In this section, we discuss what paperwork you will need to complete before hiring employees. This includes getting an EIN and registering for state taxes.
We also discuss the importance of knowing the difference between employees and independent contractors.
Step 1: Get an EIN
Before your business can hire employees, you will need to apply for an Employer Identification Number, commonly known as EIN. The EIN is like a social security number for your business. It helps the IRS identify your company and make sure your business is keeping up with its tax obligations.
EINs are free of cost and can be easily obtained by applying at the IRS.gov website.
For more information about EINs, including a step-by-step guide to completing the online application, check out our article.
Step 2: Register for State Taxes
Once you have your EIN, you can register for employee-related taxes in your state. This includes employee withholding tax and unemployment insurance.
This is typically done through the Secretary of State website.
Learn More About Employee Taxes in Your State
Note: Your state may also require you to have a Workers Compensation policy to cover work-related injuries. Learn more about workers comp and other employee taxes by reading our article, Employee Taxes for Small Businesses.
Step 3: Avoid Employee Misclassification
When making a new hire, it is important to know the difference between an employee and an independent contractor.
An employee is someone your business hires to perform a specific role or set of roles within your company. Employees are compensated in terms of hourly wages, an annual or monthly salary, commissions, other benefits, or a combination of the above.
An independent contractor is a working professional who owns and operates a business. Consultants, accountants, dentists, carpenters, and other professional service providers are common examples of independent contractors.
Businesses often hire independent contractors to perform a specific task or complete a certain project. However, depending on how much control you exert over the contractor while they complete their assignment, it may be more appropriate to classify them as an employee.
The IRS is very strict with employers who misclassify an employee as an independent contractor. For more information about the differences between employees and contractors, read our article on the topic.
Once you have decided who you wish to hire, the next steps are to confirm that they are eligible to work in the U.S. and then sign the employee agreement.
Step 4: Confirm Work Eligibility
Now that you’re ready to hire an employee, you must make sure they are eligible to work in the United States.
To do this, have the new hire fill out IRS Form I-9 on their first day on the job, and make sure they can provide the required documents to verify their identity and that they are authorized to work in the U.S.
Step 5: Sign the Employment Contract
An employment contract is a binding agreement between an employer and its employees that spells out the terms of employment and the specific duties of the new hire. Typically, an employment contract explains:
- The responsibilities associated with the role
- Starting salary
- Employee benefits
- How the employment can be terminated
If employment contracts seem too formal for your business, consider sending formal job offer letters to new hires that include some or all of the above information. Such letters often serve to substitute the more formal employment contracts.
Download a free sample employment contract from our Business Center.
In this section, we explain how to set up tax withholding and provide an overview of the Department of Labor laws regulating American businesses.
Step 6: Set Up Tax Withholding
All employers are required to withhold federal and state taxes from their employees’ paychecks. This includes federal income tax, social security and medicare taxes, as well as all relevant state taxes.
As your business expands, you will likely want to hire an accountant or professional payroll service to handle this.
Tax withholding requires you to become familiar with several basic IRS tax forms, including the W-4 and W-2
W-4 Federal Tax Form
It is good practice to have new employees fill out IRS Form W-4 before they receive their first paycheck. This form is also known as an employee’s withholding allowance certificate.
If you are working with an accountant or payroll service, you will need to send them a copy of the employee’s W-4, and you will also want to keep a copy for your business records.
The W-4 form can be filled out once for each employee, and only needs to be updated if the employee’s tax status changes.
You do not need to have employees fill out a new W-4 every year, unless an employee claims he or she is exempt from tax withholding. In this case, the employee will need to fill out a new W-4 affirming their exempt status by February 15 of each year.
W-2 Federal Tax Form
At the end of each year, employers are required to submit a copy of IRS Form W-2 to both the IRS and to each employee. This form states how much tax was withheld from an employee’s salary.
Employees must receive their W-2s no later than January 31st of the following year. In addition to sending out W-2s to employees and to the IRS, your business should keep copies in your office records for at least four consecutive years, if not longer, in case your business is ever audited.
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Step 7: Review the Law and Stay Compliant
The Department of Labor (DOL) is a United States institution formed to protect the rights of American workers.
Depending on your state and the type of industry you are in, you may be required to post DOL posters and/or notices in the workplace. These posts can range from Discriminatory laws to “Employees must wash hands.”
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