Hiring your first employee is a huge milestone for you and your business.[/inlinetweet] However, becoming an employer comes with many additional responsibilities. If you’re ready to become an employer, you must know which steps to follow.
8 Steps for becoming an employer
Use these eight steps to learn how to become an employer.
1. Find out state and local requirements
Every state and locality has different rules for small businesses. Depending on your location and type of business, requirements can vary.
State requirements
New employer requirements differ from state to state. Most businesses need to register with their state for new employer accounts. Your small business might also need to register for certain licenses, permits, and other registrations. In most cases, you can apply for this information online.
Employers need to register for state unemployment tax insurance, otherwise known as SUTA (State Unemployment Tax Act) tax. After you sign up, your business receives a SUTA tax rate. Your rate is a state unemployment percentage based on your industry and experience (e.g., 2.7%).
Some states may also require state disability insurance. For example, New York requires most employers to have disability insurance for their employees.
View our state payroll guide to see requirements for your state. Contact your state for additional new employer requirements.
Local requirements
Your city or locality may require additional types of employment registration. And, you might need to withhold local taxes from your employees’ wages.
Some states with local income tax include Alabama, Colorado, Delaware, and Indiana. Other states, like Ohio and Pennsylvania, have specific types of local taxes, such as school district tax.
Oftentimes, employers are responsible for withholding and depositing local income taxes for their employees.
Contact your local government office for more information about whether you or not you must register.
2. Apply for an Employer Identification Number
After you decide to become an employer, you need to apply for an Employer Identification Number (EIN). An EIN is a unique nine-digit number the IRS assigns your business. You must apply for an EIN if you plan to hire employees.
EINs are formatted like this: 12-3456789.
There is no charge for applying for an EIN. You can apply online for your EIN. Or, you can mail or fax Form SS-4, Application for Employer Identification Number, to the IRS.
The quickest way to apply for an EIN is online. You don’t need to fill out any forms. And, you can print an instant confirmation for your records.
If you choose to apply with a paper application, complete Form SS-4 and mail or fax it to the IRS. Keep in mind that mailing or faxing your application takes more time to receive your EIN.
3. Get workers’ compensation insurance
Regardless of your type of business, employees stand the chance of getting a job-related illness or injury. To cover unpredictable events (e.g., falling on a wet floor), you must have workers’ compensation insurance.
So, what is workers’ compensation insurance? Workers’ compensation, also known as workers’ comp or workmans’ comp, is insurance that provides wage replacement and medical benefits to employees who get sick or hurt while at work. And, workers’ compensation covers employees regardless of who causes the incident (e.g., you, a co-worker, the employee, etc.).
Workers’ compensation may cover the following issues for employees:
- Chronic back pain
- Carpal tunnel
- Hearing loss
- Lung disease
- Injuries caused by work-related stress
Your employees may be eligible for workers’ comp benefits like payment for diagnosis, treatment, and rehabilitation.
The cost of workers’ comp varies depending on your business, payroll amounts, type of work, and past workers’ comp claims.
State requirements
Each state has its own workers’ compensation programs and laws to follow.
Most states require that you get workers’ compensation insurance. However, some states let employers elect coverage until they have a certain number of employees.
Many states give employers the freedom to choose their workers’ compensation coverage. However, employers in North Dakota, Ohio, Washington, and Wyoming must purchase workers’ comp coverage through their own state fund.
Check with your state for more information about workers’ compensation requirements.
4. Determine how to handle payroll
Before you can begin hiring and paying employees, determine how you plan to handle payroll. Consider aspects like cost and how much time it takes to run payroll.
Some ways to manage payroll include:
- Running payroll by hand
- Outsourcing payroll (e.g., accountant or bookkeeper)
- Using a payroll software or provider
Running payroll by hand is the most cost-effective way to manage payroll. However, it can also be the most time-consuming option and lead to costly mistakes. When you run payroll by hand, you need to calculate the taxes to withhold for each employee. And, you must file and deposit your payroll taxes to the correct agencies.
Using an accountant or bookkeeper to handle payroll requires you to give up control of your payroll. And, outsourcing your payroll can be expensive for your small business. Although it’s more costly than other options, outsourcing payroll can save you a lot of time. And, you can have peace of mind knowing that your payroll deposits are accurate.
Payroll software can be a happy medium between running payroll by hand and outsourcing it. Software is a less expensive option than outsourcing payroll. And, payroll software is accurate and saves time. Most payroll software systems allow you to run payroll within a few minutes. When looking at payroll software, compare your options. Look at providers’ pricing, features, ease of use, security, and reviews.
5. Hire employees
Now that you’ve laid the groundwork, it’s time to begin hiring some employees.
Many new employers use traditional hiring methods (e.g., direct hiring). When hiring your first employee, determine what characteristics and requirements you’re looking for in an employee.
Create a clear and appealing job description. Pinpoint position requirements and qualifications to include in your description. Some qualifications you may list include experience (e.g., two years in an IT-related position) and education (e.g., Bachelor’s degree in Marketing).
If possible, include things like benefits (e.g., retirement contributions) to encourage candidates to apply.
Post your job description to platforms like your business website, online job boards, and social media pages. Review applications that candidates submit. Weed out unqualified applicants and contact candidates who seem like a good fit.
Interview the qualified candidates. The interview process might consist of several rounds of interviews until you find your ideal candidate.
When you are ready to hire, extend a job offer to the candidate. If the candidate accepts your offer, begin the onboarding process and new hire paperwork (which we talk about more in the next step).
As your business grows, you can form a hiring committee to hire additional employees.
6. Complete new hire paperwork
Before new employees can begin working at your business, you and your employee both need to complete new hire paperwork.
