Your business may be raring to hire its first employee, but have you taken all the necessary steps to set yourself up as a lawful employer?
Beyond the sheer decision of whether to add new employees to your business, there are several steps required by the federal and state government that must be taken before you can hire someone.
Here’s a look at 10 legal requirements every employer must do before taking on a new hire:
1. Apply for an EIN.
Every employer—even if you just employ one person—is required to have a federal Employer Identification Number (EIN) that serves as the entity’s tax ID. The Internal Revenue Service (IRS) offers several ways to apply: The fastest and preferred way to file is online using the Internet application, which allows you to receive your EIN immediately.
But you can also apply by phone, standard mail or fax. All you need to apply is the taxpayer ID number, such as the Social Security number, of the principal officer or owner of the company and basic information about the company, such as whether and how it’s incorporated.
2. Register with your state’s unemployment insurance office.
For every employee you hire, including the first one, you will need to pay unemployment taxes to your state. This generally requires registering with the state office that oversees unemployment insurance and then reporting quarterly wage details of each employee along with making the required payments into the fund. The taxes can typically be paid electronically.
Each state has its own rules and deadlines for payments, so it’s important to familiarize yourself with your state’s rules. All states now have online resources to inform employers on their requirements regarding unemployment insurance. Do a Google search for “unemployment insurance,” “employers” and your state’s name to find your state’s website with that information.
3. Verify each prospective hire’s eligibility to work.
Before you hire someone, you need to verify that they are who they say they are, and that they are legally able to work inside in the United States. This is done through filling out the U.S. Citizenship and Immigration Services’ Form I-9 with the new worker after they’ve accepted the job offer.
Along with filling out the form, the new employee will have to provide an original document (such as a U.S. passport) or documents (such as a state driver’s license and a Social Security card) that prove their identity and legal status to work in the U.S. You’ll need to examine the documents for authenticity (and perhaps photocopy them). A Form I-9 must be completed within three days of a worker’s first day on the job.
You don’t need to file Form I-9s with USCIS, but you will need to have them on file for three years after hire (or one year after employment ends, whatever is later). It is best to keep all your Form I-9s in a file or binder that only a few people in human resources are able to access, according to the Society for Human Resource Management. You’ll need to be able to produce I-9s should Immigration and Customs Enforcement come calling.
4. Look into your state’s workers’ compensation insurance rules—and get coverage.
Most states require employers to carry workers’ compensation coverage in case an employee gets injured on the job, though some exempt very small employers. It’s important to find out your state’s particular rules and get the required coverage. This database gives a brief summary of each state’s worker’s compensation rules along with links to the applicable state website where you can find more detailed information.
5. Report new employees to state registry.
You will want to keep employee records—such as full names, contact information and Social Security number—for your own administrative purposes. But you’re also required by law to collect that information.
Federal law requires employers to report basic information on new employees within 20 days of hire to the state in which the employee will work. (Some states have even tighter deadlines.) This information is put into the National Directory of New Hires that is used to locate and withhold income from people who owe child support.
The information required includes the new employee’s full name, address and Social Security, your EIN and address and the employee’s date of hire. Most employers collect this information by using an employee information form that all new hires must fill out. (Read eight tips for creating an employee information form.)
6. Set up a payroll and tax withholding system.
You’ll need to withhold federal and state income taxes, as well as federal Social Security and Medicare payroll taxes, from each employee’s paycheck. A reputable third-party payroll provider makes all of this easy by providing you with a solution in which you can simply type each employee’s compensation, employee benefit deduction and tax withholding information into the system and it will automatically create regular paychecks (paper or electronic) for you while deducting the correct amount for each type of tax withholding for each pay period.
Many large payroll providers also bundle in extra services, such as human resources. Make sure to thoroughly review your options and find a payroll provider that meets all your needs at the right price. You’ll want to find a payroll provider that also has strong customer service and support in case you encounter any problems or have questions.
7. Have all employees fill out form W-4.
Before you can start paying an employee, you need to know how many “allowances” he or she wants withheld for taxes. The more allowances an employee decides to take, the less tax that will be withheld from their paycheck.
Again, payroll providers typically provide a W-4 form and make it easy to enter the information into the system. You just have to ensure every new hire fills it out and submits it. You can also download the W-4 form from IRS.gov.
8. Get and post employee notices.
There are a number of federal labor laws that require employers to post their requirements in conspicuous places in the workplace so that workers understand their rights under the law. For example, you’ll likely need to display a poster about the Fair Labor Standards Act and its rules establishing a minimum wage, overtime pay rules, child labor restrictions, nursing mother protections and more.
