10 Things to Do Before Hiring Your First Employee

Take these 10 steps to avoid possible problems down the line.

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By Christy Bieber, The Motley Fool

Several years ago, my husband and I hired our first employee -- a massage therapist for his chiropractic practice. We'd worked with independent contractors, but this was a major milestone, as it is for most business owners.

[post_ads]Hiring an employee is a big deal because there's a lot more responsibility -- and more legal obligations -- than when you work with freelancers. Fortunately, because of my background in employment law, we were able to do the process right.

If you're thinking of bringing on an employee, it's important to understand the steps you must take. This list will get you started so you can avoid big problems down the line.

1. Decide if your new hire is an independent contractor or an employee

Before we hired an employee, we had independent contractors working for our business in various capacities. Hiring an independent contractor is much easier and less costly, and imposes far fewer legal obligations.

Independent contractors don't receive the same protections from wage-and-hour laws, and you don't have to do most of the other steps on this list, such as getting insurance or withholding taxes.

Because it's so much cheaper and easier, many employers incorrectly classify new hires as independent contractors. You don't want to do that, as there could be major consequences.

Independent contractors have freedom, flexibility, and autonomy. If you have control over where, when, and how your new hire works, you're probably hiring an employee. You can use this IRS guide to make the determination.

2. Review your state's anti-discrimination laws

When you bring on a new hire, you must comply with the law. Federal laws prohibit discrimination based on advanced age, disability status, gender, race, religion, or national origin. Some states also have laws prohibiting discrimination on the basis of sexual orientation or gender identity.

You can be held liable for unlawful discrimination even if you don't directly refuse to hire someone of a certain race or gender. If you're reluctant to bring on a pregnant woman because you don't want her to take maternity leave soon, or you impose a job requirement that has the effect of disqualifying more women or people of a particular race, this could be considered unlawful discrimination.

3. Obtain an employee identification number (EIN)

In order to be legally eligible to hire employees, you need an EIN to identify you as a business entity with the IRS. You can submit this form to apply for an EIN. Even sole proprietors can get an EIN to use when filing certain business tax forms.

4. Research wage-and-hour laws and other worker protections

While independent contractors aren't covered by most worker protection laws, employees are.

Wage-and-hour laws are some of the most important regulations. They cover how much you need to pay, how many hours employees can work without a break, and when you must pay overtime.
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Other laws, including Occupational Safety and Health Act regulations and the Family and Medical Leave Act, might apply depending how many employees you hire and the type of workplace. The Department of Labor summarizes requirements, so find out what your business must do.

5. Obtain the required insurance

As an employer, your state may require you to purchase workers' compensation insurance in case your employees are hurt on the job. You may also decide to provide health insurance as a workplace benefit.

The National Federation of Independent Business has a comparison of state-by-state workers' comp laws, and most insurers provide workers' comp policies. We purchased ours through the same insurer that covers our home and vehicles.

6. Make sure your employee is legally eligible to work

Employers must ensure that their employees have work authorization. IRS Form I-9 provides instructions on documentation used to verify work eligibility.

Employees must provide specific types of documentation, such as a passport or a green card, depending on whether they're citizens or not. Keep copies of the required paperwork in case your business is audited.

7. Have your employee complete required tax paperwork

Employees must fill out a W-4 form so you'll know how much money to withhold from their paychecks and submit to the IRS. Employers are responsible for withholding state and federal taxes, and the amount you withhold is based on the number of allowances declared on this form.

If you hire independent contractors, they're responsible for paying their own taxes. But, if you pay them more than $600, you need to send them a 1099 form declaring how much income they earned.

8. Report your employee to your state directory

A 1996 law called the Personal Responsibility and Work Opportunity Reconciliation Act requires employers to provide information on new hires to state directories within 20 days of the employee's coming on board. The Office of Child Support Enforcement provides details on when and how to report new employees.

9. Post required notices on workers' rights

Almost every state requires employers to post notices. The U.S. Department of Labor provides details on which posters federal law requires you to display. Individual states may have additional requirements, so check with the labor department where your business operates.
10. Set up a process for paying your employee and the IRS

Finally, make sure employees are paid on time and that you send in taxes you're required to withhold to the IRS. Using a payroll service makes this process easy. Most local accountants handle payroll for you, or there are online services as well.
An exciting milestone

Hiring your first employee is very exciting, but you don't want this positive event to become a problem because you fail to comply with the law.
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By taking these 10 steps, you'll know you've done the process right. And trust me, speaking from experience, any subsequent hiring is much easier after you've done it once!

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