Hiring a new employee is never as simple as saying “You’re hired!” and leaving it at that. Entrepreneurs who have never hired employees before may find the process can be extremely daunting at first. Have you filed for an employer identification number (EIN)? EINs are required by the IRS in order for a business to hire employees. Do you know what it means to properly classify workers, or the kind of paperwork they will need to fill out and return to you?
There are, of course, differences between how a corporation conducts its hiring process versus that of a startup. Let’s break it down to the absolute basics. If you’re planning to hire new employees, whether they’re your first or 30th hires, here’s what to keep in mind with the process.
1. File for an EIN
Previously, you might have been the only employee at your business. As such, you didn’t need to use more than your social security number (SSN) to identify yourself. Now that you’re hiring employees, and (likely!) planning to pay them wages, it is your responsibility to withhold taxes from their income.
As a result, you are required to file for an Employer Identification Number (EIN) for tax purposes and to identify your business. An EIN is a federal tax ID assigned by the IRS. The IRS can track your business with this number and ensure that it’s collecting payroll tax.
2. Determine the worker’s classification
Not every hire will be a full-time employee. When you decide to bring on a new hire, you must classify that worker as either an independent contractor or employee.
How do you know the proper classification? The IRS has outlined three common law rules that separate independent contractors (also referred to as self-employed workers) from employees. These rules are measured on a behavioral, financial and relationship basis. Behavioral is a reference to the company’s control over what the worker does and how this worker does their job. Financial refers to business aspects of the worker’s job controlled by the payer. Their relationship may be one that is short- or long-term through a written contract.
Determining whether the worker is a contractor or employee ultimately allows the business to understand their obligations to the worker and pay the appropriate taxes. If you are still uncertain as to which classification makes sense, it is recommended that entrepreneurs file Form SS-8. This document will allow the IRS to better determine the worker’s status.
3. Fill out Form I-9
You have filed for an EIN, enabling your business to hire employees, and classified the type of worker you plan to hire. One of the next steps in the process is to determine the worker’s eligibility to work in the United States.
Each new hire has to fill out Form I-9. This document is used by the IRS to verify an employee’s identity and employment authorization. United States citizen and noncitizen hires must complete this form, along with their respective employers. Documents like passports and social security cards must also be present to serve as evidence of the hire’s identity.
4. Fill out Form W-2 and Form W-4
Outside of Form I-9, new hires that are paid wages must fill out two more documents. Form W-2 is a wage and tax statement. It withholds federal Social Security and Medicare taxes. This form is completed by the employer, but the hire must enter their name and Social Security Number on the document.
Form W-4 is a withholding allowance certificate. This form allows federal income taxes to be withheld from the hires and must be signed and completed when the hire starts work.
Learn more about the differences between W-2 employees and contractors.
5. What to know for part-time hires
Perhaps you have decided to hire someone, not on a freelance or full-time basis, but part-time. Does the process or its paperwork get treated any differently?
It’s not uncommon to hire and pay individuals during a busy season, like the holidays, for part-time work. According to the IRS, paid part-time hires are still subject to the same tax withholding rules that would apply to their full-time counterparts.
6. Determine new hire benefits
Many businesses offer new hires benefits. These benefits tend to vary from business to business — for example, some companies may offer tuition or student loan reimbursement in addition to traditional benefits. The majority of companies, however, will offer employee benefits that include unemployment insurance, workers’ compensation and health insurance plans. These three offerings work to the benefit of the employee should they become unemployed through no fault of their own or injured on the job, and to take care of medical concerns, including doctor’s visits, dental appointments and vision.