Hiring Your Workforce
- Considering a Business
Here are eight steps from the Small Business Administration to help you start the hiring process and ensure compliance with state and federal regulations.
Step 1. Obtain an Employer Identification Number (EIN)
Before you hire a single employee, you'll need to get an employer identification number (EIN) from the U.S. Internal Revenue Service. (It is also referred to as an employer tax ID.) The EIN is necessary for reporting taxes and other documentation to the IRS, as well as when providing information about your employees to state agencies. Apply for EIN online or contact the IRS at (800) 829-4933.
Step 2. Set up Records for Withholding Taxes
You must keep records of employment taxes for at least four years. Good records can help you evaluate the progress of your business, prepare financial documents, identify sources of receipts, keep track of deductions, prepare your tax returns, and support items reported on tax returns.
Below are three types of withholding taxes you need for your business:
Federal Income Tax Withholding - Every employee must provide an employer with a signed withholding exemption certificate (Form W-4) on or before the date of employment. The employer must then submit Form W-4 to the IRS. For specific information, read the IRS' Employer's Tax Guide.
Federal Wage and Tax Statement - Every year, employers must report to the federal government wages paid and taxes withheld for each employee. This report is filed using Form W-2, wage, and tax statement. Employers must complete a W-2 form for each employee to who they pay a salary, wage, or other compensation.
Employers must send Copy A of their W-2 forms to the Social Security Administration by the last day of February to report wages and taxes of their employees for the previous calendar year. In addition, employers should send copies of W-2 forms to their employees by Jan. 31 of the year following the reporting period.
State Taxes - Depending on the state where your employees are located, you may be required to withhold state income taxes. Visit the state and local tax page for more information.
Step 3. Employee Eligibility Verification
Federal law requires employers to verify an employee's eligibility to work in the United States. Within three days of hire, employers must complete Form I-9, employment eligibility verification, which requires employers to examine documents to confirm the employee's citizenship or eligibility to work in the U.S. Employers can only request documentation specified on the I-9 form.
Employers do not need to submit the I-9 form with the federal government but are required to keep them on file for three years after the date of hire or one year after the date of the employee's termination, whichever is later.
Employers can use information taken from Form I-9 to electronically verify the employment eligibility of newly hired employees by registering with E-Verify.
Step 4. Register with Your State's New Hire Reporting Program
All employers are required to report newly hired and re-hired employees to a state directory within 20 days of their hire or rehire date. Visit the New Hires Reporting Requirements page to learn more and find links to your state's New Hire Reporting System.
Step 5. Obtain Workers' Compensation Insurance
All businesses with employees are required to carry workers' compensation insurance coverage through a commercial carrier, on a self-insured basis, or through their state’s Workers' Compensation Insurance program.
Step 6. Post Required Notices
Employers are required to display certain posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. Visit the Workplace Posters page for specific federal and state posters you'll need for your business.
Step 7. File Your Taxes
Generally, employers who pay wages subject to income tax withholding, Social Security, and Medicare taxes must file IRS Form 941, Employer's Quarterly Federal Tax Return. For more information, visit IRS.gov. New and existing employers should consult the IRS Employer's Tax Guide to understand all their federal tax filing requirements. Visit the state and local tax page for specific tax filing requirements for employers.
Step 8. Get Organized and Keep Yourself Informed
Being a good employer doesn't stop with fulfilling your various tax and reporting obligations. Maintaining a healthy and fair workplace, providing benefits, and keeping employees informed about your company's policies are key to your business' success.
Independent contractors and employees are very different. Understanding the differences will help you decide what your first hiring move will be and affect how you withhold a variety of taxes and avoid costly legal consequences.
What’s the Difference?
An Independent Contractor:
- Operates under a business name
- Has his/her own employees
- Maintains a separate business checking account
- Advertises his/her business' services
- Invoices for work completed
- Has more than one client
- Has own tools and sets own hours
- Keeps business records
- Performs duties dictated or controlled by others
- Is given training for work to be done
- Works for only one employer
Many small businesses rely on independent contractors for their staffing needs. There are many benefits to using contractors over hiring employees:
- Savings in labor costs
- Reduced liability
- Flexibility in hiring and firing
Why Does It Matter?
Misclassification of an individual as an independent contractor may have several costly legal consequences.
