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Hiring Tips: Before You Hire your First Payroll Employee

Hiring Tips: Before You Hire your First Payroll Employee

For many solo entrepreneurs, moving from seasonal workers to putting your first employee on payroll becomes a matter of necessity.

“I became a little overwhelmed with the client load,” says Bill Douglass, principal of Gotham Communications in Fairfield, Conn. Douglass hired his first employee because “I needed someone to handle administrative details and research.”

After that straightforward decision comes the grunt work -- the unfamiliar and occasionally scary financial and legal obligations of the employer, including a legal hiring process.

But take heart; you can handle it if you plan ahead, take it one step at a time, get good advice, and render unto staffing services your small business staffing needs what you're better off not doing yourself.  Here are some key factors to keep in mind.

Employee Payroll Services
If you've decided to hire a bona fide employee, Uncle Sam gives you no grace period for one of your new roles: proxy tax collector. “The minute you determine that a worker is W-2, you must begin withholding taxes,” says Kevin Mason, a vice president at MassPay Payroll Services, a Beverly, Mass., provider of payroll and other services for small and midsized businesses.

To make that happen, you've got to have the new employee fill out a W-4, and while you're at it, an I-9 to prove legal status to work. You're required to do the following:

  • Pay for unemployment and worker's compensation insurance
  • Make deposits
  • Send filings to Federal and possibly state and local tax authorities

Before you panic, take a deep breath and heed this tip: “I highly recommend that new employers hire a competent payroll service,” says Scott Berger, a tax principal with accounting firm Kaufman Rossin & Co. in Boca Raton, Fla. “It’s much more cost-effective to have a service handle tax deposit and filing requirements.”

Having just one employee can require your business to file annual or quarterly tax returns with half a dozen authorities and penalties for violations can be steep.

A payroll service will also help you comply with wage-and-hour laws and the like. “People often don’t contemplate paying overtime at time-and-a-half,” says Mason.

Ask your payroll service or your accountant to project how much paycheck no. 1 and attendant taxes will cost you. “Sometimes new employers are surprised how much they’re paying in the first payroll,” says Mason.

And, although you’re probably confident in your first hires, don't bet your business on their integrity or even their bookkeeping. “The entrepreneur needs to keep absolute control of the checkbook and check it every day,” says Edward Hess, a professor at the University of Virginia’s Darden Graduate School of Business.

Legal Hiring: Heeding Employment Laws
Do you think you needn't worry about compliance with laws designed to protect employees until you have 15 or 20 employees? Not so fast. “Laws like the Fair Labor Standards Act and OSHA regulations are in effect even with just one employee,” says Melanie Berkowitz former employment lawyer and principal at The GhostWriters, a legal and business writing company.

And as with taxes, it's not just the Feds who you must heed. “State and municipal laws can go off in many different directions,” says Berkowitz. To take two examples out of hundreds: San Francisco requires employers to provide paid sick leave; Philadelphia levies its own wage tax.

Does your business have trade secrets or other intellectual property to protect? Speak with an attorney about drafting an employment contract. Also consider obtaining professional advice about whether to incorporate or form a legal partnership if your business hasn't done so already.

Set aside a day to research legal and financial issues, especially on the web sites of relevant government agencies. Below are a few key sites. Be sure you check the sites for your municipality, county, state and any other jurisdictions, as well as other Federal agencies that may be pertinent.

Brief yourself first with the above resources so you avoid ringing up so many billable hours with your advisors. “If you’re getting information straight from the government, then you’ll know you’re in compliance,” says Berkowitz.

Small Business Human Resources
Your next hat: director of human resources. Want to have a better hiring process than your competitors? Start by writing a job description and formulating interview questions to ask that you run by an HR expert to ensure that you have a firm grasp of legal hiring practices.

Adopt an employee manual, adapt it to your business and ask your top candidates to read it and ask questions before discussing a job offer. You can start with a boilerplate manual and change as little or as much as you'd like.

It's never too early to consider some protection against liability for negligent hiring. Basic background checks can be inexpensive these days; most businesses should check candidates as a final step before extending a job offer.

As a new employer, you'll have much more to think about. But this is a good start. “It may seem overwhelming if you’re only hiring one or two people,” says Berkowitz. “But once you get these policies and processes in place, they’ll really only need to be tweaked going forward.”

Finally, expect to be surprised by what's involved in becoming an employer.  That includes cultivating employee engagement  and thinking about your management style.