The go-to guide for hiring your first employee.
If you're ready to get to the next level with your business, there's one key lever that will get you there — your first employee. Yet, tax, payroll, benefit, and general onboarding considerations need to be made when hiring your first employee.
1. Apply for an EIN. If you don't have an Employer Identification Number yet, get one. An EIN is like a Social Security number for your business. You can apply for one through the IRS website.
2. Consider your finances. Make sure you're financially equipped to hire your first employee. Check your books and review other financial documents to verify your small business is financially stable enough to add another salary to the mix. And, if you ever need to delay payroll, or skip it till more funds come in, Rollcan make it happen.
3. Develop a payroll structure and schedule. Many businesses choose a manual process for payroll, but in many cases, your schedule will be determined by which state you’re located in. State laws define payment schedules, with most favoring bi-monthly payments.
You’ll need to establish this structure and schedule so that your employees know when they will be paid and that you can start planning to set aside money for withholding taxes.
Rules on how much you need to withhold are set by your state’s Department of Labor and federal regulations.
4. Source the right talent. Look to referrals and your professional network to find qualified candidates. If that search ends up as a dead-end, look to online job posting websites.
Temporary workers can be a great resource for helping small business owners and startups meet short-term business needs, such as an increase in production demands or filling in for an employee who is on a leave of absence. You can use a third party, such as a staffing agency or a recruiter, to find temporary workers, but sometimes employers source them directly. However, there are different nuances to paying contractors, which is important to take note of.
5. Interview candidates. After you find a few qualified potential hires, get to know them. And before you meet with them (virtually or in person), make sure you're prepared to ask the right questions and give detailed information about your small business.
6. Do your diligence to make sure the candidate is qualified. Look for references and run a background check.
Keep in mind many states and local jurisdictions have enacted laws that restrict employers from asking an applicant about their criminal background on application forms. Some go even further, restricting these types of questions until after the employer makes a conditional job offer. These restrictions are often referred to as "ban the box" laws.
7. Extend an offer. Once you've found the right person, make them an offer. Your offer letter should include full employment details, like how much they're getting paid, when they're paid, their new title, and essential responsibilities.
8. Register your employee with your state government. Most states require you to submit employee names and Social Security numbers. First, reference the Department of Labor website, then look to your state government's Department of Labor website for this information.
9. Get your ducks in a row from a tax perspective. Once your first employee accepts the offer, have them complete and return an I-9 form to confirm U.S. work eligibility. Then, have them complete a W-4 Form to determine the correct federal income tax taken from their paychecks. State law also requires employers to withhold taxes, so furnish the correct state withholding form for your employee, too. You should also fill out a W-2 form each year. Here are the general requirements from Glassdoor:
Every employer who pays remuneration, including non-cash payments above a certain threshold for the year for services performed by an employee must file a Form W-2 for your employee from whom income, Social Security, or Medicare tax is withheld. Glassdoor notes the following caveats include, "If income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4."
While taxes can be daunting with or without employees, let Roll help.
10. Decide between in-house and external payroll & management. Businesses planning their first hire may wonder whether they should handle payroll in-house or use an external professional. Manage everything in-house, and you’ll save money at the cost of time. Outsource to a payroll professional when you hire your first employee, and you’ll gain time at the cost of money.
Thousands of businesses choose services like ADP to get the best of both worlds. Our mobile payroll service automates many functions of operating an efficient payroll system to save you money, work, and time.
11. Determine your first employee's payroll details. Figure out the amount of federal income tax to withhold based on your employee's tax filing status, income, and what they filled out on their W-4. Remember to withhold the proper FICA tax amount, the employee's portion of Social Security and Medicare tax.
As part of payroll, you should deposit withheld federal income taxes from your employees' pay, as well as the employer and employee portions of Social Security and Medicare taxes. Make these deposits electronically via the Electronic Federal Tax Payment System (EFTPS).
12. Outline employee benefits. Attracting the top talent is crucial, and that means deciding on an attractive company benefits package. The benefits you offer may depend on your resources and how many years someone has worked for your business. However, there are some benefits you’re required to provide by law.
These benefits protect workers and include Social Security, unemployment insurance, workers’ compensation insurance, Medicare, family leave, medical leave, and health insurance.
When hiring a first employee, anything else you choose to offer is entirely your choice.
