Wouldn’t it be nice if you could simply write your employee a check for work done? You and your employee would probably be happier.  Paying a new employee is not simple, but we’ll walk you through the steps that will make the forms and the process a little easier. If you’re still trying to figure out when to hire check out our article: The Secret to Hiring Without Going Broke. 

Depending on both your state and the federal government there are lots and lots and lots of forms to fill out.  Then, of course, you’ll need to keep this up to date.  

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Forms the Business Needs to Fill Out Before Hiring an Employee 

1. You’ll need an Employer Identification Number (EIN)

An EIN is like a social security number for your business.  You’ll need an EIN to pay your payroll taxes to the business and it will be used when you give out the W2 or 1099s etc.   

Hot Tip: You don’t have to be an S-Corp or an LLC to get an EIN but it does help protect your social security number if you’re a sole proprietor

It’s completely free to get an EIN and you can apply online or fill out a Form and send it to the IRS via mail or fax (seriously only the government still uses fax). 

2. State/Local Tax ID Number

Not only does you the federal government but you’ll need to apply for a state/local tax ID number.  Sometimes, cities and counties will want you to process income as well.  Make sure you check out your state department of revenue or comptrollers office to apply.

3. State Unemployment ID Number

Besides your Federal Unemployment taxes (FUTA) your state will also have a state unemployment tax (SUTA) once you get your state or local Tax ID Number you’ll need to get this number (if separate for your state. 

What Forms Your New Employees Will Need to Fill Out for Payroll 

Onboarding a new employee can be tough make sure that you have them fill out their documents on the First day.  If you’re using a payroll company upload or give the documents to them if not you’ll need to have these legal forms to ensure that if you get audited you have the correct info on hand.

Hot Tip: Yes, your state can request to audit your payroll. This means they come in and make sure that you are paying your employees properly. Having the correct documents on hand will make sure this is an easy process.

1. Employee Addresses and SSN/TIN

We generally have them fill out an application with all their basic information.  Now we get their private information to pass on to the Payroll company.  Make sure you keep this information under lock and key (or password protected electronically.   

2. Federal I-9 Form

Every employee needs to have an I-9 Form on hand.  I-9s are Employment eligibility verification.  Make sure your employees sign their documents as it attests to their employment authorization.  You can find the forms here. 

3. W-4 Form

Everyone hates filling out the new W-4 Form (me too!)  But you must have it as it will list the income and family information.  Payroll companies use it to calculate how much money to withhold from their paycheck for federal income tax.  You can find the new form and calculator here.  

4. Direct Deposit form  

Though there is no one form to use if you are going to deposit their checks in a bank account you’ll need to have them fill out a consent form.  Your bank may have one if not you can download the payroll pack and we have one available for your use.  

Hot Tip: Many states have a work opportunity credit that your company may be eligible for if you hire certain types of workers.  i.e. low income, recently separated veterans or recipients of Medicaid benefits.  Check with your state’s department of revenue to find additional information.  You’ll need to have employees fill out a federal form 8850.  You can find more information here.  As there are additional forms that must be filled out and filed in order to receive the credit.

Monthly, Quarterly, Annual Payroll Forms to File

Depending on your circumstances and the number of employees you’ll hire you may need to fill out a monthly but most likely you’ll fill out your withholding information on a quarterly basis.   

Quarterly Federal Form 941 or 94X(if amending)

The payroll report form tells the government of all your employment tax liabilities. And remits all taxes that you withheld from employee wages AND the payroll taxes you paid.   

Frequency:  Quarterly 

Forms:  941  

Due Date: April 30, July 31, October 31, and January 31 

Where to Pay:  https://www.irs.gov/businesses/e-file-employment-tax-forms 

Hot Tip: If you hold less than $1,000 for any of your employees you can file an annual 944 form.  This is for the tiniest businesses.  But if you’d like more information, you can find it here. 

