Starting Your Own Business Step 2 - Hiring Employees
7/05
This is the second article of a four-part series in this column about starting your own business. After you have formulated your business plan, decided on your business entity, and perhaps, have even had a successful start-up, there will come a time when you have to consider hiring employees.
The two basic types of employees you can hire are regular employees or independent contractors. Regular employees are either full or part-time employees who work for you and for whom you pay the employer’s share of the federal and state payroll taxes and for whom you collect the employee’s share of these same taxes. As an employer, you are responsible for paying your employees’ share of Medicaid, Social Security taxes and unemployment taxes. This adds about 7.5% to the cost of hiring each employee. An employer is also responsible for withholding the employee’s share of income, medicare and social security taxes from each of the employee’s paychecks and making sure these withheld amounts are paid on a monthly and quarterly basis. Larger companies have bookkeeping departments handle this function or use the outside services of an accountant or payroll company. For small start-ups, the payroll functions can easily be handled with computer programs such as Quick Books Pro.
With a regular employee, at the end of the year you issue the employee IRS Form W-2 which reports the amount of income you paid the employee. An independent contractor that works for you receives different tax treatment. A good example of an independent contract is a bookkeeper who handles your payroll and accounting functions. This person may come to your office or store every week but does much of the work outside of your office or store on their own time. They may handle this function for several other businesses and not just yours. You may pay them a set salary; however, with an independent contractor, you are not required to withhold taxes or pay the employer’s share of the independent contractor’s taxes. This saves the employer about 7.5% of the cost of hiring for this job and puts the obligation of paying taxes on the independent contractor. While the independent contractor then has to pay self-employment taxes in addition to regular income taxes, the independent contractor can also write off many business expenses to obtain business deductions on their tax returns. Independent contractors receive IRS Form 1099 which reports the amount of income you paid. The independent contractor relationship is carefully scrutinized by the IRS. A bookkeeper or computer consultant who performs job duties for you on a regular basis on their own schedule would probably pass muster, a secretary or office assistant who is required by you to work specific days and hours would not. You cannot save payroll expenses by calling someone an independent contractor unless they are truly independent.
As a small start-up business looking to hire employees, you will find yourself performing the functions of a human resources department at a large company. You will have to advertise for the job, interview job candidates, discuss salary and benefits and ultimately hire someone. You must proceed carefully with the interview process and generally steer clear of questions pertaining to religion, race, age, family planning, etc. You should clearly define the parameters of the job including duties, hours, salary, vacation time, sick days and benefits. You should consult with an attorney regarding whether or not it may be a good idea to prepare an Employee Handbook which outlines the various duties of your employees.