Hiring your first employee is a monumental step for any small business. It signals growth, success, and the exciting transition from a solo venture to a team. While you’re focused on finding the right person to help you build your vision, it’s crucial to understand that this step also fundamentally changes your financial and legal responsibilities.
Bringing on an employee isn’t just about adding a salary to your expenses. It introduces a new world of payroll taxes, reporting requirements, and compliance obligations. Getting it right from the start can save you from major headaches and potential penalties down the road. Here’s what you need to know.
1. Before They Even Start: Get Your Numbers Straight
Your journey as an employer begins before your new hire’s first day. You’ll need to be officially recognized as an employer by federal and state governments.
- Apply for an Employer Identification Number (EIN): If you don’t already have one, you’ll need an EIN from the IRS. Think of it as a Social Security number for your business. It’s required for reporting taxes and other documents. You can apply for one for free on the IRS website.
- Register with Your State: You will also need to register with your state’s labor and tax agencies. This is primarily for state unemployment insurance taxes and, depending on your state, income tax withholding.
2. Onboarding: Essential Employee Paperwork
Once you’ve made your hire, they will need to complete some key forms that are critical for payroll and tax purposes.
- Form I-9 (Employment Eligibility Verification): This form is used to verify the identity and employment authorization of individuals hired in the United States. You must keep this form on file for every employee.
- Form W-4 (Employee’s Withholding Certificate): This is the form your employee fills out to tell you how much federal income tax to withhold from their paycheck. Their filing status and dependents will determine the amount.
3. Understanding the Payroll Tax Puzzle
This is the most significant change for new employers. Payroll taxes are comprised of taxes you withhold from your employee’s gross pay and taxes you pay as the employer.
A. Taxes Withheld from the Employee’s Paycheck:
- Federal Income Tax: The amount is determined by the employee’s W-4 form.
- FICA Taxes: This is a combination of two separate taxes:
- Social Security Tax (6.2%)
- Medicare Tax (1.45%)
- State and Local Income Taxes: If your state or locality has an income tax, you will also need to withhold this from their pay.
You are responsible for collecting these funds from your employee’s pay and remitting them to the government on their behalf.
B. Taxes Paid by You, the Employer:
You don’t just pass along your employee’s taxes; you also have to pay your own share.
- Employer’s Matching FICA Taxes: You must pay a matching amount for Social Security (6.2%) and Medicare (1.45%) for each employee.
- Federal Unemployment Tax (FUTA): You’ll pay this tax on the first $7,000 of wages for each employee. The rate can vary, but it’s a cost borne entirely by the employer.
- State Unemployment Tax (SUTA): This is paid to your state government. The rate for new employers is set by the state and can change over time based on various factors.
4. The Ongoing Responsibilities: Depositing and Reporting
Collecting the taxes is only half the battle. You are now responsible for regularly depositing these funds with the IRS and your state and filing periodic reports.
- Tax Deposits: You must deposit federal income tax and FICA taxes on either a monthly or semi-weekly schedule, as determined by the IRS.
- Quarterly Reporting: Most employers must file Form 941, Employer’s QUARTERLY Federal Tax Return, to report the income taxes and FICA taxes you withheld and paid.
- Annual Reporting: You’ll file Form 940 annually to report your FUTA taxes. You will also provide your employee with a Form W-2, Wage and Tax Statement, by January 31st of the following year, which details their total earnings and taxes paid.
It’s More Than a Paycheck
As you can see, hiring an employee involves a significant amount of administrative and financial oversight. From onboarding paperwork to calculating, withholding, paying, and reporting taxes, the responsibilities can quickly become complex.
While growing your team is an exciting prospect, managing payroll can be a time-consuming distraction from your core business. At Kohani & Associates, we help business owners navigate these exact challenges. We can manage your payroll, ensure your tax deposits and filings are accurate and on time, and free you up to focus on what you do best: leading your new team and growing your business. If you’re ready to hire but want to ensure your financial back-end is handled correctly from day one, contact us for a consultation.