State Quarterly Payroll 

States with income tax or even states that don’t will require you to submit quarterly payroll reports and filings.  That list is waaaay too long to list here as every state is different.  Make sure you go to your state’s comptroller’s office to get the forms you need.   

Frequency: Quarterly 

Forms: Varies by state 

Due Date: Generally will follow federal April 30, July 31, October 31, January 31 

Where to Pay:  Various, check with your state 

Form 944:  Annual Federal Tax Return 

This form is for very tiny companies that withhold less than $1,000 in payroll.  Most businesses do not have this low so make sure you do your 940s 

Frequency:  Annually 

Forms:  944 

Due Date: January 31 

Where to Pay:  https://www.irs.gov/businesses/e-file-employment-tax-forms 

Form 8027:  Annual Information Return of Tip Income 

If you have employees that receive tips you’ll need to file this form which reports tips received and determines allocated tips. 

Frequency:  Annually 

Forms:  8027 

Due Date: February 28 if mailed and Electronically March 31st 

Where to Pay:  https://www.irs.gov/businesses/e-file-employment-tax-forms 

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Putting it All Together

I can not strongly enough emphasize that you should if you are hiring a new employee having a payroll company should be on your list of expenses. The piece of mind to get ensure that your payroll compliance is worth the cost.  Check out Gusto and even Intuit payroll and compare some prices.  On a second note having the right payroll forms that you keep on hand for any employees is a must.  If you are unsure download the Payroll pack and make sure you have a file for each and every employee even ones that leave you.  Avoid penalties and fees associated with missing out on these very important documents.

Cheers!

In part 1 of the New Hire Series, we talked about how to know when you’re ready to hire a new employee (and not go broke in the Process) which you can find here.

Now the question is?

Who to hire, an independent contractor or an employee? And really what’s the difference?

Getting a new hire can be an exciting and terrifying proposition.  There is so much that needs to be done and you’re overwhelmed (and excited) but how do you know who to hire, a new employee or an independent contractor?

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

First, let’s determine what is an independent contractor.

What is an independent contractor?

The IRS defines an independant contractor as

Basically, what this means without the legal stuff is that a contractor is largely independent from the employer or business in which it’s doing some work.  A lot of businesses will muddy the water but think of these scenarios. 

Scenario 1 – Independent Contractor

Mary owns a Marketing company and contracted Mark to do graphic design.  Mary gives Mark the deadline, the formats needed, and what the client is expecting.  After which Mark works independently, at his own home office.  While periodically checking in with Mary.  At pre-determined times Mark sends Mary an invoice for the work.  Mary pays the invoice but doesn’t pay any taxes for Mark.   

This is what makes Mark a contractor.  He works his own hours; he is free to do the work anytime and anywhere.  He’s free to take on other clients.  He pays self-employment tax on his earnings. 

What is an Employee? 

In an employee relationship, the business maintains legal control of how the work is completed and all the details pertaining to the work relationship.   

Scenario 2 – The Employee

Mary owns a Marketing company and hires Mark to do graphic design.  Mary provides the tools and equipment needed to do his work.  Mary also pays Mark and pays all taxes associated with his employment.  As the owner, Mary has the legal right to control the details of how the services are performed.  

This is what makes Mark an employee. 

How do you know if you’re hiring an Employee or a Contractor? 

Now I know that this is confusing but believe it or not the IRS has come up with a test to determine if you’re an employee or an independent contractor. 

These are called the Common Law Rules 

What will determine whether you’re an employee or a contractor can fall into the following three categories.  This means if there is a question, they are going to use the following categories to make a determination. 

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? 
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) 
3. Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? 

Whew, that was a lot.  But let’s say you’ve gone through the IRS and your new contractor is a contractor.  Even more annoying is each state has its own employment rules. You’ll need to check with your state’s employment office to help you determine if you’re new hire is a contractor or can be considered an employee. 