13. Prepare an onboarding plan. Onboarding is critical to getting your new hire into the swing of things. Determine whether your employee will need formal training or can jump immediately into their role.
The extent of your onboarding plan will depend on the nature of your business, the role being hired for, and how experienced your new hire is.
For example, some small businesses hire relative novices because they can’t afford to meet the salary requirements of an experienced employee. In this case, you’ll need to be willing to develop a more in-depth onboarding plan.
Another consideration is whether you will allow a senior employee to handle the onboarding process or will you invest in a formal training program. Each option has its pros and cons.
Every new employee onboarding plan is unique to the company, so make sure you’ve mapped yours out before hiring.
14. Launch a probation period. It’s common practice for companies to initiate a probation period for new hires. It allows employers to analyze their hires' qualities and ensure they’re the right fit for their organization.
After the probation period, you’ll have the chance to decide whether to make your hire permanent or part ways.
When you make an offer, your new hire should be aware of the probation period.
15. Report required unemployment payments. "The U.S. Department of Labor states that, generally, businesses must pay both federal and state unemployment taxes if they employ at least one person for 20 weeks in a calendar year, or if their employees' wages account for over $1,500 per quarter," notes the U.S. Chamber. If this applies to you, you should pay quarterly dues via IRS Form 940.
Hiring employees as an LLC, C-corporation, or S-corporation means running through the same considerations. A small business hiring a first employee is typically a watershed moment in that organization’s story, but hiring when you’re not ready can cause chaos.
Before figuring out how to hire your first employees, you need to ask, “Is this the right time?”
All businesses have ups and downs, but if you’re frequently operating for months with minimal work before a significant upward period, you likely want to opt for an independent contractor. Seasonal companies usually don’t hire many employees because they can’t justify the expense or the hassle.
Make sure you have a steady stream of work to keep your new hires busy during the slower periods of the year. If you don’t have adequate amounts of work, making a first hire may not be a good idea.
It’s also an intelligent move to chart the direction of your industry. Prevailing economic winds can indicate whether your niche is likely to expand or experience a downturn. The last thing you want is to hire someone only for your industry to experience mass layoffs in six months.
As a fledgling business owner, you might consider expanding into new areas. For example, if you’re planning an online or nationwide expansion, you might need the manpower or the additional expertise to make it happen.
In this scenario, looking up how to hire employees could be a good move for your organization. Filling those skill gaps and bringing in the expertise you don’t possess can elevate your brand.
Every new hire has to fill an unmet need. If you don’t have an unmet need, reconsider your decision to bring in a new face.
Hiring an employee instead of an independent contractor means taking on new legal obligations for pay and benefits. You also need to consider the costs of hiring someone in the first place.
Some of the additional costs involved for a small business to hire a first employee include the following:
You’ve also got the extra costs of purchasing uniforms, integrating new equipment, and investing in onboarding and professional development. The expenses involved go far beyond putting someone on an hourly wage.
Delve into the numbers and examine your current cash flow. Are you in a healthy position or struggling to pay your monthly bills?
Another aspect of how to hire your first employees is complying with all the red tape that comes with becoming an employer. You need to comply with state and federal regulations in various areas. Some of the things you need to bear in mind when running a team include the following:
With all this in mind, many small businesses find it easier to outsource to independent contractors because they don’t need to worry about paying for employee benefits and salaries or handling many of the additional tax forms that come with being a registered employer.
You still have obligations when working with independent contractors, but it’s much less work than being an employer. If you’re unwilling to deal with these additional responsibilities, asking, “How to hire your first employees?” may not be the right direction for you.
Nobody can look into a crystal ball and predict the future. Still, it’s up to you to predict whether you can reasonably sustain a full-time employee for the foreseeable future.
Monitoring your growth forecasts and the state of your industry will help you decide whether now is the time to take the next step and hire a full-time employee.
For example, if you are working in an industry experiencing mass layoffs due to a recession, going against the grain and hiring isn’t the best choice.
While not every part of the onboarding process is simple, there's a solution to ease the burden of your first employee's payroll requirements.
For a modern and intuitive payroll solution, say hello to Roll – the first chat-based payroll app for small businesses backed by ADP®. The app makes it easy for you to implement flexible and efficient payroll processes — without the hassles of calculating complex taxes, benefits, and other withholdings.
Download Roll, onboard yourself in just minutes, and then text away.