How To Hire Your First Employee In 15 Easy Steps
Learn how to tell if you're ready to hire your first employee and exactly how to hire and pay your first employee.
So you’ve launched your own small business and are ready to deliver services to new clients. It’s hard to do it all alone, so you may want to hire a new employee who can help you scale your operations more efficiently.
Wondering how to know when to hire your first employee? Hiring is essential to continue growing your business, and there are some things to consider to help you successfully — and legally — hire and pay them. Let’s look at what’s required for you to feel confident in hiring and paying your business’s first employee.
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How To Know When To Hire Your First Employee
You can only operate a business alone for so long before you start to stretch yourself too thin. Hiring that first employee becomes necessary when you can’t focus on growing your customer base or administering services by yourself any longer.
It’s important to hire a new employee once you realize you need help building your company’s infrastructure, its brand image, and its target audience all at the same time. And it’s equally important to choose someone who’s an asset to your business rather than a liability.
Here are a few things to consider if you’re not sure whether it’s time to hire a new employee:
Do I Have The Income To Afford A New Hire?
Your business needs to generate enough income consistently to afford to hire a new employee. Giving a new employee an annual salary is a serious commitment, so it’s wise first to sit down, figure out your annual budget, and then factor in any projected onboarding costs (from paying out benefits, for example, or withholding payroll taxes).
It’s a good idea to estimate a rough revenue forecast once you’ve nailed down your annual business budget. New hires can potentially add to your business’s revenue, so it’s recommended that you (conservatively) calculate the potential income you can generate with a new hire. If you’ve concluded that you can’t afford to hire a salaried, full-time employee just yet, you can consider hiring part-time or freelance contractors instead, whom you can pay for fewer hours and hire without offering full-time employee benefits.
Do I Need Help Handling Basic Functions For My Business?
It may be uncomfortable to admit, but sometimes up-and-coming business owners need help meeting financial goals. If you find that you’re overextending yourself and notice that it’s affecting your customer service, client calls, or important deadlines, it may be time for you to hire a new employee.
The desire to do everything yourself can be strong, but it’s not worth risking lost clients and missed deadlines. Consider hiring a salaried employee to help you manage client deliverables and build new and existing client relationships. Otherwise, you may lose more clients if you’re committing to an unmanageable workload.
Would My Business Benefit From Additional Expertise?
There’s a good chance that your business needs new hires to round out skills and expertise that it’s currently lacking. Hiring someone with specialized expertise in your industry can be hugely beneficial, especially if you’re in the middle of building out your business’s infrastructure. A new hire can free you to spend more time connecting with new and existing customers. If you decide to hire a specialist or expert in your field, though, you’ll need to look at your hiring budget and determine whether it can accommodate their salary.
Do I Need A Salaried Employee Or An Independent Contractor?
If you’re not sure of the difference between the two types of employees above, consider waiting just a bit before you onboard your first hire. Independent contractors (1099s) and salaried employees (W2s) are very different and have different federal tax implications, so you need to know how each employee type can affect your company’s bottom line.
Businesses that operate with just one person should consider hiring a contract employee if they don’t yet have a payroll system and only need help with part-time or per-project jobs. If you decide to go the independent contractor route, make sure that you sign a contractual agreement with your new hire as proof you can furnish for the government that your independent contractor is not a standard employee (and avoid reimbursing unreported wages). Consider hiring standard, salaried employees if you’re ready to provide them with benefits packages and know how to report their federal and state employment taxes.
How Much Does It Cost To Hire Your First Employee?
According to the SBA, the typical cost of hiring an employee is 1.25-1.4 times your employee’s salary. So you’ll need to determine how much you will pay your new employee and use that as a base for your employee hiring cost calculation.
When hiring your very first employee, there are some additional costs you might want to consider, such as:
- Purchasing payroll software
- Adding worker’s compensation insurance
- Providing health care
- Offering a benefits package
- Factoring in payroll taxes
How To Hire Your First Employee
Learning how to hire your first employee can be daunting, but these 15 steps make it easy to learn exactly what you need to do to hire your first employee, including how to stay compliant with your state’s hiring laws and payroll reporting.
Step 1: Get Your Employer Identification Number
Take your business’s state and federal tax ID numbers, and you end up with your two employer identification numbers (EINs). You can think of these numbers as tracking IDs that the federal government can see to make sure you’re legally fit to hire new employees.
Small businesses operating as sole proprietors or LLCs with no employees don’t need EINs and can use their social security numbers to identify their business to the IRS instead. This isn’t the case for businesses that are interested in soon becoming employers, however. For soon-to-be-hiring business owners, the IRS will require your EIN as proof that your business entity is eligible to report tax withholding amounts of the employees you hire.