As an employer, you must report new hires. Federal law states that you must report new hires within 20 days of hiring them. However, state laws for new hires can differ. Check with your state to find out new hire time frames and laws.
Employees must complete Form W-4, Employee’s Withholding Certificate, for federal tax withholding. Form W-4 determines how much you withhold from employee wages for federal income taxes. Some information an employee needs to list on their Form W-4 includes their name, address, Social Security number, and marital status.
Many states also have state income tax. If your employee works in a state with income tax, they must also fill out a state W-4 form.
To ensure employees are eligible to work in the United States, they must fill out Form I-9, Employment Eligibility Verification. When you collect an I-9 form, the employee must also provide documents proving their identity and eligibility (e.g., driver’s license, passport, Social Security card, etc.).
You might also need to collect additional documents from employees, such as a signed employee handbook, benefits information, and emergency contact forms.
7. Pay payroll taxes
One of the biggest employer responsibilities you have is paying payroll taxes. If you don’t pay your payroll taxes on time, you may receive penalties such as fines or imprisonment.
Payroll taxes include federal income, Social Security and Medicare, and federal unemployment taxes. As mentioned, some employers might need to pay state and local taxes, too.
Federal income tax
How frequently you pay federal income tax varies from business to business. You must withhold federal income tax from employee wages. And, you must pay it on a monthly or semiweekly basis on behalf of the employee.
Your schedule for paying federal income tax is based on a lookback period of Form 941. Form 941 reports your federal income, Social Security, and Medicare tax liabilities.
New businesses automatically have a monthly depositing frequency. Keep in mind that your deposit schedule can change each year.
For monthly depositors, the federal income tax payment is due the 15th of each following month. For example, federal income tax withheld for November is due by December 15.
Federal income tax deposits must be made through an electronic funds transfer (e.g., EFTPS).
Social Security and Medicare taxes
Social Security and Medicare taxes make up FICA tax. Both you and your employees contribute Social Security and Medicare taxes.
The Social Security tax withholding rate is 6.2%. You must withhold 6.2% from each employee’s wages for Social Security. And, pay the matching employer contribution of 6.2%.
Medicare tax is 1.45% for both you and your employees. Withhold 1.45% from employee wages and contribute a matching employer portion of 1.45%.
Deposit FICA tax along with federal income tax. Use the same deposit frequencies as federal income tax (e.g., monthly or semiweekly). Be sure you deposit both the employee and employer portions of FICA.
Federal unemployment tax
Most employers must also pay federal unemployment tax, otherwise known as FUTA tax.
You must pay FUTA tax if one of the following is true:
- You paid $1,500 or more in wages during any calendar quarter
- You had at least one employee for at least part of a day in any 20 or more different weeks
Federal payroll deposit rules state you must make quarterly deposits. However, only make a FUTA deposit if your federal unemployment tax liability is more than $500 during a quarter.
Like federal income and FICA taxes, you must deposit FUTA tax via electronic funds transfer.
Here is the schedule for FUTA tax deposit due dates:
- April 30 for Quarter 1 (January – March)
- July 31 for Quarter 2 (April – June)
- October 31 for Quarter 3 (July – September)
- January 31 for Quarter 4 (October – December)
State and local taxes
Again, depending on your state, you might also need to withhold state and local income taxes and state unemployment tax.
Check with your state and local departments of taxation for payment information about state and local payroll taxes.
8. File payroll reports
In addition to paying payroll taxes, you must also file payroll reports. Payroll reports are forms that notify the government of your payroll tax liabilities.
The payroll reports you need to file depend on your business. Report both the taxes you withhold from employee wages and the taxes you contribute. You need to submit payroll reports for both federal and state taxes.
How frequently you file payroll forms depends on the type of form. Some forms might be due quarterly, while others are due annually.
Quarterly payroll reports
Form 941, Employer’s Quarterly Federal Tax Return, reports federal income, Social Security, and Medicare taxes along with employee wages.
File Form 941 every quarter if you have employees, even if you do not have taxes or wages to report. Do not file Form 941 if you’re a seasonal employer or employ household (e.g., nanny tax) or farm employees (e.g., Form 943).
Due dates for Form 941 include:
- April 30 for Quarter 1
- July 31 for Quarter 2
- October 31 for Quarter 3
- January 31 for Quarter 4
State payroll reports
You might also need to file quarterly reports for state income and state unemployment taxes (SUTA).
Due dates can range widely from state to state. Although most states require you to file quarterly, you should contact your state for specific payroll reporting requirements.
Annual payroll reports
Annual payroll reports are due once per year by January 31. Some common annual payroll reports include Forms 944, 940, and W-2 and W-3.
Form 944
Some employers might be able to file Form 944, Employer’s Annual Federal Tax Return, instead of Form 941.
Like Form 941, you can use Form 944 to report federal income, Social Security, and Medicare taxes on an annual basis.
The IRS tells you if you’re allowed to use Form 944. Typically, you qualify if your business’s annual liability for Social Security, Medicare, and federal income taxes are $1,000 or less.
Form 940
Use Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report federal unemployment tax (FUTA).
File Form 940 annually to report your federal unemployment tax liability. Remember, only employers pay FUTA taxes.
Form W-2 and Form W-3
Form W-2, Wage and Tax Statement, is an annual tax form you must give each employee by January 31. Form W-2 summarizes an employee’s wages and taxes for the year. Employees use Form W-2 to file their individual tax return. You must also file a copy of Form W-2 with the IRS.
Form W-3, Transmittal of Wage and Tax Statement, is the transmittal form for Form W-2. Form W-3 is a summary of the information from your employees’ Forms W-2. Do not send Form W-3 to your employees. Send a copy of Form W-3 to the IRS each year by January 31.
This article has been updated from its original publication date of July 5, 2013.
This is not intended as legal advice; for more information, please click here.