If your independent contractor is discovered to meet the legal definition of an employee, you may be required to:
- Reimburse them for wages you should've paid them under the Fair Labor Standards Act, including overtime and minimum wage
- Payback taxes and penalties for federal and state income taxes, Social Security, Medicare, and unemployment
- Pay any misclassified injured employees workers' compensation benefits
- Provide employee benefits, including health insurance, retirement, etc.
Visit the IRS Independent Contractor or Employee guide to learn about the tax implications of either scenario, download and fill out a form to have the IRS officially determine your workers’ status, and find other related resources.
There is no single test for determining if an individual is an independent contractor or an employee under the Fair Labor Standards Act. However, the following guidelines should be considered:
- The extent to which the services rendered are an integral part of the principal business
- The permanence of the relationship
- The amount of the alleged contractor's investment in facilities and equipment
- The nature and degree of control by the principal
- The alleged contractor's opportunities for profit and loss
- The amount of initiative, judgment, or foresight in open market competition with others that are required for the success of the claimed independent contractor
- The degree of independent business organization and operation
Whether a person is an independent contractor or an employee generally depends on the amount of control exercised by the employer over the work being done. Read Equal Employment Opportunity Laws - Who's Covered? for more information on how to determine whether a person is an independent contractor or an employee, and which are covered under federal laws.
When you're hiring employees, you might need more information on a candidate to make an informed decision. The following list includes the types of information that employers often consult as part of a pre-employment check, and the laws governing access and uses for making hiring decisions.
Under the Fair Credit Reporting Act (FCRA), businesses must obtain an employee's written consent before seeking an employee's credit report. If you decide not to hire or promote someone based on information in the credit report, you must provide a copy of the report and let the applicant know of his or her right to challenge the report under the FCRA. Visit the Federal Trade Commission Bureau of Consumer Protection’s website for more information.
To what extent a private employer may consider an applicant's criminal history in making hiring decisions varies from state to state. Because of this variation, you should consult with a lawyer or do further legal research on the laws of your state before exploring whether or not an applicant has a criminal past.
For Federal Bureau of Investigation (FBI) checks, consult these resources:
- FBI Services for Businesses
- FBI Criminal History Checks for Employment and Licensing
- FBI Checks on Employees of Banks and Related Entities
Lie Detector Tests
The Employee Polygraph Protection Act prohibits most private employers from using lie detector tests, either for pre-employment screening or during employment. The law includes a list of exceptions that apply to businesses that provide armored car services, alarm or guard services, or those that manufacture, distribute, or dispense pharmaceuticals.
Even though there is no federal law specifically prohibiting you from using a written honesty test on job applicants, these tests frequently violate federal and state laws that protect against discrimination and violations of privacy.
Under the Americans with Disabilities Act, employers cannot discriminate based on a physical or mental impairment or request an employee's medical records. Businesses can, however, inquire about an applicant's ability to perform specific job duties. Some states also have stronger laws protecting the confidentiality of medical records.
Bankruptcies are a matter of public record and may appear on an individual's credit report. The Federal Bankruptcy Act prohibits employers from discriminating against applicants because they have filed for bankruptcy.
Military service records may be released only under limited circumstances, and consent is generally required. The military may, however, disclose name, rank, salary, duty assignments, awards, and duty status without the service member's consent.
Under the Family Educational Rights and Privacy Act and similar state laws, educational records such as transcripts, recommendations, and financial information are confidential and will not be released by the school without a student's consent.
Workers' Compensation Records
Workers' compensation appeals are a matter of public record. Information from a workers' compensation appeal may be used in a hiring decision if the employer can show the applicant's injury might interfere with his ability to perform required duties.
An employee handbook is an important communication tool between you and your employees. A well-written handbook sets forth your expectations for your employees and describes what they can expect from your company. It also should describe your legal obligations as an employer and your employees' rights. This guide will help you write an employee handbook, which typically includes the following topics:
- Non-disclosure agreements (NDAs) and conflict of interest statements
- Anti-discrimination policies
- Workers' compensation
- Work schedules
- Standards of conduct
- General employment information
Visit the following pages for more information:
- Employment and labor laws
- Foreign workers, immigration and employee eligibility
- Performing pre-employment background checks
- Terminating employees
- Safety and security
- The workplace safety and health guide provide information on your legal requirements as an employer.
- Computers and technology
- Media relations
- Employee benefits
- Leave policies