Step 2: Register With Your State’s Labor Department
As a business owner, it’s your responsibility to withhold federal as well as state unemployment taxes. You need to register with your state’s labor department to allow them to process your payments and contribute them to their state unemployment compensation fund. Contact one of the offices on your state’s list of agencies that process unemployment insurance tax contributions to make sure they can process your state unemployment withholdings.
Step 3: Obtain Worker’s Compensation Insurance
To hire and retain a W2 employee, you must agree to provide them with certain benefits. Among these benefits is workers’ compensation insurance through either a commercial provider, self-insured policy, or program offered by your state.
Worker’s compensation insurance is a legal requirement that businesses in 49 states need to provide in some capacity. Without coverage for worker’s comp, your business is financially liable for covering any on-the-job accidents that may occur.
Step 4: Decide On A Hiring Budget
New business owners need to find the right candidate by providing clear salary and wage expectations. It’s important to decide on a hiring budget that helps your business attract potential hires with competitive salaries as well as cover taxes and benefits costs.
According to a trusted Merchant Maverick expert, “there’s more to consider than just salary when deciding on a hiring budget. Small business owners may need to pay state payroll and unemployment taxes as well as worker’s comp and other benefits, which they need to think about before they can know how much they can pay someone.”
Before you finalize a budget that you can work with to hire somebody new, double-check which benefits and payroll taxes your state requires that you pay when you hire your first employee.
Step 5: Create a Benefits Package
Benefit programs such as health insurance and 401(k) matching are a critical component of employee payroll and set your company apart from other businesses eager to hire the kind of talent you’re interested in.
Here are the top benefits employers should offer to stay competitive.
What’s more, certain company benefits are legally required to be provided to employees and are an essential part of hiring, paying, and retaining new hires. Generally, businesses with one or more employees need to provide worker’s compensation as well as disability and unemployment insurance:
- Worker’s Compensation: Choose a commercial worker’s compensation policy carrier for your business, or make sure that your new employee receives worker’s compensation benefits through either their own insurance or a state-funded compensation program.
- Disability Insurance: Businesses in California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island are all required by law to provide employees with disability insurance coverage. Coverage for disability insurance is crucial for your employees if they fall ill or are injured outside of the workplace.
- Unemployment Insurance: The Federal Unemployment Tax Act requires that businesses contribute to their state’s own unemployment fund. If you paid an employee more than $1,500 in wages during any fiscal quarter of a year in which they worked 20 or more weeks for you, you need to complete an IRS Form 940 for that year. States ask that businesses register with their state labor departments to process unemployment insurance contributions.
Small businesses can more easily find and hire employees with the talent level they’re looking for by offering benefits such as health insurance and maternity/paternity leave. Other highly popular benefits, such as employer-sponsored retirement savings options (pension plans and 401(k) matching), can also make it easier to retain employees once you hire them.
Step 6: Write Up A Job Description
You’ve fulfilled your preliminary legal requirements to start hiring employees, and you know what position(s) you want to fill. Writing a detailed job description is your next step toward hiring your first employee.
A quality job description helps you find employees who are good matches for your open position by clearly stating expectations like starting salary, job responsibilities, and schedule of hours worked. You know better than anyone what kind of candidate best suits your open job requirements, so write a job description the same way you would explain what you need from a candidate during an interview or conversation.
Step 7: Get Organized Ahead Of Time
Small businesses can get organized ahead of time by creating employee handbooks that set clear expectations and describe their vacation and sick leave policies. Employee handbooks are great resources that can answer questions new hires frequently ask about your onboarding process and pay periods. You aren’t legally required to have an employee handbook, but they go a long way in making onboarding easier for both you as well as your new employee.
Step 8: Choose The Right Hire!
What, exactly, makes the perfect hire who can fill your open position? It’s important that you choose someone who meshes well with your company culture and has the expertise to make short order of their role’s responsibilities quickly and independently. But new businesses need candidates who can also adapt to evolving priorities and deadlines and be able to meet standard expectations and responsibilities required of their role.
There are many channels to source qualified candidates for your role, although few are as popular as employee referrals, which generate up to 48% of new hires. Other popular channels, such as online job boards, make it easier for job-seekers to find and apply to open positions on both desktop PCs and mobile devices. Make sure that you monitor your recruiting channels to identify the one that sources your most attractive candidates on paper, then go from there to stick with a recruiting channel that finds you the right candidate for your open role.
