Congratulations on your decision to hire your first employee! This is an important step in growing your business. However, it’s important to remember that hiring an employee is a big responsibility.
There are many legal and financial considerations, as well as things you will need to do from a human resources standpoint. In this blog post, we will walk you through the process of hiring your first employee and provide you with all the information you need to make the right decisions for your business.
Knowing When it’s Time for Hiring
For many small business owners, hiring their first employee is a milestone. It can be a big step forward in terms of growth and development for the company. But how do you know when it’s time to hire?
There are a few indicators that it may be time to hire your first employee:
- Your revenue growth rate is progressively improving
- You have reached the limited capacity of current employees
- Current employees are working overtime regularly
- There is a particular skill set needed for business operations that current employees are missing
- You have found yourself turning down work
- Current employees are becoming burned out, which impacts morale
If any of these sound familiar, it may be time to start thinking about hiring your first employee.
There are a lot of costs involved with hiring a new employee that go beyond just their salary. Here are some:
Advertising the Job
Hiring is free in some places on the internet, like forums or social media. However, if you’re looking for a specific type of applicant, you may choose to run paid ads. Monster, for example, charges $325 for a 30-day listing while LinkedIn charges $495.
Time Cost of Reviewing Resumes
The time you spend going over applications is time that you aren’t spending on other tasks. Recruiters only spend an average of six seconds reviewing each resume, but you may spend longer on the ones you’re interested in. Again, this is time you could be making money.
Time Cost of Conducting Interviews
A typical employer will interview 6-10 people before finding the right one for a given job. If you’re interviewing in person, you can expect to spend 45-90 minutes on a candidate, while you may be able to get away with closer to 15 minutes over the phone. This is because in-person interviews encourage more interaction.
Drug Screens and Background Checks
Depending on the type of job and other factors, you may decide to run a background check and/or drug screen on your job candidate(s) before hiring. According to one survey of HR professionals, 95% of companies background check employees at some point. Drug screens are less common (45%) and could be used simply as-needed.
Cost of Salary During Training
You will of course need to pay your new hire while he is training, at which point he is not producing any deliverables for your company. On the other hand, should the employee work out, training him is making a long-term investment in his (and your) success.
Time of Cost of Training
You have to train the new hire, which involves time you could be spending on something that generates revenue or otherwise contributes to overall productivity
Your Legal Obligations as an Employer
If you are still in the infancy of your company, there may be some critical tasks that you haven’t gotten around to handling yet. If you are running as a sole proprietor, which we do not recommend if you are at the hiring stage, you will want to treat employees as independent contractors. If you are an LLC or incorporated, though, there are some things you’ll need to do before hiring.
Obtain an EIN
An EIN, or FEIN, is a (Federal) Employer Identification Number. It is a nine digit number that identifies you business entity for tax purposes and it is required if you want to be an employer. You will also need an EIN to open a bank account under your business name, which will come in handy once you get into payroll.
State and Local Registration
Your state will likely require you to register as an employer so you can begin paying your state unemployment insurance. There may also be other permits or state-level mandates in your area. Check out this new employer payroll guide for information on your state’s requirements.
Depending on where you live, you may also be responsible for local tax filings or registrations. Check with your county’s or municipality’s website for employer resources.
Worker’s Compensation Insurance
You will probably be wanting to look into insurance policies when bringing on employees, if you haven’t done it already. That’s a subject for a different post. At the very least, you are required to have worker’s compensation insurance in most states if you have employees.
This type of insurance covers lost wages and medical expenses for employees who are injured on the job. You may be able to get worker’s compensation through your state, or you may need to purchase a policy from a private insurer.
Again, each state has its own laws when it comes to worker’s compensation insurance. Check out this overview of each state’s requirements.
Withholding Taxes Through Payroll
If you’re formally paying an employee on the books, you’re going to have to withhold a certain amount of their pay each pay period for income taxes. You’re also going to have to withhold Social Security and Medicare.
You may also have to withhold state taxes depending on your state. Check Intuit’s payroll tax database to see where your state falls. You are responsible for submitting these taxes to the IRS and the applicable state agencies, if applicable.
The easiest way to do this is through the use of a payroll company. It’s an extra expense, but it could save you time that you could devote to something else more profitable.
Collect Form W-4 From Your New Employee
Your new hire will have to fill out IRS form W-4, which tells you how much to withhold from each paycheck. The employee will list their filing status and the number of withholding allowances they are claiming.
The more allowances an employee claims, the less you will withhold from their paycheck. The IRS provides a withholding calculation tool their website so you can get an idea of how much you’ll need to take out of each check.
File a form I-9 For New Hires
Another step in the hiring process is having new employees fill out a form I-9. This is an Employment Eligibility Verification form and it is required by law. The new hire will need to provide identification documents so you can verify that they are legally allowed to work in the United States.
You will need to keep this form on file for all of your employees for three years. Immigration and Customs Enforcement (ICE) officials could request it at anytime and penalize those who can’t furnish it.
New Hire Reporting Agency
You have to report employees to the New Hire Reporting Agency
Post Required Notices and Signage
Governmental agencies require you to display different notices and signage somewhere it is visible to employees. The Department of Labor’s requirements can be viewed on their website. The same can be said for each state’s division of labor.
Aside from the budget implications all the things that you absolutely must do according to the law, there are other things to think about when hiring your first employee:
- Pay: what type of compensation are you going to offer? Are you going to offer straight pay or does this position involve commission? If you are going with a traditional pay structure, is it going to be hourly or salary?
- Benefits: are you in the position to offer benefits? If so, you may want to hire an outside benefits administration firm. Otherwise, you’re responsible for everything from creating the program and helping employees update benefits selections to interfacing with and paying providers.
- Personnel file: this is where you will keep your employee’s tax forms, job application, offer letter, resume, evaluations, disciplines, other federal forms, and other records related to his employment.
- Job description: well before any of the onboarding process, you’re going to have to come up with a compelling description to get the talent you’re trying to hire. It should include a job title, job summary, list of responsibilities and duties, required qualifications, and the salary and benefits being offered. There is ongoing debate whether it is ideal to include a specific salary in a job description, but it is becoming more common.
Congratulations on reaching a point in your business where you have found it necessary to bring someone in. This is a major success milestone for small business owners. There is a lot that goes into bringing on a new hire, but the above pointers should help when it comes time.