Preparing to Hire
Thinking of staffing up? Here's how to get startedYou have several steps and decisions to make before you start looking for employees. This information will help you sort through the process: from applying for an Employer Identification Number to choosing a payroll option.
Classify workers correctly: independent contractors vs. employees
What's the difference between an independent contractor and an employee? It's important to classify workers correctly.
For payroll tax purposes, workers are generally classified as employees or independent contractors. Whether a worker is an employee or an independent contractor depends on the amount of control the employer has over the worker.
What's the difference between an employee and an independent contractor? A worker's classification has certain payroll tax implications. Basically for employees you pay payroll taxes (like Social Security), but for contractors you don't have to. A few simple questions can help you determine whether the person you're hiring is an employee (and will need a tax form W-2) or an independent contractor (and will need a tax form 1099).
If you answered "yes" to any of the questions above, odds are you're hiring a W-2 employee, and not a 1099 independent contractor. For more detailed information on how to classify a new hire, check out the IRS's Publication 15-A.
While it's tempting to pay someone as an independent contractor since it's less expensive, it could get you into trouble later. In fact, the IRS has started cracking down on employers who classify their workers incorrectly. Read the article at the Wall Street Journal.
Get your employer identification number
In order to do business, you will need to get a number that identifies your business to the government.
There are a few identification numbers you typically must have as an employer — one from the IRS called an Employer Identification Number (EIN), one from your state revenue department, and one from your state employment department—and you need to check with local jurisdictions as well.
What is payroll? As an employer, you have specific payroll responsibilities that are required by federal, state or local agencies.
Payroll can be complicated. But there are essentially 3 main jobs for employers in doing payroll:
To learn more about payroll, check out this Payroll 101 Guide
Choose a payroll method
When it comes to running payroll, we make it easy for you to choose the option that's right for your business.
There are 3 basic ways to do your payroll —by yourself, by yourself with the help of software, or by outsourcing to a third-party service. Use the chart below to figure out which method is right for you.
Find out how much hiring an employee really costs
How much does it cost to hire an employee? It's more than just paying a salary.
For every employee you hire, you are responsible not only for each employee's compensation but also for each employee's associated payroll taxes.
Let's say you hired a W-2 employee named Nick, and you wanted to pay Nick $10 per hour. On top of all the deductions taken from Nick's paycheck, you, as the employer, will also have to pay payroll taxes and other expenses (also known as liabilities).
The table below gives you an idea of what those payments might look like:
So, for every $10 you pay Nick, it will actually cost you about $11-12 dollars per hour to employ him. Keep in mind that this is roughly how much it will cost before offering any employee benefits, providing any work supplies (like a computer) or spending time training him. As a general rule of thumb, depending on your state and local laws, payroll taxes can add 15% or more to the total cost of hiring an employee.
So easy, you can confidently focus on running your business
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