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Putting it All Together

When you start to hire make sure you know if you are hiring an independent contractor or an employee by using the common law category test.  Check with your state on their rules to make sure you have the correct category for the state.  Never be afraid to ask questions the cost of doing it wrong is all the back taxes and penalization that come with doing it wrong (The IRS is no joke about penalties).   

And remember hiring a new employee takes time and patience but when you find the right one it’s totally worth it.   

Our next article will be on the paperwork needed to do payroll.  If you’d like to know more about the practical side of business connect with me on LinkedIn as I talk about business, taxes, and sometimes life in general.

Cheers! 

Your business is growing…, you’re turning away work because you can’t keep up with the demand. This is quite the conundrum of business ownership (yes, I did use conundrum because I love the way it sounds). This is one of the best problems to have. But how do you really know when to hire an employee…..Without going broke in the process.

Hiring an employee is scary, most of the time it’s confusing you have many questions so we’re going to break it down to a science because I love numbers. First, though let me say that hiring an employee is complicated so we’ve broken it down into several parts. Which we’ll be coming out over the next couple of weeks.

 We’ll be using some handy tools which will help you figure out if you’re ready to hire your first employee. First things first, now is the time to see if you’re even ready to hire.

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Your Employees WILL Make you Money

What a minute Andrea, you just listed all the expenses what do you mean my employees will make me money…. Is the most common question I get but guess what? All your employees whether they are direct labor (or labor that builds the product or provides the service) and indirect employees (managers and administration that don’t directly provide services).

Will make you money.

Hot Tip: If you’re confused about direct and indirect labor costs go read out article on Direct Labor

Every employee (including the owner) should expand your ability to service more clients and increase your revenue and profit.

Let me explain further.

If you hire someone to build a widget you’ve probably determined their cost in the price of your product (aka direct labor cost). Generally, small business owners neglect to include that their indirect staff will also make them money.

How you ask…..

They will free up the time for you to sell more, create new products or services and be able to service more clients/customers.

For every employee you have your profits should be increasing (after a training period).

We use a simple formula to evaluate this for every employee you hire you should be increasing your revenue by 3 times their salary +benefits + overhead.

If I hire an employee for $50,000 per year I would expect to bring in an additional $150,000 into my business once my employee is trained.

When You Should be Hiring an Employee

Let’s answer a few questions to see if you should hire an employee

1. Is your business is making a profit?
2. Are you turning down work?
3. Are your clients complaining about service?
4. Is the quality of your products or services starting to go down?
5. Is it taking too long to fulfill orders and is your waiting time for customers too long?

If you’ve answered yes to some of these questions and there are now no more ways to automate and streamline your processes then it may be time to start the search to hire your first or next employee.

There are however more things to consider and that is

DID YOU ANSWER YES TO NUMBER ONE?

Yes, I’m yelling at you.

If the first thing you haven’t considered is whether or not you’re making enough of a profit to not only hire an employee but…keep yourself paid then you need to rethink hiring and look to other ways to increase productivity.

Ok, I’ve made my point.

If you’re unsure whether you’ve made money or not, you need to stop what your doing and first start cleaning up your accounting. You will be in no position to hire anyone if you don’t know where your money is coming in and going out. You can check out our simple money series to organize and get this up and running.

Whew ok that one was a little tough love 😉 but don’t worry if you need some help you can always give us a call for a free consultation.

The Real Cost of Hiring an Employee (It’s not just salary)

Before going forward I want to discuss the pesky details of hiring an employee and what the cost is to you the employer.

Federal and State Taxes

You need to factor in the cost of the salary but also the payroll taxes you’ll need to pay, and payroll provider costs (otherwise known as payroll expenses). The cost of keeping compliant etc.

Your business will need to pay employment taxes this includes

• Medicare (FICA)
• Social Security (FICA)
• Federal Unemployment (FUTA)
• State Unemployment (SUTA)

Benefits

Will you be offering benefits like:

•  Sick Pay
• Vacation pay
• Health insurance
• Retirement compensation

Most first-time employers forget about the additional benefits you may (or not be offering your employee). Just remember employees will need time off too so you’ll want to plan to cover these costs. If you will not be offering health and retirement benefits expect a hire turnover rate. This will also decrease your chances of hiring people with experience so you may need to get creative.

