The Basics of Hiring Employees
Making the decision to hire employees is a significant step for any business. As an employer, you must consider many critical issues to ensure compliance with employment rules and regulations. The following are some of the key issues to consider when hiring employees.
Apply for an Employer Identification Number (EIN)
Employer Identification Numbers, also known as tax ID numbers, are used to report withholding taxes and should be applied for 6-8 weeks prior to hiring. You should apply for an EIN (SS-4) if hiring employees, incorporating or operating a partnership, administering a Keogh plan, filing excise, alcohol, tobacco & firearms tax returns, or opening a bank account in the name of the business. The SS-4 application is available at the following link:
For detailed instructions on filing the SS-4, visit the IRS website at:
Verify Employee Eligibility and Obtain Employee Forms
As an employer, you are responsible for verifying the legal employment eligibility of each new hire. The Federal Immigration Reform and Control Act of 1986 obligates employers to have new employees complete the Form I-9, Employment Eligibility Verification. Additionally, employees must also complete the Form W-4, Employee's Withholding Allowance Certificate. These forms must be retained as a part of the employer's records.
For additional information and online forms, visit the IRS website at:
Recognize the Difference Between Employees and Independent Contractors
When a business hires employees, the business must generally withhold federal and state income taxes, pay federal and state unemployment, and withhold as well as pay Social Security and Medicare taxes on each employee. In contrast, if a worker is classified as an independent contractor, these responsibilities are eliminated or are shifted to the worker.
Properly classifying a worker as an employee or independent contractor is an extremely important decision. Many businesses assume they can reduce their expense and paperwork burden by arbitrarily "classifying" their workers as independent contractors. However, proper classification is based on IRS guidelines, not on employer preferences.
The Internal Revenue Service has very strict guidelines as to who can be classified as independent contractors. The 20 classification factors relate to various aspects of the relationship between the business and the worker, specific responsibilities of the worker, and the way the worker conducts his assignments. These 20 factors are listed in detail in the Employers Supplemental Tax Guide, IRS Publication 15-A. The publication also gives various examples of types of employer-employee/independent contractor relationships.
Misclassification of a worker may result in significant financial liabilities. The penalties for failing to make required employee related payments and withholdings can be as much as 100% of the tax not withheld or paid.
If you are in doubt as to whether a worker is an employee or independent contractor, discuss the issue with your C.P.A. Additionally, the IRS can make the distinction for you if you file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Understand your Payroll Responsibilities
When you hire employees, you have various responsibilities relating to employee payroll expenses. Therefore, you must be knowledgeable in the areas of federal and state income tax withholding requirements as well as Social Security/Medicare withholding. Furthermore, as an employer, you are responsible for paying your portion of Social Security and Medicare taxes, Federal unemployment taxes (FUTA) as well as State Unemployment Taxes (SUTA). Employers must also comply with quarterly reporting requirements as well as the requirements regarding the frequency of payroll tax deposits.
Federal and State Income Tax Withholding
The employer typically withholds federal and state income taxes from each employee's wages. An employer must follow Federal and State guidelines regarding the amount which is to be withheld from each employee's pay.
The IRS Publication 15 (Circular E), Employer's Tax Guide, discusses important information for employers and includes tables for calculating federal wage withholding and advance earned income credit payments as well as information concerning benefits and tips. Employers are responsible for complying with all rules set forth in this publication and withholding the full amount in income taxes from each employee's paycheck.
The Ohio Department of Finance & Administration provides information regarding state income tax withholding requirements:
Social Security and Medicare
In order to comply with the Federal Insurance Contributions Act (FICA), an employer must withhold the employee's portion of Social Security and Medicare taxes. The employee's tax rate for Social Security is 6.2% and is subject to wage base limits announced annually by the IRS. The employee's tax rate for Medicare is 1.45% and is not subject to wage base limits. The employer must also match the amount withheld from the employee's pay as there is an additional 6.2% required for Social Security and 1.45% required for Medicare. IRS Publication 15 (Circular E) contains information regarding Social Security and Medicare tax requirements.
Employers are required to file a W-2 form with the Social Security Administration for each employee and furnish a W-2 to each employee in order to report wages earned. For more information, review Instructions for W-2 and W-3 published by the IRS.
Federal and State Unemployment Insurance
Employers must comply with the Federal Unemployment Tax Act (FUTA). According to FUTA, employers are responsible for paying taxes to compensate workers who have recently lost their jobs. FUTA taxes are to be paid by the employer and are not to be withheld from an employee's wages. FUTA is paid and deposited separately from withholding and FICA taxes.
Unemployment insurance must also be paid to the state of Ohio. Employers must establish a state unemployment insurance account (SUTA). The state unemployment insurance rate varies depending on the company's history. Information on state unemployment insurance can be found on the Ohio Department of Workforce Services website at the following link:
As an employer, it is critical that you adhere to all requirements and deadlines regarding withholdings, payments, and reporting. Taxes should be withheld and paid on time. Failure to make deposits and payments on time will result in penalties and interest charges that increase your expenses. It is recommended that you utilize the professional guidance of an accountant for tax questions as well as to assure compliance with all tax-related matters. If you would like assistance with processing payroll, options include working with your accountant or payroll service. Alternatively, some accounting software programs have a payroll support subscription service.
Research and Comply with Applicable Employment Laws
Various regulations and laws exist pertaining to employees. If you plan to hire individuals to work for you, some understanding of the rules that apply to your business are necessary. Federal laws, depending on your sales volume and number of employees, may supersede state laws. Consult with the state and federal Departments of Labor to learn more. If you are unsure of your obligations, an attorney's guidance can be useful in assisting you to meet legal requirements.
Additionally, the United States Department of Labor website provides in-depth articles online at www.dol.gov. Information on state regulations can be found at the Ohio Department of Labor website.
Understand Workers' Compensation Insurance
Workers compensation insurance is to be paid solely by the employer and should not be deducted from employee wages. Most employers with three or more employees are legally obligated to provide workers' compensation insurance coverage for their employees. There are exceptions to the three or more employee rule. Some industries require workers compensation insurance with the first hire. Therefore, all employers, regardless of the number of employees, should contact the Ohio Workers' Compensation Commission.
Workers compensation insurance is purchased by the employer from an insurance provider. Employers must also comply with workplace posting requirements and must comply with procedural and documentation requirements in the event of an accident in the workplace.
For additional information, visit the Ohio Workers' Compensation Commission.
Remember to Keep Adequate Employee Records
Just as you should keep good records for all operational aspects of your business, it is important to practice good recordkeeping tactics with your employees. The Internal Revenue Service recommends employers keep employee records for at least four years. However, some records may be retained indefinitely. For detailed information concerning what records to keep, employment tax records, etc., visit the IRS website.
Consider Optional Employee Benefits
Many business owners find it challenging to attract and retain qualified employees. Therefore, as an employer, you may need to consider offering employee benefits. While not required, offering optional benefits such as healthcare and/or retirement accounts may improve your ability to attract and retain employees. The cost to the employer of offering such benefits can vary. In some cases, an employer may offer options to employees at little or no cost to the employer where premiums or contributions are the responsibility of the employee. Employee participation in such benefits would be optional. In other cases, the employer may choose to share in some of the cost of premiums or contributions as an added benefit to the employee.
When deciding whether or not to offer optional benefits to employees, it is important to learn about the benefits offered by other employers in your industry to understand what is typical and competitive in the labor market. Contacting venders (healthcare, retirement, etc.) to discuss options for small employers will allow you to make the best choice for your business and your budget.