Becoming an employer is something that happens at the best of times. Your business is growing and you need help, plain and simple. It’s a great feeling, but becoming an employer can also be very daunting with the added requirements and greater tax burden.
Maybe you’ve already hired employees, and you just want to make sure you’re on the right track. Maybe you’re considering hiring your first employee. These tips will give you a good place to start on your employer journey, but keep in mind, this list is far from exhaustive.
Let’s dive in!
1. Make sure you have an EIN (Employer Identification Number)
This is one of the first steps to becoming an employer, and it’s like a social security number for your business because it’s required for any business with employees. Be sure to check with your state to see if they require a State EIN.
2. Become familiar with your Employer tax requirements
As an employer, you are responsible for withholding federal income taxes and payroll taxes (social security and Medicare) from your employees’ paychecks.
Employers must also match the amounts withheld from employees for payroll taxes. This tax withholding must be deposited on either a monthly or semi-weekly schedule depending on the tax liability of your business in prior years. (New businesses are monthly depositors unless a few special rules apply.)
In addition to the taxes discussed above, employers are responsible for paying Federal and State Unemployment taxes on each employee. This is paid by the employer and is a business expense to the company.
Most states also require employers to have Worker’s Compensation Insurance. If your state doesn’t require it (Texas does not), it may still be a good idea to do your research.
Having this insurance will help you reduce your potential liability from work-related, employee injuries, which may help you tremendously in the long-run. Check with an insurance agent and your state for more information.
You can learn more about your payroll tax requirements by checking out this blog post.
3. Determine if you need state or local tax IDs, licenses, or permits
Some state and local governments require additional information from companies who have employees. Be sure to check with them to determine your requirements.
4. Get setup with a Payroll software and decide who will manage it
Small business owners spend an average of eight hours a month on payroll. That’s 12 days a year you could spend doing something else!
QuickBooks Online Payroll can help! It integrates seamlessly into the QuickBooks Online ecosystem making it a more user-friendly option for running payroll.
If you don’t think you have the time to manage payroll and keep up with the latest tax laws and regulations, consider having someone take it off your hands.
Other payroll options include ADP, Gusto and Wave.
5. Create a compensation plan for holiday, vacation and leave and document it
If you plan to continue adding employees, you may want to put together a formal compensation plan and employee handbook. This is a great way to attract new talent and retain happy employees!
But don’t forget…as the employer, how will work continue when people are on vacation or sick? Make a plan of action for when this happens so you have the help you need in a pinch.
6. Consider Retirement Plans
You may want to consider how employees can invest in retirement and what impact that has on you as the business owner. There are several options with different vesting, contribution limits and requirements including the SEP IRA, Simple IRA and Simple 401(K).
Do your research and be sure to consult with an investment professional to walk you through the process.
7. Become familiar with the Labor Laws in your state
Each state has specific labor law requirements, and it’s very important that you follow them. Consult with your state for more information on required compliance posters and other regulations.
8. Ensure new employees return a completed Form W-4 (within the first few days of employment)
This form will determine the amount of federal income tax withholding from each employee’s pay. Form W-4 should be updated by an employee any time a major life event takes place (marital status change, dependent change, etc.), or whenever they feel they should update it.
Just keep in mind that when they update their W-4, you are required to update it in their payroll settings immediately.
9. Make sure new employees are eligible to work in the U.S. (I-9)
Form I-9 should be completed on a new employee’s first day, and documentation should be provided by at least the third day of employment. Employers must retain original I-9 forms for three years after the date of hire, or one year after the date employment ends, whichever is later.
10. Report all new hires to your state registry within 20 days of the date of hire
Once you become an employer, reporting new hires to the state is required by law (at least in most states). Failure to do so could result in large fines or penalties. Consult your state for more information.
11. Pay your employees and report payroll taxes on a quarterly basis
File payroll tax returns on a quarterly basis unless the IRS instructs you otherwise. This is separate from depositing tax withholding. Payroll tax withholding must be deposited based on an IRS schedule (monthly or semi-weekly).
Find someone to help you meet these requirements, and work with a good payroll system to streamline the process.
Wrapping It Up
Well, there you have it! If you are considering becoming an employer and making the jump into managing employees, this list will help you get started from a compliance perspective. Remember, this list is not exhaustive so be sure to consult with your state and a tax, accounting and/or legal professional to help you navigate your requirements.
For more information, check out the IRS’ Employer’s Tax Guide here.
Note: This blog post is meant for educational and informational purposes only. Please contact a tax or accounting professional if you have specific questions about what this means for your business before taking any further action.
