ensure you withhold the appropriate amount of federal and state income taxes from your employee’s paycheck.
FICA Taxes: Deduct Social Security and Medicare taxes and match the employee’s contribution.
Payroll Schedule: Decide whether you’ll pay employees weekly, biweekly, or monthly. You must adhere to this schedule once established.
Pay Stub: Provide employees with a pay stub showing their earnings, deductions, and tax withholdings.
Consider using a payroll service (e.g., Gusto, QuickBooks, or ADP) to streamline the payroll process and stay compliant with tax regulations.
As an employer, you are required to display certain workplace posters. These include notices about:
Workers’ Compensation Insurance: Required in most states and should be displayed in your workplace.
Equal Employment Opportunity (EEO) Laws: Federal laws prohibit discrimination based on race, gender, religion, etc.
Family and Medical Leave Act (FMLA): If your business meets certain thresholds, you may need to inform employees about their rights under FMLA.
Check with your state and local government for additional workplace posting requirements.
You must ensure your employee is legally authorized to work in the U.S. To verify this:
Form I-9: Employees must complete the I-9 form to verify their identity and employment authorization. You, as the employer, must retain this form for your records.
E-Verify: Some states require employers to use E-Verify, an online system that verifies an employee’s eligibility to work.
Most states require employers to carry workers’ compensation insurance to cover employees who are injured on the job. The insurance protects both you and your employees and typically covers medical expenses and lost wages due to workplace injuries.
Check with your state’s workers' compensation board for specific requirements in your area.
As an employer, you must comply with federal and state labor laws regarding:
Minimum Wage: Ensure you pay your employee at least the federal or state minimum wage, whichever is higher.
Overtime: Employees must be paid time-and-a-half for hours worked over 40 hours per week, unless they qualify for an exemption (e.g., salaried employees).
Paid Time Off (PTO): Some states require paid sick leave or other types of paid time off. Understand your obligations at the state level.
Health Insurance: Under the Affordable Care Act (ACA), employers with 50 or more full-time employees are required to provide health insurance. While this doesn’t apply to small businesses with fewer than 50 employees, offering health benefits can help attract top talent.
Retirement Plans: Some small businesses offer retirement plans like 401(k)s to employees, though it’s not required by law. If you do offer one, ensure it meets compliance standards.
Paid Family and Medical Leave: Depending on your state, you may be required to offer paid family or medical leave.
As an employer, you must regularly file employment taxes with the IRS and your state tax agency. These include:
Form 941 (Quarterly Tax Return): Used to report the employee’s wages and taxes withheld.
Form W-2: At the end of the year, you must provide your employees with a W-2 form that shows their total earnings and the taxes withheld.
Though not required by law, it’s a good idea to create an employee handbook that outlines your business’s policies and procedures. This can help set clear expectations for employees and minimize legal risks. Your handbook may include:
Workplace behavior and code of conduct
Anti-discrimination and harassment policies
Time-off policies (vacation, sick leave, etc.)
Confidentiality agreements and intellectual property policies
Hiring your first employee involves more than just finding the right person for the job. As a small business owner, you’ll need to understand and comply with various legal and tax requirements to ensure that your business stays on the right side of the law. By setting up proper systems and staying informed about federal, state, and local regulations, you can create a positive and compliant work environment for your new hire and your growing business.
If you’re uncertain about any aspect of the process, consider consulting with an accountant, attorney, or payroll expert to ensure full compliance.