Welcome to the fifth installment of a six-article series on starting your first business (SY1B). In this series, we cover a range of important topics that will help you get your first business up and running:
- How To Choose Your Business Name
- How To Handle Legal Business Formation
- How To Set Up Your Business Finances
- How To Develop Your Business Operations
- How To Build Your Workforce [You are here.]
- How To Market Your Business
As an entrepreneur and new business owner, you’ll probably be inclined to take on as much work as you can by yourself. But being a one-person army will only get your small business startup so far. Plus, you don’t want to experience burnout and stall your business.
That’s where hiring employees come in. Business growth requires having other human resources to lighten your load. Instead of having to worry about sales, marketing, client work, operations, and so on, you can get help in some (or all) of these areas from employees.
Of course, the choice is up to you in what areas of your business you want your new workforce to handle. Maybe you’re great at client work but fall short in selling—this is common unless you have a background in sales. Perhaps you just need a helping hand around the office. Whatever your scenario, hiring employees can be a great way to get things done more efficiently and start growing.
But before you start posting job ads, keep reading to see what areas you should know about when it comes to building your workforce.
4 Important Workforce Knowledge Areas
1. Understanding the Difference Between Employees & Independent Contractors
Before hiring employees for the first time, you need to understand the difference between an employee and an independent contractor. Why? Depending on your goals, how you run your company, and the type and amount of help you need, an independent contractor may be a more appropriate match.
Now you probably have a solid idea of the term employee—they are employed by an employer that dictates how they perform work. In contrast, an independent contractor is self-employed and delivers work results, but the recipient does not dictate how that work is completed. An employee is part of your business, while an independent contractor can assist your business as a third party.
In general, employees and independent contractors differ in three key areas: control, taxes, and legality. For control, consider these key factors of an employment relationship from Section 2 of the Equal Employment Opportunity Commission’s compliance manual:
- The employer dictates when, where, and how the worker performs the job.
- The employer furnishes the resources necessary to perform work.
- The employer sets working hours and the duration of the job.
- The work performed by the worker is part of the regular business of the employer.
For tax purposes, you will need to withhold the federal, state, and Social Security taxes of your employees; independent contractor taxes aren’t within your purview.
Regarding legality, you’ll be legally required to provide health coverage to employees once you reach the Affordable Care Act’s 50-employee threshold and report to the IRS accordingly. However, independent contractor law frees you from providing non-employees with health insurance and other employee protections such as workers’ compensation, unemployment compensation, and certain liabilities.
Numerous other factors can determine whether a worker is an employee. Still, the above points provide a solid foundation to consider whether an employee or independent contractor is what you need for your business.
2. Offering Employee Benefits
Assuming you do choose to hire employees, you’ll need to consider employee benefits and perks. The importance of employee benefits lies in attracting the right talent to your company and retaining them over the long term.
It’s not enough to just pay a decent wage, as you probably know from your own employment tenure. Employee benefits are often a deciding factor in employment. In fact, 80% of employed adults would choose a job with benefits over a similar position that offered 30% more salary with no benefits.
The reasons to offer employee benefits go beyond attracting and retaining talent (though that’s reason enough by itself). For example, offering health benefits correlates with fewer sick days and overall less absenteeism. Employee benefits and perks also contribute to higher morale. You can even enjoy certain tax advantages with some benefits.
Notably, there are several employee benefits you must provide by law:
- Social security taxes
- Workers’ compensation
- Disability insurance
- Certain leave benefits
- Unemployment insurance
However, to enjoy the advantages of employee benefits, you can offer additional perks:
- Retirement plans (401k or pension)
- Stock options
- Flextime
- Wellness programs
- Corporate memberships
- Tuition reimbursement
Keep in mind that you don’t have to start out offering every perk. Brainstorm what extras you can provide within your budget and business constraints. For example, maybe stock options are out of reach, but flextime is within reason.
3. Following Federal, State, and Local Labor Laws
It’s critical that when hiring employees for your small business, you adhere to labor laws at the federal and state levels. Additionally, there may be local labor laws you should look into from your county or city.
At the federal level, you’ll need to know about:
- Wages and hours
- Workplace safety and health
- Workers’ compensation
- Employee benefits security
- Unions
- Family and Medical Leave Act (FMLA)
Additionally, the state imposes laws related to:
- Minimum wages
- Child labor
- Minimum paid breaks & meal periods
- Payday requirements
In general, federal labor laws tend to provide minimum criteria you must meet, while state labor laws impose additional requirements that vary by state. For example, the federal minimum wage of $7.25 per hour was set in 2009; however, states like California—which has a $14 per hour minimum wage—showcase how federal and state labor laws differ. So it’s important to stay in the know about labor laws at both levels.
For a more in-depth look at federal labor laws, refer to the Department of Labor’s summary page. You can also check out their state labor law page.
4. Hiring and Paying Your Team
With the foundation of knowledge above, you’re ready to learn about the hiring process. The importance of hiring the right employee cannot be overstated, especially with your first few hires. You’re handing off key responsibility areas that impact your business, so you need to be sure they’re in the right hands—whether you’re hiring full-time employees or hiring freelancers.
Keep in mind that the hiring process can sometimes be lengthy, especially if you’re doing it for the first time, so keep your expectations realistic. For example, don’t assume you’ll have a new employee by next week.
Consider these key steps to hiring an employee, as noted by the Small Business Administration:
- Obtain your employee identification number (EIN).
- Determine whether you need state or local tax IDs.
- Review your business needs and decide whether an employee or independent contractor would be a better fit—or hire both, with each addressing different needs.
- Have new employees complete and return W-4 forms.
- Schedule pay periods to coordinate with IRS tax withholding requirements.
- Create a compensation plan for holiday, vacation, and leave.
- Select an in-house (e.g., payroll software) or third-party service for administering payroll.
- Decide who will manage your payroll system.
- Know which records must stay on file and for how long.
- Report payroll taxes as needed on a regular basis.
The above isn’t an exhaustive checklist for hiring employees, but it should give you a solid base to work from as you navigate the hiring process.
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