Paying Your First Employee

All in all, the hiring process can take anywhere from a few days to several months, so we always advise anticipating that it will take more time than you expect. This is especially true for employers who are going through the process for the first time and on their own. 

Taxes

What are business taxes and how much can you expect to pay?  

Business taxes are also called employment taxes, and they refer to many different taxes that are connected to employing workers. FICA covers Social Security and Medicare and is based on a percentage of your employee’s salary.

Business taxes also include income tax that is withheld from the employee’s salary and paid to the federal and state government. Additional business taxes include Federal Unemployment Taxes (FUTA), Medicare taxes, and worker’s compensation taxes. These all fall under this “employment tax” umbrella, as well. Everything in this category is paid by the employer to the appropriate federal and state agencies, although the funds come from different sources, including the employer’s pocket, withholding from the employee’s pay, or some combination of the two.

What about payroll taxes?

Payroll taxes are a lesser category than general employment taxes. In fact, payroll taxes generally fit as a subcategory of employment taxes, because this refers to the Social Security and Medicare taxes that are withheld by the employer from the worker’s paycheck and then matched by the employer.

In the video below, our Tax Manager Ashley Hamilton explains how payroll taxes are calculated.

Labor Law Posters

Did you know that you are required by law to display posters that communicate important labor laws to your employees? The Department of Labor provides information about each of the possible posters you could include, as well as the potential penalties for not including the required ones. For example, you may choose to display the Fair Labor Standards Act poster, but there is no penalty for not displaying it. However, certain OSHA posters are required for all commercial employers and there are citations and penalties for neglecting to display them. Use this poster updates resource to determine what you are required to display in your workplace. 

Employee Handbook

You have a few options for creating your employee handbook: write a new one from scratch, use a pre-existing handbook template (paid or free), or hire a professional to write it for you. Your handbook serves multiple purposes. In addition to informing your employees of the policies of the workplace, it also protects you from litigation.

Your handbook should cover the following:

• Anything that your state law says you must include

• Company history

• Family Medical Leave policies

• Paid time off policies

• Equal employment and non-discrimination policies

• Worker’s compensation policies

• Employee behavior expectations and policies, as well as disciplinary procedures

• Information on pay and promotions

• Benefits information

• A statement that says that handbook policies are subject to change

• Employee acknowledgment page

We recommend having a legal professional review your handbook before it is distributed to any employees.

Critical HR Functions

Small businesses that are hiring their first employees typically don’t have a dedicated Human Resources department, which means that someone is serving in an HR role who may not have a specific HR degree or work experience. This person will need to be familiar with critical HR functions. In 2019, the Houston Chronicle published a useful list of the six key functions of an HR department. They are:

• Ensure Compliance with Labor Laws

• Recruitment and Training

• Record Keeping and Tax Compliance

• Payroll and Benefits

• Employer-Employee Relations

• Employee Performance Improvement Plans

Employee Termination

Unfortunately, not all employees work out. If you are first starting your business, or if you have not hired someone before, you may be overly optimistic about the long-term presence of the employees you are going to hire. Even if you are an optimistic, look-on-the-bright-side person, you still need to have a plan for what happens should you need to terminate someone’s employment.

If you find yourself in the unfortunate position of having to terminate an employee, check out our NYS Employee Termination Kit by clicking here or the button below. The kit includes a how-to guide to employee terminations and a bundle of all the forms and letter templates you may need during the process.

Worker Classification (Employees vs. Independent Contractors)

When you hire an employee, you are responsible for withholding taxes from their pay, abiding by all applicable labor and employment laws, and issuing their pay on a consistent basis, whether that is weekly, bi-weekly, or monthly. It is also the employer’s responsibility to provide an annual W-2 tax form to the employee.

Watch our Tax Manager, Ashley Hamilton, explain how to properly classify employees and independent contractors.

Independent contractors are not covered by most employment and labor laws. The keyword “contractor” is important here because you must have a signed contract that defines the scope and details of the work, as well as the legal responsibilities of both parties. You do not withhold taxes from the pay of an independent contractor, because they are responsible for maintaining their own records and paying their taxes accordingly.

