Hiring your first employee is an important milestone for a small business. It can allow an owner to delegate responsibilities, expand operations, serve more customers, and create new opportunities for growth. At the same time, becoming an employer introduces new payroll, tax, insurance, and employment-law responsibilities.

Whether you're hiring your first employee or expanding an established team, having a structured process can make the transition easier.

1. Determine Whether Your Business Is Ready to Hire

Before advertising a position, review your business's finances and determine whether you can reasonably support the additional cost.

Look at recent profit and loss statements, cash flow, revenue trends, and operating expenses. Remember that an employee's cost is more than wages or salary. Depending on the position and location, you may also have payroll taxes, workers' compensation costs, benefits, equipment, training, and other employment expenses.

If a full-time employee is not appropriate for your current needs, alternatives may include part-time employees, seasonal workers, or independent contractors. However, worker classification must be based on the applicable legal standards rather than simply on the label used in an agreement.

2. Obtain an EIN and Complete Employer Registrations

Businesses that hire employees generally need an Employer Identification Number (EIN) from the IRS.

You may also need to register with your state for payroll withholding, unemployment insurance, or other employer accounts. Requirements vary by state, so business owners should consult the appropriate state agencies before the first employee begins working.

The IRS recommends that employers understand their federal payroll responsibilities before hiring.

3. Identify the Role Your Business Needs

Before writing a job posting, determine exactly what work needs to be performed.

Create a list of responsibilities and identify the skills necessary to complete them. For example, a growing company might need help with customer service, bookkeeping, sales, marketing, administrative work, production, or technical tasks.

Defining the role first makes it easier to determine the appropriate qualifications, compensation, schedule, and employment arrangement.

4. Create a Clear Job Description

A well-written job description helps potential applicants understand what the position involves.

Consider including:

·         Job title

·         Primary responsibilities

·         Required qualifications

·         Preferred skills

·         Relevant experience

·         Work location

·         Schedule or expected hours

·         Employment classification

·         Compensation range, where appropriate or required

·         Benefits

·         Travel expectations

·         Required licenses or certifications

·         Physical or other job requirements

·         Information about the company and its work environment

Employers should also review applicable federal, state, and local employment laws when creating job advertisements and hiring criteria.

5. Establish the Compensation Structure

Determine the expected pay before beginning interviews.

The appropriate compensation may depend on the position, required experience, geographic location, industry, work schedule, and applicable minimum-wage and overtime requirements.

Don't focus exclusively on the employee's hourly rate or salary. Estimate the broader employment cost, including payroll taxes, insurance, benefits, paid leave where applicable, equipment, and training.

Also determine whether the position is properly classified as exempt or nonexempt under applicable wage-and-hour rules. That classification can affect overtime and recordkeeping obligations.

6. Review Workers' Compensation Requirements

Workers' compensation requirements are primarily determined by state law, and the rules can vary significantly.

Before your first employee begins work, determine whether your business must obtain workers' compensation coverage and when coverage must begin.

Don't assume that a rule from another state applies to your business. Check with the appropriate state workers' compensation agency or insurance regulator for the requirements where your employees work.

7. Understand Applicable Employment Laws

Hiring employees means complying with a range of federal, state, and local requirements.

Depending on your business and workforce, these rules can address:

·         Minimum wage

·         Overtime

·         Employee classification

·         Workplace safety

·         Anti-discrimination requirements

·         Employee leave

·         Payroll and tax withholding

·         Recordkeeping

·         Workplace notices

·         Workers' compensation

·         Unemployment insurance

The U.S. Department of Labor provides an Employment Law Advisor that can help employers identify federal employment laws and related recordkeeping, reporting, and notice requirements.

State and local requirements must also be reviewed separately.

8. Advertise the Position

Once the position is defined, decide where to look for candidates.

Potential sources include:

·         Employee referrals

·         Professional networks

·         Online job boards

·         Industry associations

·         College and career centers

·         Social media

·         Local organizations

·         Trade publications

·         Community networks

Using several recruiting channels can expand the pool of potential applicants.

9. Review Applications and Select Candidates

Evaluate applications against the requirements established for the position.

Create consistent criteria for comparing applicants and document the hiring process where appropriate. Depending on the position, employers may also use lawful skills assessments or pre-employment screening.

Any screening process should comply with applicable federal, state, and local requirements.

10. Conduct Interviews

Prepare a consistent set of questions before meeting candidates.

Ask questions that help you understand:

·         Relevant experience

·         Technical skills

·         Problem-solving abilities

·         Communication skills

·         Knowledge related to the position

·         Availability

·         Examples of how the candidate handled workplace situations

Avoid questions that could lead to unlawful discrimination or request information that is not relevant to the job.

11. Complete Appropriate Background Checks

Depending on the position and applicable law, an employer may conduct background screening.

Before obtaining a consumer report for employment purposes, employers should understand their obligations under applicable federal and state laws. Requirements can include disclosures, authorization, notices, and procedures for adverse employment decisions.

The rules can vary depending on the type of screening and where the employee works.

12. Make a Written Job Offer

After selecting a candidate, provide a clear job offer.

Depending on the position, the offer may identify:

·         Company name

·         Job title

·         Pay rate or salary

·         Full-time or part-time status

·         Expected start date

·         Work schedule

·         Reporting relationship

·         Benefits

·         Expected travel

·         Employment conditions or contingencies

·         Other relevant terms

Make sure the terms in the offer are consistent with applicable law and the company's actual employment policies.

After the position has been filled, close job advertisements and consider notifying candidates who were not selected.

13. Complete Form I-9

After hiring an employee, the employer must complete the federal employment eligibility verification process.

Form I-9, Employment Eligibility Verification, is used to verify an employee's identity and authorization to work in the United States. The IRS states that U.S. employers must properly complete Form I-9 for individuals hired for employment, including both citizens and noncitizens.

Employers should follow the current U.S. Citizenship and Immigration Services requirements for completing and retaining the form.

14. Collect Form W-4 Information

Employees should provide Form W-4, Employee's Withholding Certificate, so the employer can determine the appropriate federal income tax withholding from wages.

The IRS states that employers should have a Form W-4 on file for each employee.

State and local withholding forms may also be required depending on where the employee works.

15. Report the New Hire

Employers generally must report newly hired employees to the appropriate state new-hire reporting agency.

The specific deadline and information required can vary by state. Employers should check the requirements applicable to the state where the employee works.

16. Set Up Payroll and Employment Taxes

Once an employee is hired, establish a payroll process for calculating wages, withholding taxes, maintaining records, and making required tax deposits.

Federal employer responsibilities can include:

·         Federal income tax withholding

·         Social Security and Medicare taxes

·         Employer payroll tax obligations

·         Federal unemployment tax, when applicable

·         Wage reporting

·         Payroll tax returns

 

Employers generally use Form 941, Employer's Quarterly Federal Tax Return, to report federal income tax withheld and Social Security and Medicare taxes, although certain employers may qualify to file Form 944 instead.

Form 940 is used for federal unemployment tax reporting when the applicable FUTA requirements are met.

State and local payroll requirements must also be handled separately.