Before you start suddenly hiring tons of workers, it’s a good idea for employers to go into the process with a pre-hiring checklist. Let’s take a look at some of the items that this checklist must cover.
- What type of worker should I hire?
- Employee versus independent contractor
- Documents that should be filed before hiring.
- Employer Identification Numbers (EINs)
- Form I-9, Form W-4, and Form W-2
- Compensation plans (for employees).
- Required compensation plans and insurance
- Reporting new hires to the state.
Which Type of Worker Should I Hire?
It’s incredibly important that you understand how worker classification works before hiring for your small business. First, you must first be able to classify a worker as an employee or independent contractor. You’ll be able to make that decision with the help of three categories.
- Behavioral Control. According to the IRS, workers are considered to be employees when the business has the right to direct and control their workload. This includes, but is not limited to, instructions for when and where to work, tools to use, training, and evaluation systems, like performance reviews, measuring the employee’s end results.
- Financial Control. Under this category, the business has the right to direct or control the financial and business aspects of the worker’s job. For example, employees are generally guaranteed wages for hourly or salary work paid out during a specific period of time (weekly or biweekly). A contractor, however, is typically paid a flat fee for the job performed.
- Relationship of the Parties. This category determines the interaction the worker has with the business. Let’s use the example of benefits. Many businesses will provide benefits to employees that include but are not limited to insurance, sick pay, and vacation pay. However, these types of benefits are not offered to independent contractors/freelancers.
Why does worker classification matter? This goes beyond the workload the worker is responsible for fulfilling at the company. Worker classification is key for federal employment tax purposes. Once the employer understands if the worker is an employee or a contractor, they may withhold income taxes accordingly.
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Employers, for example, would pay Social Security, Medicare taxes, and unemployment tax on wages for employees. If the worker is classified as an independent contractor, however, they would not have their taxes withheld. Instead, an independent contractor would be subject to self-employment tax.
Necessary Employee Hiring Documents
Now that you have determined the worker classification for the individual you’d like to hire, it’s time to file certain documents that will ensure you may hire these talented workers. In order to maintain consistency throughout the rest of this post, let’s say that your small business is hiring a full-time employee. You have classified the worker. It’s time to determine which documents and forms you’ll need to file before you are able to hire for the role.
- Employer Identification Number (EIN). An EIN is a nine-digit federal tax ID. The IRS uses an EIN to uniquely identify employer tax accounts. It is slightly less sensitive to use than a social security number (SSN) and may be used for legal paperwork in lieu of an SSN. Small business owners must file for an EIN if they plan to hire paid employees for their business, open a business bank account, or establish a business credit profile.
For more information about how EINs work, check out our three-part Guidant series.
- Form I-9. Form I-9 is used for Employment Eligibility Verification purposes. This document is used to verify the identity and employment authorization of the employee’s eligibility to work in the United States. U.S. employers, and employees, are required to complete Form I-9 for each employee hired in the company and keep it on file.
Forms for Withholding Taxes
In addition to an EIN and Form I-9, employers must also complete two separate forms for withholding employee taxes.
- Form W-4. Form W-4 is the Employee’s Withholding Certificate. This form must be filled out and returned to employers so federal income taxes may be withheld.
- Form W-2. Form W-2 is the Wage and Tax Statement. This form is completed by the employer and withholds federal Social Security and Medicare taxes.
It is also wise to check in with your local Secretary of State to determine if your business — or the new hire — needs to complete any other forms. Depending on your state’s tax regulations, there may be additional state forms to complete.
Compensation Plans and Insurance
As mentioned earlier, full-time employees typically receive compensation plans that include a range of required and optional employee benefits. Which employee benefits are required by law? Let’s review, as outlined by the U.S. Small Business Administration (SBA).
- Workers’ Compensation. In the event that an employee suffers an injury on the job, employers are required to pay for workers’ compensation. This insurance may be obtained through the state Workers’ Compensation Program.
- Disability Insurance. This benefit covers employees who cannot work due to a medical condition. It is required in California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico.
- Leave Benefits. Part of the Family and Medical Leave Act (FMLA), leave benefits are extended to eligible employees. They cover a wide variety of circumstances ranging from pregnancy and childbirth to care for a covered servicemember.
- Unemployment Insurance. Employers may register for unemployment insurance with their state workforce agency.
Reporting New Hires to The State
You’re almost done! After employers have classified the worker and completed these necessary legal forms, they may begin the process of hiring an employee.
However, before the employee begins their first day of work the employer must report this information to the state. For example, employers in California use the New Employee Registry — California’s New Hire Reporting Program to report new employees to the Registry. Every state has a different set of reporting requirements, so check in with the local state to determine their reporting requirements and how you may report new hires.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.