As for vacation and sick pay aka PTO you need to account for times when they will be paid but will not be working. Obviously, if you’re hiring a part-time worker this may not apply but we’re really talking about hiring a second full-time employee. Keep these things in mind.

Additional Overhead

Whether you’re bringing people into a brick-and-mortar store or working remotely you’ll have increased overhead costs. Things like

Brick and Mortar office

• Furniture
• Benefits
• Utilities
• Security
• IT costs
• Phone Costs etc.
• Uniforms

Don’t worry below we’ll help you determine what those costs are.

Remote Employees

• IT costs
• Phone Costs
• IT Security costs

Just to name a few.

You’ll want to figure out how much it will cost you. Do you need to buy them a laptop? A phone?

Software subscriptions and email addresses? These things all come into play when you hire. List out what you’ll need once you onboard so you can figure out the true cost of hiring an employee.

You can use this Payroll Calculator to help you figure out the costs.

Quick tip: Even if you hire a contractor for a role, you’ll want to include the additional cost of software and anything they may need to do the job you hire them to do.

The Simplest Way to Determine When your Ready to Hire an Employee

Now you know what hiring a new employee is going to cost you on an annual basis for the overhead you’ll need to determine their salary or an hourly wage.

For example, let’s say you’re going to hire a graphic designer.

You need to determine how much the salary for the graphic designer is. The easiest way is to go to Salary.com and enter their title and how much experience you want to hire. In the next lesson we’ll discuss more in-depth on hiring when you want inexperience vs. experienced employees but for now… let’s just say you want a graphic designer with 3 to 5 years of experience.

According to salary.com, a graphic designer can make somewhere between 62,000 a year and 94,000 a year. A lot of this depends on location someone in New York will make more than someone in Texas.

Don’t make this too complicated just look to the location and then the median salary and start there.

Step 1: Determine the Annual Salary

We’re going to use $55,000 for this example.  Now divide their salary by 12.

Step 2: Add payroll taxes and benefits as a monthly cost

We’re going to use the standard employer payroll costs. Including some healthcare costs just to make it more fun. We came up with $736.00 per month (don’t worry I’ll show you how to do this.)

Step 3:  Figure out your monthly and annual overhead

We’ve added overhead monthly costs. Basically, this is anything that will increase monthly See examples above. We came up with an additional $81.00 per month.

Add in any one-time charges and divide by 12 (for the first year).

We came up with some additional overhead like a laptop and a phone for $158.00

Step 4: Add up the costs

Once you get the figures you can add up your monthly costs.  For this example, we’ve come up with a grand total of $5,558 per month in additional costs for a full-time employee.

Now we have all the costs associated with hiring a new employee.

Can You Start Hiring an Employee? (the easy way)

You have the cost.

Now can you set aside the money today for the next two to three months?

If you can set aside the money each month without it affecting YOUR OWN PAY and you can still pay all your current overhead expenses then….

Your ready to hire an employee

If however, you can’t set the money aside or it affects your pay or expenses, you may not quite be ready to hire an employee. You’ll need to find a way to reduce your expenses or increase pricing until you can get to that point.

If you need a little help figuring this out read our articles on How to Ruthlessly Cut Your Expenses and the Art and Science of Pricing.

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Putting it All Together

Believe it or not but your employees will make you money. Don’t be fooled into thinking that they are a cost only. Next, you should find out if you are ready to hire by answering a few questions. When working on the cost of hiring an employee make sure that you include all costs like Salary + Taxes + Benefits + Overhead. Once you’ve determined their monthly cost set aside the amount for a minimum of two months. Then check out our next article on the Paperwork needed to onboard your new employee.

Cheers!