In addition to reviewing resumes and interviewing candidates, a small business owner must also comply with state and federal regulations when hiring. In order to protect you and your organization from paying penalties, back taxes, or defense costs from a lawsuit, follow these practical steps to keep you compliant with state and federal hiring regulations.
1) Procure an Employer Identification Number (EIN). You need to obtain an EIN number from the IRS, before hiring your first employee. An EIN is required for reporting taxes and other employee related documents. You can apply for an EIN online at the IRS’s website here.
2) Set up employee withholding taxes. As a small business with employees, the IRS requires you to withhold taxes from employees. These taxes typically include federal income tax withholding, state income tax withholding, local income taxes, and the employees portion of Medicare and Social Security taxes. Make sure you set up employee withholding taxes to comply with state and federal regulations when hiring.
3) Obtain Employee Eligibility Form (I-9). Within three days of an employee’s hire, you must obtain a signed copy of Form 1-9: Employee Eligibility Form in accordance with the Immigration Reform and Control Act. This form provides verification that the employee you hired is eligible to work in the United States. While you are not required to file this form with the federal government, you do need to keep the form on file for three years subsequent to hire date. If the employee’s employment is terminated within those three years, you must keep this form on file for one year after the employee’s employment termination date. To download Form 1-9, visit the U.S. Citizenship and Immigration website.
4) Obtain workers compensation insurance. Most states require employers to purchase workers compensation insurance. Not only does workers compensation insurance ensure legal compliance, but it can protect you from costly financial damages as a result of an employee lawsuit.
5) Comply with state new hire reporting. Within 20 days of hire or rehire date, all employers, large and small, are required to report newly hired or re-hired employees to be in compliance of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. Visit the Small Business Administration’s New Hire Reporting Requirements to learn how to report your hiring for your state.
6) Know the difference between an employee and independent contractor. The IRS has very strict guidelines when it comes to classifying workers. Misclassifying an employee as an independent contractor can result in substantial financial woes, including penalties and back taxes. You can find detailed information of the IRS rules on its website here.
Making the decision to hire your first employee for your small business is an exciting and significant first step. Being a good employer doesn’t end with complying with state and federal regulations when hiring though. Maintaining a safe workplace, empowering employees, and facilitating employee engagement are also keys to successfully growing your business.