OK, so many business owners believe they can have individuals work for them, but pay them as independent contractors. Well, to be honest – this is not actually the case.
Most individuals in a business environment should be classified as employees. So now the question becomes, how can you ensure you have all the necessary steps completed to make the transition from independent contractor to employee or if you are looking to hire your first employee, what steps need completed.
I have listed 10 steps that you should follow to ensure all the necessary paperwork and documentation is in place.
1. Obtain an EIN (employer identification number): Before hiring any employees, you need to get an EIN form from the IRS. This is your employer Tax ID or Form SS-4. The EIN is necessary for reporting taxes and other documents to the IRS.
2. Set up Records for withholding taxes: You must keep business tax records for a minimum of four years. This is also helpful so you may monitor the annual progress of your company. You will also need to provide your employees with a W-4 for employee exemptions. A W-2 is required for employers to report to the federal government wages paid and taxes withheld for each employee. And in the state of Indiana, we have state taxes so you will be required to withhold taxes in that category as well.
3. Employee Eligibility Verification (Form I-9): This is a federal law that requires employers to verify an employee’s eligibility to work in the United States. Specific identification documentation is required such as a social security card or driver’s license. Be careful what documentation you request, as documentation not listed on the I-9 may end up subject to a lawsuit.
4. Register with Indiana’s new hire reporting program: The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires all employers to report newly hired and re-hired employees to a state directory.
5. Obtain worker’s compensation insurance: Businesses are required to carry worker’s comp insurance through a commercial insurance provider.
6. Unemployment Insurance Tax Registration: Businesses are required to pay unemployment taxes under specific conditions. You must register your business with the local workforce agency.
7. Obtain Disability Insurance (if required).
8. Post Required Notices: Employers are required by state and federal laws to prominently display certain posters in the workplace that inform employees of their rights and also employer responsibilities.
9. File your taxes: Generally each quarter, a series of taxes are due.
10. Get organized and keep yourself informed: It is recommended to work with a local CPA who specializes in your industry or has a solid reputation in your community. Dealing with employees and taxes is often complicated and overwhelming. It is worth the investment to have peace of mind.
Heather Strohm is the regional director for Indiana State University’s Indiana Small Business Development Center.
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