Expanding Your Circle:
Hiring employees

Your business has grown, and it's more than you can handle on your own. You've looked at the option of independent contractors and decided that's not the answer. Your next option — hire an employee. But what does this involve? What are the reporting requirements? What regulations must you meet?

As a home-based business owner, start by looking at the regulations established by your own city or town. Many home occupation guidelines state that "no person shall be engaged in such home occupation other than a person occupying such dwelling unit as his/her residence." Such restrictions would allow you to hire a spouse or someone else who resides within your home, but it would not allow you to hire others to come into your home to work for you in your business.

Master the ground rules

If you make it past the hurdle allowing you to have employees, your next step is to obtain a Employer Identification Number (EIN). You may already have a EIN if your business is established as a partnership or corporation. No matter what your business format, you are required to have a EIN if you have any employees. More information and a link to an online application form is available through the IRS at www.irs.gov/businesses/small/article/0,,id=97860,00.html.

To begin the actual employment process, you should verify that each potential employee is legally eligible to work in the United States. All new employees must have "proof of employment eligibility" such as a Social Security card, military registration card or immigrant "green card." Employers should record this information on an I-9 Employment Eligibility Verification Form, available from the U.S. Citizenship and Immigration Services Web site at www.uscis.gov/files/form/i-9.pdf.

You're probably getting the picture by now — hiring an employee will help you get more work done, but it will also create a good deal more paperwork too. As an employer, you must do the following:

• Keep separate payroll records for each employee.
  
  
• Withhold federal income, Social Security and Medicare taxes.
  
  
• Withhold state income and possibly other state taxes.
  
  
• Prepare quarterly and year-end payroll tax returns.
  
  
• Pay employer's portion of Social Security and Medicare taxes and unemployment taxes.
  
  
• Possibly purchase workers' compensation insurance.
  
  
• Prepare year-end earnings statements for each employee.
  

It is estimated that it will cost you an additional 30 percent to cover employer's taxes, worker's compensation insurance and paperwork alone. So, for example, if you pay an employee $9.00 per hour, it actually costs you about $12 per hour.

Start the payroll process by obtaining a copy of "Circular E - Employer's Tax Guide" from the IRS. "Circular E" contains federal tax withholding and Social Security tax requirements for employers, as well as up-to-date withholding tables for you to use to determine how much federal income tax and Social Security tax is to be withheld from each employee's paycheck.

To know how much income tax to withhold, you should have a Form W-4, Employee's Withholding Allowance, indicating marital status and the number of exemptions claimed on file for each employee.

Checklist for compliance

Following is a summary list of the basic procedures most employers must follow:

• The IRS requires that you withhold income tax from each employee's paycheck. The amount to be withheld can be calculated from the tables in "Circular E."
  
  
• Employers must also withhold Social Security and Medicare tax.
  
  
• You, as an employer, are liable for the employer's portion of Social Security and Medicare taxes in addition to the employee's contribution.
  
  
• Federal Payroll Tax Returns (Form #941) are due quarterly on April 30 (for January, February and March); July 31 (for April, May and June); October 31 (for July, August and September) and January 31 (for October, November and December).
  As long as the total payroll taxes due in any quarter are less than $1,000, the entire amount can be remitted with the return. However, if at the end of any month within the quarter total taxes due are $1,000 or more, the employer must deposit the full amount to an authorized bank by the end of the 15th day of the next month.
  
  
• Annually, you must provide each employee a year-end W-2 form by January 31.
  
  
• As an employer, you are subject to Federal Unemployment Tax (FUTA) if you paid wages of $1,500 or more during any one calendar quarter or had one or more employee for some portion of at least one day during each of 20 different calendar weeks.
  
  
• Every employer must keep a payroll and expenditure ledger showing details of every check for every employee. These ledgers should be permanent. Employees can come back to you years later with Social Security retirement issues.
  
  
• Employers must also comply with state requirements, which might include obtaining a state employer's identification number (EIN), withholding and submitting state income tax, and purchasing unemployment insurance and worker's compensation insurance. (Since rules for unemployment and workers' compensation insurance vary, contact your state business assistance center to determine requirements pertaining to your business: in Missouri, visit the Missouri Business Portal or phone 888-751-2863; in Kansas, 753-296-5298.)

Does it sound like you need to hire someone to take care of the paperwork involved with hiring someone? Not necessarily. Most small business owners find that outsourcing payroll tasks to a CPA or a payroll service is economical, especially when it frees them up to conduct income-producing business.

- Barbara Cunningham, former business specialist, SBTDC