Steps to Consider When Hiring 1st Employee.

It’s important to have some understanding of the payroll process and payroll taxes whether you choose Do-It-Yourself or hire a Payroll service.  Hiring that 1st employee is often exciting considering that the business is getting bigger but it’s definitely scary too when you’re not sure how to handle payroll and all those payroll taxes.  Even if your payroll services handles everything, you are still responsible, not the payroll service, for ALL timely and accurate tax filings and payments.  The payroll process is easy once you become familiar with it, but mess it up and you can possibly loose your business.   Let’s go over the payroll and hiring process and take the mystery out of it.

Bank Account

Start by opening up a business bank account.  It is preferable to have a separate checking account for payroll but not necessary.   Your business will need a Federal Identification Number (FIN) to set up your bank account.  The IRS requires a payroll to have a FIN and not a social security number.  You will find electronic deposit of payroll taxes (sometimes required) and online banking very useful tools in managing your business.

Collect Employee Information

Regardless whether you hire a payroll service or not, you will have to collect information from employee(s) to setup employee files and properly handle the tax filings, payments, and other requirements.  The “New-Hire Packet” should be the first thing the employee, or new hire, is given and their first work assignment is to complete the paperwork!  Failure to collect the employee’s social security number for later filing of wage reports could leave you in an uncomfortable situation if that new employee leaves before you have the information.

So, What Should be Included in the New-Hire Packet?

The most common forms include:

  1. Employment history of employee – application, resume, references, background checks, etc.
  2. Equal Employment Opportunity information
  3. I-9 Employment Eligibility Verification with at least two forms of identification
  4. Form W-4 Employee’s Withholding Allowance Certificate
  5. Employee Withholding Exemption Certificate for state if State income tax is imposed
  6. Direct Deposit Agreement Authorization if appropriate
  7. Employment agreement if appropriate
  8. Acknowledgment of receipt and understanding of Company Employee Handbook
  9. Insurance papers
  10. 401k paperwork
  11. Occupational Safety and Health Administration (OSHA) as appropriate

Payroll Taxes

This is were a payroll service earns it keep.  They will work with you to set up the accounts with the Internal Revenue Service and your state and local taxing agencies. They may even take the taxes owed these agencies directly from your checking account and pay the taxes for you.   BUT, a word of caution, you are responsible for the taxes not the payroll service. That means if for any reason they mess up, you are the one who foots the bill.

To file your Federal withholding and Social Security and Medicare taxes and your Federal Unemployment with the Internal Revenue Service, you will use your FIN and deposit with either your bank or directly with the IRS.  I prefer to setup the account directly with the IRS and either using the web or by phone, make the payments (follow the Enrollment instructions on the web. This also allows for other types of tax payments as needed and gives a bit more flexibility.  Timing of when to make these payments is set by the IRS depending on the size of your payroll.  See for publication 15, circular E, Employer’s Tax Guide for all the details.

Aside from the federal payroll taxes, you must comply with your state and local payroll taxing requirements.  Here are a list of the most common additional payroll considerations:

  1. File the “New Hire” report with your state
  2. Open state Unemployment account – can often be setup and paid online
  3. Get workers’ compensation insurance – can often be setup and paid online
  4. Setup and pay any local taxes
  5. Work with a specialist when paying employee benefits – health care or retirement
  6. Sick leave and vacation may be other benefits to consider

In summary, when hiring that 1st employee: 1) use a business checking account;  2) put a “New Hire Packet” together – see above for list and links; 3) Open payroll accounts with the Federal Gov’t (see above for link) and State and Local government agencies for filing and paying of taxes.

Look for more postings this week on Using a Payroll Service and The most Common Payroll Filing Mistakes.

We look forward to sharing a lot more information through this blog so please check in now and then and share it with your friends.  For help with your payroll or tax questions and problems, visit our website or call Better Financial Solutions, LLC at 330.494.5335.