As an employer, there are a good number of things you need to do when you hire a new employee.
Employer Identification Number (EIN)
Long before you hire anyone, you’ll need to obtain an employer identification number. You can register on the IRS website and you will be issued an EIN instantaneously. The EIN is also known as your tax identification number (TIN). You will definitely want to obtain this number as soon as you acquire your address and finalize your entity status.
Even if you’re a sole proprietor, you will probably want to get an EIN because you will otherwise need to use your social security number for all your practice’s administrative and financial needs. You will also need your EIN to apply for Medicare and credential with private health insurers. For a good number of private insurances, you’ll be using your EIN to submit claims. Pretty much, you’ll need your EIN for everything, so get it right after you incorporate.
State Employer Number
In California, as with probably all other states, you will also need a state employer registration number. For Californians, you can also register online. You’ll need to do so within 15 days after paying over $100 in wages to an employee. I still haven’t registered yet. I’ll probably do it this week. With this account number, you’ll be able to report new hires and to pay state payroll taxes.
You’ll need to have each new employee complete a W-4 (Federal Income Tax Withholding) and an I-9 (Employee Eligibility Verification). Google the forms and print them off the internet.
On the W-4, your employee will indicate the total number of allowances he or she will claim. This number will determine how much federal income you’ll need to withhold. It looks like the IRS no longer requires employers to submit this form to the IRS by the way.
The I-9 verifies an employee’s eligibility to work in the United States. You’ll need to have your new employee complete this form within 3 days of hiring. To complete the I-9, you’ll need to request to see certain acceptable forms of documentation that verifies the information your employee provided. You can also use E-Verify to verify eligibility online.
You’ll also need post required notices at your practice where employees can easily see them. You can use Poster Advisor to figure out what you need to post, and you can print them out for free by going to the correct websites. I think this site includes state requirements. You could also buy a poster on eBay for about $10.
Workers Compensation Insurance
I think most states require employers to carry workers compensation insurance for their employees, which covers lost wages and medical benefits for on the job injuries and illnesses. In exchange, employees forfeit the right to sue the employer for negligence or pain and suffering. You have to purchase these policies through commercial carriers. The rate depends on the salary and the type of work.
As the owner of your practice, you’re not required to carry workers compensation for yourself, but you can if you want to do so (Howie’s note: this depends on if you elect S corp taxation which requires you to pay yourself wages, some states require S corp owners to be covered under workman’s comp, others do not).
I went through the insurance agent that got me my business owners policy. I’ll be paying $1.27 per $100 in wages plus $20 a month in taxes and surcharges for a $1 million worth of coverage per employee. This was the lowest quote I got.
(Note: workman’s comp is based on wages paid and your company will do a audit once a year and either refund you if you overpaid or send a bill if you underpaid. Many in our google group use The Hartford for insurance, my business and workman’s comp costs just under $2000 per year).
According to my calculations, payroll tax, which includes federal and state, will cost me another 13.95% on top of the wages I will pay.
1. Federal Insurance Contributions Tax (FICA)
FICA includes Social Security and Medicare tax. In 2010, both employees and employers were each responsible for paying 6.2% of gross wages up to $106,800 to Social Security and 1.45% to Medicare with no cap. In 2011, employees will pay 5.65% for FICA, but employers will continue to pay 7.65% (6.2%+1.45%).
2. Unemployment Insurance Tax
Federal Unemployment Insurance Tax (FUTA) is currently 6.2% and California’s State Unemployment Insurance Tax (SUTA) is 3.4% for the first $7,000 of yearly wages. Fortunately (relatively speaking), we will be able to deduct up to 5.4% in FUTA from SUTA. That means that I’ll be paying 6.2% for both federal and state unemployment insurance.
Howie’s note: your unemployment tax rate is adjusted based on your claims history, so document all employee disciplinary actions carefully. We will have more on this later.
3. Employee Training Tax (ETT)
I have no idea what this one is, but I know it’s 0.1% of wages. I think ETT is specific to California.
4. State Disability Insurance (SDI)
I’m not sure if this is California specific also, but this tax comes out of your employees’ wages at 1.2%, so whatever.
Here’s what blows however. As an owner, regardless of your entity status, you’ll need to pay FICA taxes on both ends, as an employee and as an employer, or the entire 13.3% for 2011. If you’re a sole proprietor, you’re going to pay it all as a self-employment tax, and as a corporation, you’ll pay one portion as an “employee” and another as the “employer.” Now, as an S corporation startup, I’m won’t be paying myself any wages until my practice becomes profitable. Hence, I’ll be able to avoid paying these taxes for a while (hopefully not too long).
In terms of administering payroll, I’m going to try to do it myself using Quickbooks Payroll, which costs about $400 per year. (Note: it is very easy to do, takes me about 10-15 minutes per pay period and I’d have to calculate hours to send to a payroll company anyway, why not enter it myself. Every month I use quickbooks to pay state and federal payroll taxes, which is very straightforward. Each quarter I spend another 10 minutes or so to do the payroll tax forms generated by quick books which are sent electronically to the right agency). I could outsource my payroll to an accountant or a payroll service, but for one employee, I’d rather save $50 a month, and risk making some mistakes here and there. (Howie’s note: if you forget to submit a quarterly tax form, usually the state or IRS will send you a letter to submit it. Once instance I entered the wrong percent for my unemployment tax, and had to pay about $10 in interest and late fee penalties).
I’m eventually going to provide health insurance. There definitely are a few options out there. I’m considering a health savings account (HSA) tied to a high deductible plan. I’m planning to offer it after a few months of employment. I want to try to pay for the entire premium and maybe also make some contributions to the HSA itself. We’ll see.
I’m not sure how complete this information is, but this is the checklist I have so far. If I discover some other requirement, I’ll let you know.
New hire form
Google your state. In Arizona you must use this form to let the state know of your new hire. I think it’s used to prevent unemployment insurance and welfare fraud as well as for tax purposes.
DISCLAIMER: Not legal or tax advice. I just learned all this stuff just recently myself through Google. Take it for what it’s worth. Here’s a good link: https://www.thebalancesmb.com/forms-you-must-have-new-employees-complete-at-hire-398826