What you’re required to post depends on such factors as the size and nature of your business, which state you’re in, whether you have federal contracts or employee disabled or foreign workers, and more.
Also note that individual states may have their own poster display requirements. So it makes sense to also contact your state’s labor department for guidance. The U.S. Department of Labor keeps an online contact list of state labor offices.
9. Comply with OSHA rules.
Employing workers also means that you must comply with the federal Occupational Safety and Health Administration (OSHA) and its rules, which go back to the Occupational Safety and Health Act of 1970.
OSHA rules cover a variety of workplace conditions. Think having safe tools and equipment, safe use and maintenance of the equipment, safe handling of hazardous chemicals and much more.
You’ll need to use codes, posters, labels and signs to warn your workers about dangers, as well as provide them necessary training and medical examinations. The OSHA poster, or its state-level equivalent, must be displayed in a prominent workplace location.
10. Establish any necessary employee benefits.
Small businesses with fewer than 50 full-time-equivalent (FTE) employees are exempt from the Affordable Care Act (ACA) mandate that requires larger businesses to carry health insurance for their employees or pay an annual penalty. That said, the federal government offers incentives for small employers who do offer insurance.
Employers with fewer than 50 FTE employees can get their employees insurance through the Small Business Health Options Program (SHOP) exchanges. Those with fewer than 25 FTE employees can qualify for tax credits worth up to 50% the cost of the health insurance premium.
Depending on your industry and market, offering health insurance to employees may be a smart, competitive move even if you’re not required by law to offer it. Several states are also in the process of enacting regulations that will require employers who don’t offer their employees a standard retirement plan—such as a 401(k) or pension—a state-sponsored retirement plan.
California, for example, is phasing in rules requiring employers with five or more employees to either automatically make IRA payroll deductions for each employee through its CalSavers Program or offer an employer-sponsored retirement plan.
Covering Your Bases
Though these are the main steps employers must take that are required by federal or state law, there are other smart things to do before you start employing people. These include creating an employee handbook, so there are no questions about your rules and protocols for employees (even your first hire), and creating a personnel file for every employee.
While keeping personnel files is not technically required by aw, it protects you if you ever get sued by an employee. It also makes it easy for you to quickly find any relevant information about an employee, including their basic information, work and performance history, and benefits enrollment information, and workplace injury history.
Medical records, any disciplinary actions taken against the employee, and I-9 forms should be kept outside the personnel file. (Nolo offers tips on what should—and shouldn’t—go into an employee’s personnel file.) Once you create personnel files, it’s important to have an organized and consistent system for maintaining those files. For example, you’ll need to limit who can access the files to just supervisors of the employee. States also have various rules for how much access employers must give employees to their personnel files, if requested.
Before you hire, it’s essential to thoroughly review all the required steps you need to ensure you’re not exposing yourself to legal problems. The payroll provider you choose to go with may be able to help you with several of the steps, depending on the level of service you choose.
Once you get the right processes and procedures in place, adding new employees should be much easier and faster. It’s just getting set up in the first place that takes time.
This is all very helpful information. We do not have any employees yet and have just hired contractors. Do any of these apply if they are a contractor and NOT an employee?
None of the items in the article apply to independent contractors. But be aware that worker classification rules – which impact independent contractors – are soon to be changed by the DOL and that may require you to classify some of your 1099’s as employees.
Regarding Number 5, how does one accomplish this? We have all other points in for our office, but I have never heard of the requirement in Number 5.
This is a state thing and most states require reporting new employees, including part-timers and re-hires. The reason has to do with unemployment and child support. Most states track people to ensure they’re meeting obligations. You should check out your state’s website for more information.
What are the legal ramifications of employee policy’s? Are they considered a binding contract?
That’s a tough one to answer because it really depends on the policy and how it’s implemented. But generally, your company’s policies are your policies and when an employee is hired they are agreeing to abide by those rules.
Every employee is considered an ‘at-will’ employee, meaning you can fire them no matter what for whatever reason. The second you make a guide of rules to follow you forfeit that unless you make it clear that it still stands. Make sure that it’s clear that the policies don’t imply that if they don’t follow them that they will be fired or be marked up as that can lead to them filing a complaint that they followed all the policies, so they were wrongfully fired.
Good information, I hadn’t heard of ‘SHOP’, unfortunately this is NOT a program available all over. When I looked into it, I discovered it’s not available in my area. Sad that a program like this isn’t available in all areas of the country. Another reason to separate health insurance from employment and provide basic health coverage to all citizens.
Thank you for commenting!
Great information. Thank You.