The decision of whether or not to hire employees can be a difficult one. There are a number of critical questions you must answer in making this decision, such as:
- Do you have the skills necessary for the operation of your business or do you need to hire someone with those skills?
- If you need to hire someone with necessary skills, should that individual be an employee of your business or should he or she be an outside contractor?
- If you hire employees, do you have the necessary management procedures in place to ensure that hiring and managing your employees conforms to all necessary government regulations?
- Do the expenditures related to hiring employees (salary or wages, benefits, federal taxes and so on) make sense given the projected financial situation of your business?
- Are you ready to take on the cost and time requirements to file employee taxes with various state and federal agencies?
- Examining these questions and others before you hire employees can help you avoid many potential problems. You also need to understand your legal obligations as an employer. The most important of these obligations are discussed below.
Employees vs. Contractors
Individuals may provide services to your business as either employees or as contractors. Which status an individual has affects your taxes, liability, benefit costs and many other areas of your business. The question of employee vs. contractor is therefore critical, but not simple. There are many different tests the IRS and the California Franchise Tax Board may apply to determine whether an individual is an employee or contractor. Improperly classifying someone whom the IRS considers an employee as a contractor can result in very stiff penalties. If you wish to consider using contractors instead of employees in your business, it is important that you consult with a competent tax advisor prior to making a decision.
Unemployment insurance protects workers who lose their jobs through no fault of their own. The funds used to pay workers who are covered under this type of insurance are accumulated from taxes on the wages of employees during their employment. Both state and federal unemployment taxes are paid by employers. No deductions can be made from an employee's wages to cover these taxes.
Federal Unemployment Insurance (FUTA) is collected by the IRS. When you file your application for a Federal Employer Identification Number (FEIN) with the IRS and indicate you have employees, the IRS will send you a packet of forms.
State Withholding Tax
If you have paid more than $100 in wages to an employee in a given calendar quarter, you are required to withhold taxes for state disability insurance, personal income taxes, unemployment insurance and employment training. You must register for an employer account number. Contact the Employment Development Department of the State of California at EDD for guidelines and information.
Federal Withholding Tax
You are required to withhold income tax, Social Security (FICA), be liable for the employees' portion of Social Security taxes, and pay Federal Unemployment Tax (under certain circumstances). Nonpayment of federal employer taxes can result in audits, penalties, difficulties obtaining bank financing and closure of your business. Information from the IRS is at:
Federal Self-Employment Tax
Everyone must pay Social Security Tax. If you're self-employed, your Social Security contribution is made through the self-employment tax. You will also need to determine how best to report earnings and pay your business taxes. Information from the IRS is at: http://www.irs.gov/businesses/small/article/0,,id=98846,00.html
Workers Compensation Insurance
You are required to carry Worker's Compensation Insurance if you have employees. If an employee is injured on the job, this insurance will cover his or her medical bills, for which you would otherwise be liable. You can obtain a policy from many private insurance companies as well as the State Compensation Insurance Fund. The California Industrial Relations Department site is at: