So, you’re starting to think about hiring your first employee – how exciting! Adding new members injects fresh energy to the workplace, creates new friendships, and it’s a great opportunity for pulling pranks.

But, without the right preparations, hiring can be intimidating. After all, you want to make sure your new hire, the company management, and the government are all happy.

Here are the essentials you’ll need to know before adding employees to your payroll.

Get your employer identification number (EIN)

Before starting payroll, your business needs to obtain federal and state EINs. Your payroll provider is going to use these numbers to file your payroll tax returns for you. It’s pretty easy. You can apply for a federal EIN on the IRS website; then visit your state’s website to get your state identification numbers.

Decide if they are an employee or contractor

It’s important to classify workers correctly, as it affects their method of pay, tax withholdings, and employer-side taxes. Additionally, the IRS keeps a close eye on employee classifications to make sure employers don’t avoid payroll taxes.

What’s the difference?

Employees need to be on regular payroll

  • Pay them on a regular basis (e.g. bi-weekly or semi-monthly)
  • Calculate and withhold payroll taxes with every paycheck (e.g. Social Security, Federal Income Tax)
  • Pay employer-side payroll taxes (e.g. Federal Unemployment Tax)
  • Report payroll tax withholdings and payments on a quarterly basis
  • File W-2s at the end of the year

Independent contractors are not on regular payroll

  • Pay them according to their contract (e.g. when they finish their project)
  • Give them a 1099 form by the end of the year to enable them to report their personal taxes

How do you classify your new employee?

If you answer ‘yes’ for any of the following questions, chances are they are an employee:

  • Do you determine the working hours for the individual?
  • Does the individual work in the company office?
  • Do you provide the individual with work tools?
  • Do you prevent the person from working in another place during the employment period?

Choose a payroll provider

This is the fun part! With a good, modern payroll service you can onboard your company and new employee in a matter of minutes, completely online. Here are five things to look for in your new payroll provider:

  1. Convenience: Can you setup payroll from any device in just a few minutes? Payroll shouldn’t be a hassle and you should be able to do it on your own time.
  2. Setup: Moving to a more advanced paperless system shouldn’t require extensive training or hours of support to set up.
  3. Cost: Do you know what’s included in the monthly fee? Add-ons, if existent, should be limited to very rare occasions.
  4. Service Options: Full-service payroll options include direct deposit, payroll reporting, payment and filing of employment-related taxes, vacation and sick day tracking, and more.
  5. Partners and Integration: Payroll providers that seamlessly integrate with HR and accounting tools means you’ll spend less time running your back office and more time building your business.

Find a workers’ comp provider

Once you hire your first employee, chances are you’re legally required to have workers’ compensation insurance.

It’s a policy you’ll need to take out as an employer to protect your employees if they’re injured on the job. A lot of factors go into the pricing of a policy, so it’s important you find a trustworthy and reputable agent who can guide you through the process.

Congratulations! You’re now ready to make your first hire. Go forth and find the best person for your team, make them an offer, and stay tuned for our next post on what to do on day one.

Tomer London Tomer is the co-founder and Chief Product Officer of Gusto. He is responsible for the development and execution of the product vision — reimagining how modern payroll, benefits, and compliance should operate.
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