Now that you’ve committed to starting your new business, developed a solid business plan, obtained necessary financing, decided on a business entity and entered into a commercial lease, it’s time to consider the hiring of employees. Whether or not to hire employees is a critical decision all new San Diego business owners must make. Depending on the type of business, some entrepreneurs may decide that they are able to move forward without the need for employees with the understanding they will revisit the issue in the future. If after careful consideration, you decide that you need to hire an employee or employees, the following is a summary of important steps to take. There are a number of state and federal regulations to navigate making it important for all businesses to carefully evaluate their legal responsibilities. See “New and Growing San Diego Businesses – Hiring Employees“, Parts One through Three for a additional analysis.
Obtain an Employer Identification Number (EIN No.): Often, new businesses obtain an EIN No. without thinking much about it. When forming a formal business entity such as a corporation or limited liability company or when opening a back account after obtaining a DBA, it is common for business owners to obtain an EIN No. for use in opening a bank account under the business’ name. If one hasn’t been obtained for whatever reason, then you will need to get an EIN No. (Employer Tax ID) from the IRS. It is a simple process and can be completed on-line using IRS Form SS-4.
Set Up a Payroll System for Withholding Taxes: Employers are required to withhold taxes from employee income as well as Social Security and Medicare taxes. These withholdings are then paid to the IRS. There may also be requirements for State tax withholdings (check with your state tax agency – in California it’s the California Franchise Tax Board at California Tax Service Center). You will need to obtain a completed Form W-4 from each employee prior to start of employment. This form which requests employee withholding information (number of dependents claimed, etc.) is then provided to the IRS. At the end of each year, employers then report employee income and withholdings using Form W-2 (wage and tax statement). This form should be provided to employees by the end of January and sent to the IRS by the end of February the following year. Employment records need to be kept for at least four years.
Setting up a payroll system provides employers with the tools necessary to calculate employee incomes and withholdings, make tax payments to the IRS, prepare financial statements and prepare tax returns. The payroll system thus becomes part of the business’ accounting system. For some businesses, it may make sense to outsource payroll to companies that already have efficient systems in place to manage payroll for companies. Review the IRS’s Employer’s Tax Guide for a more detailed explanation of federal tax filing requirements.
Register With the California Labor Department: In addition to tax withholdings, employers are required to pay state unemployment compensation taxes.
Verify Employee Eligibility: The U.S. Citizenship and Immigration Services (USCIS) requires all employers to verify each employee’s eligibility to work in the United States. Verification starts with Form I-9 which can be found online at www.uscis.gov. The form is to be filled out by the employer within three days of the hire date and kept by the employer for three years from the hire date or one year from termination, whichever is later. However, it does not have to be filed with USCIS or the IRS. Rather, the employer is required to maintain all From I-9s in a separate file making them available for inspection upon request.
Form I-9 lists acceptable documents employers may rely upon in determining eligibility. Employers may only ask for the documents identified. Employers then use the information provided obtained to electronically verify (E-Verify) eligibility. by registering with E-Verify.
Report to Your State’s New Hire Reporting Program: Each state maintains a new hire reporting program to assist in locating parents who owe child support. California employers are required to report information on all new employees (see New Hire Reporting on California’s Employment Development Department website).
Obtain Workers’ Compensation Coverage: California law (as in most states) requires all employers to maintain workers’ compensation insurance or self insure. Failure to maintain workers’ compensation insurance can have catastrophic consequences for growing businesses.
Post Required Notices: Employers are required to post notices that provide important information regarding employee rights. Go to the Department of Labor website at www.dol.gov/elaws/posters.htm for information on required federal postings. Go to California’s Department of Industrial Relations, Workplace Postings for information on required postings in California.
File IRS Form 940 Annually: IRS Form 940 is required to report federal unemployment taxes for each year in which an employer pays wages of $1,500 or more in any quarter or where an employee has worked in any 20 or more different weeks in a given year. Visit www.irs.gov for more information.
In addition to the above legal requirements, it is advisable for employers to set up workplace safety guidelines, maintain organized personnel records and stay up to date on state and federal guidelines including record keeping requirements. Employers may also consider offering employee benefits and maintaining an employee handbook. These options should be considered carefully after consultation with your business attorney and tax professional. Finally, become familiar with your federal and state labor laws and OSHA regulations regarding work place safety, minimum wage and overtime regulations, child labor law and anti-discrimination law. Visit the U.S. Department of Labor for information on the Fair Labor Standards Act. A good source for general information on California labor law is the Division of Labor Standards Enforcement (DLSE) Frequently Asked Questions page.
On average, businesses can expect payroll associated costs to add approximately 18% to their total operating costs. This all may seem daunting. However, once systems are in place, the hiring of employees typically becomes routine. Consult with an experienced San Diego business lawyer if you have additional questions regarding the hiring of employees.