You do, however, provide them with a W-9 to fill out, which you will keep on record. Often, contractors will invoice you for the work they’ve completed, and you will issue a check to pay for the invoiced amount. However, your contract could also specify a single payment or payments that are made on a schedule. Independent contractors can be paid by the job or by the hour.

Setting Wages

There are a number of tools you can use to determine the fair market wage for the position you need to fill. Some companies are pretty transparent to the public about what they pay their workers, while others are more protective of that information. It depends on the industry, the company ethos, and several other factors.

Using a website like Payscale can be a starting place. If you are going to be filling multiple positions or hiring on a regular basis, you may want to solicit the input of a recruiter for your industry. Hiring a recruiter or a HR consultant can be a great way to know for sure that you are on the right track with the wage-setting process.

Salary vs. Hourly: An hourly worker is paid an hourly rate for the time they work within the pay period. If an hourly employee goes over 40 hours per week, they are to be paid overtime. Salaried workers are not entitled to overtime pay, and they are paid a consistent amount every pay period regardless of the number of hours worked.

Determining Pay Frequency

You will need to determine how often you want to pay this employee. It’s important to note that depending on the job the employee will be doing, labor law may mandate pay frequency (manual workers are required to be paid weekly, for example). The options for paying employees are: weekly, bi-weekly, and monthly.

Minimum Wage

Minimum wage is governed by both federal and state policies. As of 2021, the federal minimum wage is $7.25/hour. However, many states have higher minimum wage requirements, especially in states with higher costs of living. In New York State, the minimum wage is $13.20/hr as of December 31, 2021.

Employers should anticipate changes to the minimum wage in the coming years, whether on a state-by-state level or on a federal level.

Tipped Wages

If the employee is in the hospitality industry and/or is expected to be earning tips as part of their wages, this could have pay implications. Tipped employees can be paid at a lower wage and have other labor law implications, depending on the state.

Exempt vs. Non-Exempt Status

Will the employee be exempt or non-exempt? This has implications for whether or not they must be paid overtime for any hours worked over 40 in a given week. There are federal rules for this. Many states have their own rules for this as well.

A non-exempt worker is entitled to overtime pay if they work more than 40 hours in a week. The overtime rate must be 1.5 times their normal pay. Non-exempt workers can be hourly or salaried and can work in any professional industry. Their non-exempt status is unaffected by how much they are paid.

An exempt worker is not entitled to overtime, and only salaried employees can be designated as exempt. They also must be paid $455 per week, and the tasks they perform must fit into the exempted categories.

Creating a Job Description

When you create the job description, it should be clear, detailed, and concise. Some of the requirements for a great description include:

• A specific job title that clearly communicates what the position is, but also stands out from other job titles in the long list of advertised positions.

• A brief job summary that avoids jargon and language that doesn’t make sense to people outside of your company.

• Some information about your company culture and values.

• A detailed job description that accurately describes the work to be completed by the person who is hired. This should still be concise, even though it needs to be detailed.

• The required and preferred qualifications, educational background, experience, and certifications you are looking for in a candidate.

• A list of both soft and hard skills that will be needed.

• Information about the location of the position and whether it can be done remotely or not.

Advertising the Position

Jobs can be advertised on general job application websites, industry-specific sites, and, occasionally, via social media. You may also choose to work with a professional recruiter to ensure that you get the job description in front of the right candidates.

Best Practices for Interviewing

Often, advice about job interviews is targeted towards the job candidate, rather than the interviewer. When it comes to best practices for interviews, it is important to keep in mind the goal of the interview: to go beyond the information you get from the paper application and resume of a candidate and understand who they are as a person and a potential employee, colleague, or team member.

You likely already know answers to some of the questions you’re going to ask, but this is your chance to evaluate how the candidate presents the answers, and how they present themselves. Here are some things to remember when preparing to conduct a job interview:

• Prepare your questions in advance. Make sure they make sense and aren’t overly dependent on industry or institutional jargon that your candidate may not be familiar with.

