When you start your business, often it’s a bootstrap endeavor. For many companies, it’s the founder and her idea against the world. But as you gain traction and customers, your company grows. One of the earliest signs of growth is the potential need for help. But hiring employees changes everything about your business. It can mean drastic improvements in customer service and your quality of life. Hiring also creates a number of legal and administrative hassles that are important to consider. Here are five things every entrepreneur needs to know before they take the leap to hire help for their business.
W-2 Versus 1099
There are two typical types of hire. The first is what you might think of as a consultant. These individuals typically do a specific task for your business, such as copywriting or transcription. Often, they run their own businesses. They may work for you in a part-time capacity, on a project basis, or nearly full-time for a short period of time. At the end of the year, these employees will receive a 1099, which means that they are responsible for paying their own taxes. In contrast, a regular employee receives a W-2. As an employer, you’re responsible for withholding taxes and also for paying a share of their employment tax. Many states have stringent rules and penalties for classifications, so don’t overlook data on misclassifying prospective workers.
Insurance requirements
When you hire an employee, states typically require some basic kinds of insurance. You may be thinking benefits such as health and dental insurance. In some cases, these are required but often the caps start when you have reached 20 or more employees. There are two basic kinds of insurance you can expect to pay. The first is paying into unemployment insurance. These payments are made to the state in the event that your employee loses her job. The second is workers compensation insurance, which protects your employee in case of injury on the job. Many first time business owners believe that this is required only in high-risk environments such as construction. In fact, every employee needs to be covered even if they spend the day working on a computer or answering the phone. If you have any questions about insurance requirements, contact an experienced employment attorney or an insurance broker.
Payroll services
Having employees changes your cash flow management needs. When your business just represented your personal income, whatever you made covered expenses and bills. What was left was yours, whether to take for salary or to reinvest into the company in strategic ways. However, with an employee it’s critical that your primary concern be covering your employee’s payroll on expected dates. It’s important to answer the question of how the employee will get paid. Will you personally write checks, send payments electronically through wires or PayPal, or consider using an outsourced service? The advantage of either using an outsourced service or partnering with your accountant for this process is that it simplifies keeping and filing taxes.
Hiring an employee can have significant benefits. However, it’s also important to remember that legally and financially an employee creates many costs and administrative requirements for your business to follow. Before you take the step of hiring an employee, make sure you understand your state’s requirements and do a cost benefit analysis to make sure it makes sense for your business.