If you’re thinking about hiring your first employee, congratulations!  It’s important to start off on the right foot as an employer by making sure you follow all of the new tax and legal rules that now apply to you.  I know you want to create a smooth transition from a one (wo)man show to an employer, so be sure to understand all of the new obligations that come along with this new, and exciting, title.

Contractor vs. Employee

The first thing you’ll want to consider is if you are hiring an employee or an independent contractor. 

This classification is really important because it determines if you as an employer have to withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee.  On the other hand, you are generally not required to withhold taxes and pay payroll taxes for contractors.

Generally, an individual is an independent contractor if you have the right to control or direct only the result of the work, not what will be done and how it will be done.  However, if you set the individuals hours, provide training and equipment, and have general control over their work, then your worker likely should be classified as an employee.  Learn more here!

Apply for a Federal EIN

If you haven’t already, now is the time to get your Federal Employer Identification Number (EIN).  This number is a thumbprint that tells the IRS who you are.  As an LLC or Sole Proprietor, you can use your Social Security Number instead of an EIN until you hire your first employee.  You can grab an EIN within just a few minutes using this IRS Tool.

Register With Your State 

Your next step is to comply and register with your state.  Every state has at least one department that specializes in tax compliance, unemployment, and disability insurance — and each state can be VERY different.  Most states will require you to register to obtain your state employer registration numbers.  Go to the Department of Labor’s website for a list of state unemployment insurance tax agencies.  

Since this varies from state to state, be sure to work with your payroll provider to help navigate exactly what you need.  I am OBSESSED with Gusto, who makes getting set-up on payroll and all reporting and filing requirements an absolute breeze.

Get Workers’ Compensation Insurance 

Many states require you to have workers’ compensation coverage to protect workers who might suffer on-the-job injuries.  Workers’ comp insurance is required in the vast majority of states, although some make an exception for very small employers. The National Federation of Independent Business (NFIB) lists out each of the 50 policies here, but be sure to refer to your local state’s website to see what your exact responsibilities are.

Pick Your Payroll Provider

Your last step is to decide on which payroll company you will use.  And there are A LOT of options out there.  You’ll want one who handles everything, leaves nothing to chance, and is affordable.  Because let’s face it, we’re in business for ourselves to do what we love… and for 98% of us that is not payroll processing!  If this sounds like you then I would encourage you to check out Gusto! Not only do I recommend them to all my clients, but I use them for my own payroll as well.  With Gusto, they help you and your team stay compliant with all the tax and regulatory laws so you never have to worry about a thing.