• Don’t forget that you are also trying to make a good first impression. In a candidate-driven market where top-tier talent often has several options of employment available to them, interviewees are taking into consideration what your demeanor, attitude, and preparedness say about the work environment and whether or not they want to come on board.

• Don’t bring too many people into the interview process. If the candidate has to meet a dozen people and try to remember everyone’s name and role, they are probably going to be a little overwhelmed. Limit the involvement of other colleagues or partners to one or two other people in the interview setting.

• Ask sincere questions, rather than cliche ones.

How to Extend an Employment Offer

When you are ready to extend an offer of employment, you can do so in a number of ways. You can extend the offer in person, as soon as the end of the interview, or you can wait to call them or write them afterward.

It is important to have a written document to support whatever offer you make, even if you are making the offer in an informal way. The written document is something the candidate can review in the decision-making process. The offer you make should specify the following:

• The position/job title

• An accurate job description

• Salary and benefits information

• Start date

Running a Background Check

In some industries, running a background check is a state or federal requirement. In others, it’s simply a good idea. We recommend that you run a background check on new hires to prevent any surprises down the way. Generally, employers cover this cost. There are numerous programs and websites that will run a background check for you. Complete Payroll provides quick, trustworthy, and affordable employee background check services for employers looking to screen potential new hires.

Employee Referral Program

Creating an employee referral program: One of the best ways to get new employees into your company or firm is to have a strong employee referral program. Today’s hiring climate means that workers have a lot of room to decide where they want to work and whom they want to work for, and the influence of friends, colleagues, and acquaintances who are happy with their workplace can’t be overstated. Referral programs incentivize finding ideal candidates to come work for you.

Outsourcing Payroll vs. DIY

Some employers choose to go the “Do-It-Yourself” route for managing payroll, which means being the person who is responsible for payroll accounting, payment disbursement, and all payroll taxes and fees. You can do this through a number of software programs, the most popular of which is QuickBooks. We generally recommend an e-payment system rather than paper checks, as you can save both time and money by enrolling your employees in direct deposit.

There are some liability issues with managing payroll on your own that are important to take into consideration, especially in a small business where there are fewer people overseeing the process and catching potential errors. Here are some of the problems we have seen employers get into with DIY payroll management:

• Miscalculations of payments and withholdings. This can mean accidentally withholding too much or too little, incorrect reporting of pay rates, improper verification of bills, etc.

• Simple errors and mistakes in recordkeeping.

• Intentional errors. Unfortunately, there will be times when businesses unintentionally employ unscrupulous people. Payroll is one of the places where funds can go missing through the underhanded actions of problem employees.

• Incurring penalties from missing deadlines, miscalculating pay rates, or making mistakes in various legal forms and documents.

• Security gaps, in which employee and employer information is vulnerable to being accessed inappropriately by individuals inside and outside the company.

One of the best ways to avoid these penalties, risks, and general payroll-related headaches is to outsource this part of your business to the experts. Professional payroll companies can manage every aspect of your business’s pay, from tax forms to direct deposit and post-pay record keeping.

Live Checks

Some small businesses still use paper checks, often called “live checks,” even though the frequency of check cutting has decreased dramatically in the past twenty years.  Companies that continue to print, sign, and mail paper checks to employees may prefer to do so because of something as simple as “it’s what we’ve always done.”

There is also the fact that e-payments, while common, are not completely prolific throughout all vendors. When it comes to payroll, some businesses provide paper checks because they don’t want to obligate all employees to use direct deposit. However, the paper check system does create delays in the payroll process, as well as opportunities for error and fraud. There are also expenses associated with live checks that can add up to some pretty substantial numbers, especially if you end up employing several people.

Direct Deposit

If you employ workers in a state where employers are permitted to require employees to enroll in a direct deposit program with their bank, you should go ahead and make that a requirement. If you’re not permitted by law to require it, you can incentivize direct deposit in a number of ways.