Step 9: Report Your New Hire To Your State’s Hire Reporting Agency
Now that you’ve brought on a new hire, you need to report their employment to your state. States require that you report basic information on your new hire within 20 days of their start date (certain states require that you notify them even sooner). New business owners need to send their new hire reports directly to the State Directory of New Hire in their state.
You can submit your new hire reports either by first class mail, electronically, or through magnetic tapes. If you’re not sure where or when you should send your report, you can consult your state’s New Hire contact for instructions for submission.
Step 10: Choose Payroll Software
At this point, you’ve decided on a hiring budget, written up a detailed job description, and sourced and hired your perfect candidate. Pat yourself on the back — you’ve made a lot of progress! Now that you’ve onboarded your first employee, you need to figure out the best way to pay them.
But, how do you choose between all of the popular payroll options available on the market? Decide on a payroll software app that considers things important to small businesses, such as tax support, filling W2s, and assistance with onboarding. Remember that each payroll software provider is different and that each product they offer has slight nuances that make sense for businesses of different sizes and scopes.
Step 11: Gather Your Employee’s Information
You’re almost ready to add your new employee to your payroll processing system, but first, you’ll need some of their information. Important employee information such as their legal name, social security number, and a W4 form are just a few of the things you’ll need to gather from your new hire. A more detailed list of the necessary information you’ll need includes:
- Full legal name
- Social security number
- A complete W-4 form
- Tax filing status
- Information on deductions and contributions
Having this information makes it possible for you to calculate the appropriate amount of withholdings and deductions to comply with federal and state law. It’s also a smart idea to file this information away securely so that you have it on file to furnish at a later date if needed.
Step 12: Add Your Employee To Your Payroll Software
There are no ifs, ands, or buts when it comes to paying your employees. You need to add your new hire to your payroll software system as soon as you’ve gathered their necessary information and documents so that you can start paying them. Depending on the provider and software you use, you may need to invite your employees to make an account with them and sign up to complete their registration.
Step 13: Fill Out An I-9
The I-9 form is one of the most important payroll tax documents that small business owners need to become familiar with, and with good reason. The I-9 document helps the federal government verify the identity and employment availability of every new employee you hire each time you onboard them.
Every business in the US needs their new hires to sign an I-9 as soon as possible since business owners are responsible for completing the second part of this form. Once employees fill out their portion, make sure that they send you some form of their formal identification — a current US passport, a green card, a birth certificate, even a social security card, for example — to complete their identity and employment availability verification.
Step 14: Track Time & Run Payroll
Now that you’ve added your new hire to your payroll system, you’ll need to make sure you’re properly tracking the hours they work and paying them accordingly. Tracking time and running your own payroll may seem like a laborious task at first, but most modern (read: quality) payroll processing solutions can also be used for timesheets and easily keeping track of employee hours.
Tracking time and running payroll will keep your payroll records tidy and organized so that you can be ready to furnish them to the IRS when necessary. The IRS recommends that businesses hold onto most of their payroll records for at least three years, so it’s important that you accurately track employee time worked and consistently run your payroll on time.
Step 15: Don’t Forget Payroll Taxes
Before you consider yourself a hiring pro, don’t forget that you need to withhold taxes on paychecks and file payroll taxes when you hire new employees. When you remove taxes from your new hire’s paycheck, you’re responsible for earmarking some funds for federal and state services by withholding federal and state income tax. As a small business owner, you also need to withhold 6.2% of your employee’s wages to cover their social security contributions and another 1.45% to cover their Medicare contributions.
After you’ve finished collecting payroll taxes for your business, you’ll either deposit them on a monthly or semi-weekly basis, although most small businesses typically deposit their withholdings every month. Make sure that you submit all of your payroll taxes on time to state and federal agencies to avoid incurring hefty payroll tax penalties. Businesses that fail to withhold the correct amount from their employees’ wages are responsible for furnishing all missing funds owed.
Read more about how to withhold federal payroll taxes or check out which state payroll taxes your business will have to pay below.
The Bottom Line On Hiring Your First Employee
Hopefully, we’ve covered every question you have about how to hire employees. Now that you’ve hired your first employee and begun paying them, you can officially say that you’ve taken your business to the next level! No matter your original reason for hiring a new employee, you’re now well-equipped to more quickly and efficiently source, hire, and begin paying more new hires in the future.
Always remember to stay on top of withholding your taxes on paychecks and filing your payroll taxes to avoid being dinged by fines, and make sure that you’re always paying your employees and tracking their hours accurately and on time. If you do these things right and consistently, hiring employees for your business will become as second nature to you as building your own company and creating the quality products and services you offer.