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Things to Consider Before
Hiring an Employee
By Marsha Steinweden, Steinweden Accounting
Services
Every small business owner dreams of the
day when their business is so profitable and has grown so much that
it is time to hire an employee. Hiring an employee is a wonderful
thing to do. It gives someone a job and reduces part of your workload.
The “American way” is for businesses to grow and expand.
But taking that step—becoming an employer—is almost
as frightening as first starting your business. When the time comes
to make the move to becoming an employer, I advise my clients to
take baby steps.
Think before you hire that first employee. Are you expanding
too quickly? Are you financially stable enough to warrant expansion
of this type? Will you compromise your unique product or service?
In some cases it is better to stay small, making your product
or service exclusive, desirable, and rare. Your business becomes
less personal, less handcrafted, once you start to hire help.
What do you Really Need?
The first consideration is, “do you need help or do you
want some company?” Owning your own small business can
be lonely. If you are lonely and think you need companionship
or the motivation working with another person might provide,
hiring an employee is an expensive way to meet those needs. If
you really do need help, ask yourself if you can out-source or
sublet parts of your business without compromising your product
or service. Examples would be sending out your accounting or
laundry. If you have a storefront, perhaps hiring a cleaning
service would reduce the pressure on you and give you the needed
time to go about your business. Carefully consider hiring other
businesses to do some of the things that are not critical before
you hire your own employee to do that work.
Help Hiring
Many businesses in my area use an employment agency to hire
employees. The average cost is usually about fifty percent of
the payroll. They can find you temporary workers to fit your
needs or permanent workers. An employment agency will also take
care of the paperwork, withholdings, and workers compensation
insurance for temporary workers. As you develop a relationship
with the agency, you will find they are acting as your human
resource department. Finding the right employee that matches
your expectations is not an easy task. An employment service
will advertise for a job opening, handle the application process,
and do preliminary screening or job interviews for you. This
is a time-consuming process. If you are a new business owner
who has never hired anyone before, using an agency improves your
chances of hiring a quality worker while it reduces the liability
of your making a mistake in hiring practices. For an extra fee
most will also handle dismissing an employee.
If you are not sure what work you can assign to someone else
and how many hours you might need someone, a temporary worker
is a good way to start. It is a way to see if becoming an employer
is right for you and your business. If things work out, after
a few months you can make the employer-employee relationship
permanent. Whatever you decide, take it slow, enjoy getting to
know someone and working with them. You can experiment with temps,
to see how someone else will fit into your business. And you
can practice how to train permanent workers by training temps.
As you cycle through help, you will also learn your training
routine. At first you will forget to train your new help in something.
Things that seem obvious to you will have to be explained in
detail to a person unfamiliar with your business.
Finding an employee you can get along with and who shares your
same standards of business is not easy. Stress safety, customer
relations, and quality at all times. You will have to be able
to give up some control. No longer will you have to do everything.
You will have to build trust in yourself that you can train someone
to handle your business, and build trust in your chosen person
that he/she will carry out your wishes.
If you excel in one area of your business, try and find someone
that excels in areas you are weak. Maybe you are a detail-orientated
craftsman that doesn't like dealing with the public; if so, you
should hire someone that is a “people-person,” one
who never meets a stranger, a natural, friendly sales expert.
The two of you would then form a team for your business benefit.
Each of you will also have your own areas of responsibility,
and won’t constantly be in each other’s way.
What you Need to Know
Employees have many hidden expenses. Some of these expenses
are directly related to payroll, benefits, taxes, etc., but others
have to do with your expanding business beyond an owner-operator.
Hiring brings with it many considerations and more paperwork.
- There is the hidden cost of training. Will you be paying
wages while you teach them to do the work they are hired
to do?
- What about the perks of the job? Will there be employee
discounts offered on your product or service that will
decrease your profit margin?