Sometimes it is a matter of conveying to employees the benefits of getting paid immediately on payday, with no potential for delays in receiving a paper check. Some companies also provide a monetary incentive for enrolling in direct deposits, such as a gift card or a small bonus.

Paying Commissions and Bonuses

Depending on your employment structure, you may choose to offer commissions or bonuses to your employees. These are payments that are in addition to the employee’s regular salary and benefits. They can improve morale and performance when handled well.  

Commissions are based on specific performance tasks, such as reaching a sales goal. We recommend having a straightforward formula for commissions because a lack of transparency in this process can cause frustration and annoyance in your workers, which is the last thing you’re trying to do with commissions. Don’t forget to look into the tax rate for commissions, which is often different than the regular income tax rate.

Different from a performance-based commission, bonuses are awarded more frequently as an annual, seasonal, or occasional event. Bonuses are taxed at a rate of 22%.

Understanding Payroll Taxes

Employer Taxes: Employers are responsible for withholding FICA, which is calculated as follows:

• 6.2% Social Security tax
• 1.45% Medicare tax
• 0.9% Medicare surtax (for employees who earn over $200,000 annually)

Employers must also cover what is called the employer’s portion of the same percentages of their employees’ Social Security and Medicare tax. That means you’ll pay 6.2% in Social Security and 1.45% for Medicare. For each employee, you withhold 6.2% of their wages for Social Security and also pay 6.2% yourself. You’ll withhold 1.45% in Medicare tax and pay 1.45%.

Tracking Time for Hourly Employees

When you begin tracking time for hourly employees, it is important to ensure you are paying them fairly and remaining compliant.  Things like ensuring they have a minimum 30-minute meal break after 6 hours worked, that their hours are being rounded fairly and that overtime is properly managed and paid are all essential components of an hourly employee.  While non-essential, you may also want to offer paid benefits, such as vacation time and holidays. Whether essential or not, managing these aspects of hourly employees can be tricky and time-consuming.

Timekeeping Software

There are a number of software options available for your hourly employees. Free time tracking programs are available, though sometimes glitchy and unreliable. There are plenty of high-quality, affordable timekeeping apps and programs that can be used by employees in a wide range of industries and working environments.

Apps are now frequently used by employers to track their workers’ time, and often the usage fee for these apps is not very expensive. The best apps or software will integrate effectively with your payroll system so that you are not losing time entering timekeeping data into your payroll program.

Timekeeping Hardware

Depending on your work environment, you may choose to have a timekeeping clock. You may be envisioning an old punch card system, but today’s timekeeping clocks for hourly workers can be much more sophisticated. ID cards, fobs, and passcodes can be used to clock in and out. Of course, your hardware should be integrated with your payroll software, as well.

Employee Scheduling

This is ideal for employers that may need to work through multiple employee shift scenarios. Employee scheduling apps can use data to create a reliable shift schedule based on a lot of factors, including the intricacies of worker availability and changes in operating hours. This is very common for restaurants and retail employers.

Paid Time Off (PTO)

PTO is expected by salaried employees and many hourly ones. In fact, PTO is frequently ranked as the second most important benefit that employers provide, only trailing behind employer-sponsored health insurance.  Your company’s PTO policies will cover vacation days, sick days, and personal days, and you have the flexibility to decide how much control you want to have over the use of those categories.

The Bureau of Labor Statistics states that the average first-year employee can expect 10 days of PTO annually. Often, employers provide more PTO the longer an employee is with the company. You will need to decide if PTO (or certain portions of it) can be banked to roll over from year to year, or if there will be a “use it or lose it” system. Be aware that there are benefits and drawbacks to each strategy.

Health Insurance - Medical, Dental, Vision

Employer-sponsored health insurance is the single most important benefit to most employees. The Affordable Care Act states that employers with 50 or more Full-Time Equivalent (FTE) employees are required to offer minimum essential coverage to their full-time employees. Choosing not to do so will lead to a tax penalty. Companies with fewer than 50 employees may be eligible for tax benefits by providing insurance anyway. Dental and vision insurance packages are also popular with employees.

