Hiring Employees: Easy 10-Step Guide for Your First Employees
Startup Law ResourcesEmployment Law, Human ResourcesHiring employees is tricky with a lot of legal regulation to protect both sides. Read our guide on how you can easily hire your first employees in 10 steps.6 min read updated on February 01, 2023
If you've come to the point where your business needs employees to get things done, there are a few steps you have to take. You'll obviously want to do things like create an employee handbook, make your own employee personnel files, and create safety measures to protect your workers. These basic tasks, however, do not correctly represent the long process of hiring an employee. In fact, there are many legal issues you'll have to deal with to make sure you’re compliant with state and federal regulations.
1. Get an Employer Identification Number
The first thing you should do is set up an Employer Identification Number (EIN). You'll need to apply for this through the Internal Revenue Service (IRS). This number will be used when you and your employees are filing taxes. Several other important documents for the IRS and state agencies require it as well. You can apply for an EIN here or call the IRS at 1-800-829-4933 for help with EIN setup.
2. Satisfy Federal and State Tax Reporting Requirements
Employers must classify workers as employees or independent contractors. This categorization determines the amount of unemployment taxes you pay, as well as filing requirements for each worker. Independent contractor, freelancer or consultants are responsible responsible for reporting and paying their own Social Security and income taxes. You will still need to pay taxes for independent contractors (see IRS Form 1099) to the federal government.
If you are hiring full time or part time employees, your employees will need to fill out a withholding exemption certificate (Form W-4) on or before the date of employment to determine the proper amount of federal income tax withholding from their pay. You will need to file this form with the IRS. You should set up a payroll system that can accurately manage and keep track of tax withholdings and payments (including Social Security and Medicare tax payments).
The IRS requires you to maintain employment withholding tax records for employees for at least four years. You may need to withhold state taxes, but the requirement and filing steps vary by state. You should be prepared to file a wage and tax statement (Form W-2) for each employee that you pay any type of compensation to. This is for reporting wages paid and taxes withheld for each employee. Copy A of Form W-2 needs to be filed with the Social Security Administration. More information on Social Security Administration filing requirements is available here.
If you pay wages of $1,500 or more in any calendar quarter or have an employee on the payroll for any 20 weeks of the year, you’ll also need report and pay federal unemployment taxes and file an Employer’s Annual Federal Unemployment (FUTA) return (Form 940) each year.
These forms may also need to be submitted to your state's Department of Labor or Taxation.
3. Be Prepared to Meet Filing Requirements
Take time to also learn state rules related to filing requirements. Your state and local obligations vary depending on where your employees are located. You can find out more about your state and local tax obligations here. These taxes are handled by each individual state rather than at the federal level. This means what you need to file in California could be completely different than in Florida. You can learn these rules from your state's labor department. You'll need to register with that department before hiring employees, so you won't have to go out of your way to get the information.
4. Verify Employees' Eligibility to Work
Employers are required by federal law to verify the employee’s eligibility to work in the United States. You will need to fill out an employment eligibility verification form (Form I-9) for each employee you hire within three days of hiring. You will need to examine each employee’s acceptable forms of documentation (specified in the Form I-9) to confirm their citizenship or eligibility to work in the US. The form doesn't need to be filed with the IRS, but you do need to keep it on file for either three years after the date of hiring the employee or one year after that employee’s termination, whichever is later.
Employers can also electronically verify the eligibility of newly hired employees by registering with E-Verify here.
5. Avoid Potentially Bad Employees
Now that most legal issues are out of the way, you'll want to make sure you're hiring the right employees. While it's not mandatory, you may want to perform a background check and drug tests, but make sure your testing complies with state laws. Make sure to call former employers and check references as well.
6. Know What Questions Are Allowed
Asking questions of your possible employees is a great way to see if they are a right fit for the company. You need to make sure that you’re complying with federal and state laws governing the questions that are allowed to be asked.
You cannot base hiring decisions on an applicant's age, sex (including gender identity, sexual orientation, and pregnancy), marital status, religious affiliation, disability, race, national origin, or genetic information. If there is any indication of bias or discrimination in the hiring process, you can face serious liability. By reading up on and understanding The Age Discrimination in Employment Act, the Civil Rights Act's Title VII, The Americans With Disabilities Act, and The Family Medical Leave Act, you can avoid plenty of problems. The websites for the U.S. Department of Labor, the Equal Employment Opportunity Commission and MyEmploymentLawyer.com are helpful for understanding how to comply.
7. Get Required Information for U.S. DOL
The U.S. Department of Labor (DOL) also requires you to keep certain information on file about your employees. This information must be kept the entire time they are employed. No special form is needed, but you'll need to maintain this information:
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Employee’s full name and Social Security Number;
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Complete mailing address;
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Pay rate;
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How often an employee is paid;
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If an employee is under 19 years old, you'll need their birth date;
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Gender and occupation;
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Time and day of week when the employee’s workweek begins;
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Hours worked by an employee each day and workweek;
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Amounts paid in overtime;
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Date paychecks are paid and the pay period covered;
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Total amounts paid each pay period;
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Deductions and additions to paycheck; and
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“Straight time” hours worked (standard number of hours worked in pay period).
8. New Hire Reporting Program State Registration
Your state has a registry that you must report your newly hired and re-hired employees to. You must file new hire information with the state’s directory within 20 days of bringing them on. You can find your state's information here.
9. Obtain Workers' Compensation Insurance
All businesses with employees are required by federal law to carry workers' compensation insurance coverage. This will protect you and your company from costs of accidental or fatal injuries in the workplace. Without this protection, you may go broke paying for an employee's injury or disability suffered while on the clock. Each state has different workers’ compensation requirements as these benefits are administered at the state level. Check here for the requirements for each state.
10. Post Required Notices in the Workplace
Before bringing in your employees, there are certain notices you’re required to display in the office. These must be posted in a place where all employees will see them. The Department of Labor's Workplace Poster page lists the specific federal and state posters that are required to be posted. They’re available for free from the federal and state labor agencies. You should also check rules from the Occupational Safety and Health Administration (OSHA) to see what safety notices are required.
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