- Having an employee will generally increase your general
or liability business insurance, and might even affect
your professional insurance, if that is applicable. Remember
to discuss this with
your insurance agent before you hire an employee.
- Some places base a business license fee on the number
of employees a firm has, another thing to consider before
hiring that first employee.
- In some industries, employee turn-over is very high.
Gone are the days of a person working the same job, with
the same employer for life. Expect employee turn-over.
Have ready applications, a written safety policy handbook,
a written
policy
handbook of your business rules, a written job description,
and any insurance or tax forms needed.
- Many states require that an employer file a report,
within ten days, of hiring a new employee. You will have
to furnish the name, address and Social Security number
for each person.
This is used to track people who are behind in various
payments, the most common being child support.
- Some types of businesses must have the local health
department or safety office do inspections and each person
working must have certain types of education or certificates,
along with
immunizations. Day-care providers frequently must have
CPR training, and current immunizations; food service
workers are required
to have safety training and immunizations. Do you pay
for this or will your employee?
- Many times, workers’ compensation insurance will
require you to hold safety meetings and training sessions.
- Check locally and see if your business premise needs
to be inspected by a local fire department or Fire Marshall.
- Will you require a drug screening before employment
and random drug testing during employment, or a drug
test at the time of an accident? Will you pay for this?
Help is Available
Once you decide hiring a permanent employee is best for your
business, you will need to contact your local IRS office to find
out how to set up an account for depositing employee federal
tax withholdings. They will issue you an account number and payment
coupons. They will also send you forms 940 and 941, your quarterly
reports. Once you have your Federal EIN (Employer Identification
Number) and your account number for withholdings, contact your
state revenue department. Get your federal numbers first. Most
states will also issue you a state EIN along with a payee account
number–if applicable. At this time some states will remind
you about any state business tax, and any special requirements
for a state sales tax. This should have been in place before
you started your business.
If you are not extremely organized, tolerant of paperwork, and
able to meet deadlines, please consider paying an accountant
or payroll service to take care of the payroll part of your business.
You may be too busy training your new employee to wade through
all the deadlines and paperwork associated with deductions. As
an employer, you are responsible for withholding federal and
state income taxes (provided you are in a state that has income
taxes). These withholdings have to be deposited or paid on a
set schedule. Some are mailed, and others are paid in person
to a bank, and reports must be filed with taxing authorities
by set deadlines. An accountant will understand all this. Some
of the things a payroll service or accountant could help you
with include:
- In most states you must acquire Workers Compensation
Insurance. Rates are based on the type of business or
industry you are engaged in, and your projected yearly
payroll. Some states require an entire year or a percentage
of
your
premiums in advance.
Be prepared for this extra expense. This can cost you
anywhere from 4-52%, above and beyond the hourly wage.
- The employer also pays unemployment taxes, both state
and federal, as well as matching the withholding for FICA
and Medicare. These taxes are collected at different times
of the
year depending on the size of your payroll. Your accountant
will mail out the year end W-2s to your employees.
- Often an employee will have their wages “attached,” meaning
you will be responsible for withholding a set amount from your employees pay
check and sending it to a specified destination, in a timely manner. It could
be child support, a court ordered debt collection, fines or even some type of
alimony, maintenance, or back taxes owed. You may also be required to notify
the collecting party when the working relationship has been severed.
- If you provide a benefit package to your employees,
you and your accountant will have to set it up, and do
any withholdings from their checks for their portion,
along with paying your share.
It could be health insurance, vacation pay, retirement
funds, or a flex plan. Talk to your insurance agent about
this too.
Conclusion
Hiring that first employee is a big step, but every American
small business owner dreams about it. Take time and plan how
you will expand your business, when you should hire, and what
skills that employee should bring to your business.
Here’s hoping your business grows and prospers!
Contact Information
Marsha Steinweden
Steinweden Accounting Services
2210 42nd St.
Missoula, MT 59803
(406) 251-1227
marsha@marsweb.com
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