If you provide health insurance, you can negotiate with multiple health insurers to get the best rates for what the company contributes and what the employee contributes. You will also need to decide who will assume the risk if your actual costs exceed the expected ones. You can choose to be self-insured vs. fully insured, and the insurance companies you talk to can help explain the differences and benefits of each insurance strategy.

Healthcare Spending or Reimbursement Accounts (HSA, FSA, HRA)

Some of your decisions related to HSAs, FSAs, and HRAs are going to be determined by the health insurance package that you provide. For example, you cannot provide an HSA (Health Savings Account) if your employees are not also enrolled in a High Deductible Health Plan (HDHP). Your insurance company can provide guidance in this area. However, here are some definitions that you may find useful:

• Health Savings Account (HSA): a savings account that an employee can put pre-taxed funds into throughout the year. Employees can also contribute to HSAs. HSA funds roll over from year to year and do not have to be spent within a given amount of time. In fact, the person who holds the HSA funds can use the money even after they are no longer covered by the plan or employed by the organization. HSA funds can be used for any medical expense. The individual limit on HSA contributions is $3,500 in 2019. That could change though. The IRS sets an individual and family limit on the amount that can be contributed to an HSA each tax year.

• Flexible Savings Account (FSA): a savings account that is limited to $2,850 for an individual in 2022, and the funds must be used within a certain amount of time or they are forfeited. Employees typically fund their own FSAs, although employers can contribute if they want to. Some companies allow employers to contribute to both an HSA and a FSA. Once again, the limits are changed by the IRS each year.

• Healthcare Reimbursement Arrangement (HRA): When you offer an HRA to your employees, you set a specific reimbursement allowance that they can use on a monthly basis to cover medical costs. Some reimbursement plans allow employees to fund their health insurance using this money.

Retirement Accounts

A 401(k) is a retirement account offered through an employer. Typically, employers have a set amount of funds that they contribute on a monthly basis, and employees can also have a portion of their pay withheld to be placed in the account.

A 401(k) can follow an employee from one employer to another, and there are significant tax benefits for the employee contributor. There are also tax penalties should the worker need to access money from the 401(k) before retirement.

There are several other types of retirement plans, including:

• 403 (b)
• Simple IRA
• Roth IRA
• SEP IRA
• Pension plans

Disability Policy

You will need to decide what disability policies to offer to your employees. More employers offer short-term disability than long-term, although recent trends show that 35% of employers provided long-term disability coverage in 2021, and 42% provided short-term.

Employees don’t generally contribute to short or long term disability coverage, as these costs are covered by you, the employer. The BLS states that, “the cost of access for short-term disability and long-term disability across all private industry workers is $0.30 per hour worked.”

Tuition Reimbursement

If you provide tuition reimbursement, you can pay back education-related expenses to your employees who are pursuing further education that is connected to their work. Some employers choose to reimburse significant portions of tuition and related costs, while others reimburse at a smaller percentage.

You may also set restrictions such as requiring employees to stay with your company for a certain amount of time after the reimbursement or be mandated to pay back the costs.

Childcare Benefits

Providing childcare benefits typically comes in the form of a pre-tax contribution to an FSA or other account that can be used to pay for licensed childcare costs.

Wellness Programs

Wellness strategies are an attempt to lower healthcare costs by improving the general health of the employees in a company. You can incentivize healthy habits through a number of methods. Employers often offer financial incentives to participate in these wellness programs.

Payday Advances

This is a less frequently offered employee benefit, but some companies do offer payday advances to employees. This prevents employees who are in need of cash from becoming beholden to predatory lenders and payday advance companies.                    

The amount of the payday advance can be deducted entirely from the next paycheck or in increments over the next several paychecks.

Other Employee Benefits

There are other employee benefits that you may choose to offer, including:

• Short and long-term disability

• Life insurance

• Paid parental leave

• Long term care insurance

• Telecommuting/work from home