Handbook / Hiring and growth

Hiring your first employee: the checklist for a one-person business

The first hire is a turning point. It can free you to take on more work or focus on what you do best, and it turns you into an employer, with forms, taxes and legal duties that did not exist before. None of them is hard on its own, but there are several, and they have deadlines. This guide sets out the steps in order, using IRS, USCIS, SBA and federal child support agency guidance.

Step 1: decide whether you need an employee

Before hiring, check whether the work could be handled differently: a contractor for a specific project, software, or outsourcing a task. If the need is ongoing and you will direct how the work is done, an employee is likely right.

The IRS says a person is generally an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how. Treating an employee as a contractor can lead to back taxes and penalties. The working-alone guide on contractor or employee explains the factors, and the guide on independent contractor agreements covers genuine contractor relationships.

Step 2: plan the role and the cost

Write a short description of duties, hours, pay and start date. Then estimate the full cost: wages, plus employer Social Security and Medicare taxes, federal and state unemployment taxes, workers' compensation, any benefits, payroll fees and equipment. The employer's cost is more than the wage.

Step 3: get your numbers and accounts

The SBA's payroll steps begin with getting an Employer Identification Number and finding out whether you need state or local tax IDs. Typically you will register with your state for:

• state income tax withholding, if your state has an income tax
• state unemployment insurance
• new hire reporting

The SBA notes that state employment obligations vary but often include workers' compensation insurance, unemployment insurance taxes and temporary disability insurance.

If your business is a single-member LLC, the IRS treats it as a separate entity for employment taxes, so it reports them under its own name and EIN.

Step 4: arrange insurance

Workers' compensation is required in many states once you have employees, with rules that vary by state, number of employees and industry. Ask an agent for a quote and check your state's requirements. Review your general liability and other policies too.

Step 5: set up payroll

The SBA lists decisions including pay periods and how you will handle payroll. Options:

• payroll software that calculates withholding and files forms
• a payroll service that handles deposits and filings
• an accountant who runs payroll for you

Payroll involves calculating withholding, paying employees, depositing taxes on time and filing returns. The IRS says employers must deposit and report federal income tax withheld and both the employer and employee shares of Social Security and Medicare taxes, and report wages paid. Most small businesses benefit from software or a service.

Step 6: when the employee starts

Form I-9. The IRS and USCIS say all US employers must properly complete Form I-9 for every individual they hire, citizens and noncitizens alike. Both the employee and the employer complete parts of it. Keep it in your records; it is not sent to the government.

Social Security number. The IRS says you must get each employee's name and SSN and enter them on Form W-2. Do not accept an ITIN in place of an SSN.

Form W-4. The IRS says you should have a Form W-4 on file for each employee to know how much income tax to withhold, and that if a new employee does not give you one, you withhold as if the employee is single. Some states have their own withholding form.

New hire report. The Administration for Children and Families says federal law requires employers to report basic information on new and rehired employees within 20 days of hire to the state where they work, and some states require it sooner. The required items are the employee's name, address, SSN and date of hire, and the employer's name, address and EIN.

Step 7: workplace basics

Depending on your state and business, you may need to display labor law posters, follow minimum wage and overtime rules, and have written policies on leave and pay. The SBA's payroll steps mention deciding on a leave policy. Check federal and state labor department sites.

Step 8: ongoing duties

• run payroll on schedule and keep pay records
• deposit employment taxes on time and file returns
• give each employee a Form W-2 after the year ends
• keep employment tax records; the IRS says to keep them for at least four years

Check your other arrangements

Hiring can affect other parts of your business. A one-participant 401(k), for example, loses its no-testing advantage once eligible employees join. Your insurance, lease and local permits may also need updating; a home occupation permit may limit non-resident employees.

Confirm it is a real employee role, register as an employer, insure, set up payroll, complete I-9 and W-4, report the hire within your state's deadline, and keep the tax schedule.