When you run your business by yourself, there may be times you feel buried by your responsibilities. That feeling could mean it’s time to hire an employee to help you. But, the endless information about becoming an employer can be overwhelming.
Small business owners make up 99% of all U.S. employers. How do so many people just like you manage payroll on top of their business?
You all have one thing in common: Every small business owner starts with their first employee.
If you’re considering hiring extra help but you’re not sure where to begin, take a look at our checklist for first-time employers.
Register for accounts
As an employer, you will need several account numbers, registrations, and insurance policies. Be sure to keep your account numbers and passwords in a secure place where they won’t get lost or stolen.
- Business permit, registration, or license. Every state enforces different registration rules. Check with your state business license office for your requirements.
- Employer Identification Number (EIN). Your EIN identifies your business when you report taxes and other information to the government. Apply for an EIN through the IRS.
- Electronic Federal Tax Payment System (EFTPS) account. Use the EFTPS to pay all federal taxes online, including income taxes, Social Security taxes, Medicare taxes, and FUTA taxes.
- SUTA (State Unemployment Tax Authority) account. Sign up for an unemployment insurance account through your state department. All employers must pay SUTA taxes, but every state has its own rates and taxable wage base.
- New hire reporting system account. Use this account to report all new hires to your state’s new hire reporting program.
- Workers’ Compensation Insurance. All employers need Workers’ Compensation, which covers wages and medical benefits if employees are injured on the job. Your state determines your requirements, so check with your state’s Workers’ Compensation office.
Make your payroll decisions
After you are signed up for all the necessary accounts, you get to start making decisions about your payroll program. The more carefully you plan now, the easier running payroll will be in the future.
- Decide who will do payroll. Many small business owners run their own payroll. You can also hire an in-house payroll professional, a payroll service, or an accountant to do it for you.
- Choose how you will record and run payroll. The easiest way to run payroll is by using a payroll software program. Online payroll software allows you to run payroll from anywhere with an Internet connection. You could also install desktop payroll software to your computer or do payroll by hand.
- Determine your job offer and description. You need to decide on a pay rate, pay period, and if you will offer benefits (e.g., healthcare). Write your expectations for your employee and your company information in an employee handbook.
- Post required notices. You need to hang up certain payroll posters where your employee can read them. Display all required state and federal posters (state posters can be found on your state’s commerce website).
- Hire an employee. Advertise the job opening and interview interested candidates. Consider each person’s skills, professional background, and character. Set a work schedule and spend some time training your new employee.
Fill out paperwork
Fill out these documents when you first hire your employee. Do not procrastinate completing these forms.
- Report the new hire. Use your new hire reporting system account to report your new employee to the state.
- Form W-4. Each employee must fill out Form W-4 upon hire for federal tax withholding. Keep Form W-4 as long as the employee works for you and use it to fill out their wage and tax statement. Note that many states have an additional state tax withholding form that you must fill out, too.
- Form I-9. The employee fills out Part 1 for employment eligibility in the U.S. You complete Part 2 and keep Form I-9 with your payroll records.
Deposit payroll taxes
You need to file and deposit taxes to federal and state governments. You withhold some taxes from your employee’s paycheck. You pay other taxes out of your pocket.
- Income tax. Employers withhold employee wages based on allowances marked on Form W-4.
- Medicare tax. Employers withhold 1.45% of wages and match 1.45% of employee wages.
- Social Security tax. Employers withhold 6.2% of wages and match 6.2% of employee wages. Taxes are paid on the employee’s first $127,200 earned in wages for 2017. In 2018, Social Security tax applies to the first $128,700 the employee earns.
- FUTA (Federal Unemployment Tax Act) tax. Some employers may be required to pay FUTA taxes quarterly. Pay this tax at 6% on the first $7,000 of employee wages.
State and local taxes
- SUTA tax. Employers use their SUTA accounts to file and pay SUTA tax quarterly.
- State and local income tax. Some employers must withhold income taxes for their state or locality. Check with your state and local commerce department for requirements.
File reports and returns
You need to file these reports to the correct government agency by their deadlines.
- Form 941. Report the federal income taxes you withheld. Also, report your share and your employee’s share of Social Security tax and Medicare tax. File Form 941 quarterly.
- Form 940. Though you pay FUTA taxes quarterly, you report your FUTA payments once a year on Form 940.
- Form W-2. File Form W-2 annually to report wages and withheld taxes. Send a copy to the employee and to the Social Security Administration. With the forms you send to the SSA, file Form W-3 as a summary of all Form W-2s.
- Form 1095-B. File Form 1095-B if you offer your employee self-insured health plans. This means your business operates under its own insurance and you pay all employee health claims (not just premiums). Send Form 1095-B to each covered employee. Send copies to the IRS with the summary Form 1094-B.
Hiring your first employee
This is a comprehensive list to get you started with your first employee. Getting a handle on payroll tasks can give you a better understanding of your responsibilities as an employer.
You may have more payroll requirements based on your business’s industry, location, and size. Check with your state and local commerce departments, as well as industry publications, to make sure you don’t miss any steps in your payroll process.
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