Hiring your first employee is an exiting time for any growing small business. But, it's not as simple as just writing a paycheck to your new worker. Failure to comply with the law can have some serious consequences when it comes to labor and employment, so knowing what you're getting yourself into upfront is essential. Here are 8 standard steps that you’ll want to take before hiring your first employee in Illinois.
Step 1. Obtain an Employer Identification Number (EIN)
Before hiring your first employee, you need to get an employment identification number (EIN) from the U.S. Internal Revenue Service. The EIN is often referred to as an Employer Tax ID or as Form SS-4. The EIN is necessary for reporting taxes and other documents to the IRS. In addition, the EIN is necessary when reporting information about your employees to state agencies. Apply for EIN online or contact the IRS at 1-800-829-4933.
Step 2. Set up Records for Withholding Taxes
According to the IRS, you must keep records of employment taxes for at least four years. Keeping good records can also help you monitor the progress of your business, prepare financial statements, identify sources of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns. A payroll system, like Zen Payroll (zenpayroll.com) can take care of everything for you for a monthly fee. There are others out there as well, but Zen will actually help with new hire paperwork and reporting, which is something many others don’t include.
Below are three types of withholding taxes you need for your business:
Federal Income Tax Withholding - Every employee must provide an employer with a signed withholding exemption certificate (Form W-4) on or before the date of employment. The employer must then submit Form W-4 to the IRS. For specific information, read the IRS' Employer's Tax Guide [PDF].
Federal Wage and Tax Statements - Every year, employers must report to the federal government wages paid and taxes withheld for each employee. This report is filed using Form W-2, wage and tax statement. Employers must complete a W-2 form for each employee who they pay a salary, wage or other compensation. Additionally, you will be required quarterly to file an IRS form 941 to indicate employment taxes due for that quarter and an IRS Form 940 annually to report any unemployment taxes due. Employers must send Copy A of W-2 forms to the Social Security Administration by the last day of February to report wages and taxes of your employees for the previous calendar year. In addition, employers should send copies of W-2 forms to their employees by Jan. 31 of the year following the reporting period. Visit SSA.gov/employer for more information.
State Taxes - Depending on the state where your employees are located, you may be required to withhold state income taxes. Visit the state and local tax page for more information. In Illinois, you’ll need to register for business tax payments at http://www.revenue.state.il.us/Businesses/register.htm
Step 3. Employee Eligibility Verification
Big thing to remember here is that you need to have each employee complete an I-9. Federal law requires employers to verify an employee's eligibility to work in the United States. Within three days of hire, employers must complete IRS Form I-9, employment eligibility verification, which requires employers to examine documents to confirm the employee's citizenship or eligibility to work in the U.S. Employers can only request documentation specified on the I-9 form.
Employers do not need to submit the I-9 form with the federal government but are required to keep them on file for three years after the date of hire or one year after the date of the employee's termination, whichever is later.
Employers can use information taken from the Form I-9 to electronically verify the employment eligibility of newly hired employees by registering with E-Verify. However, use of E-Verify is not required for private entities.
Visit the U.S. Immigration and Customs Enforcement agency’s I-9 website to download the form and find more information.
Step 4. Register with Your State's New Hire Reporting Program
All employers are required to report newly hired and re-hired employees to a state directory within 20 days of their hire or rehire date. In Illinois, you can register at http://www.ides.illinois.gov/Pages/New_Hire_Reporting.aspx If you go with Zen, I believe they will make the new hire report for you. In addition, in Illinois, once you pay out $1500 in wages over a 20 week period, you’ll be required to contribute to the state unemployment insurance fund. You will be able to make your reports and contributions here, otherwise, I believe Zen can help with that as well.
Step 5. Obtain Workers' Compensation Insurance
All businesses with employees (even a single part-time employee) are required to carry workers' compensation insurance coverage through a commercial carrier or on a self-insured basis.
Step 6. Post Required Notices
Employers are required to display certain posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. If you will be having a principal place of business, you can purchase poster bundles here.
Step 7. File Your Taxes
Generally, employers who pay wages subject to income tax withholding, Social Security and Medicare taxes must file IRS Form 941, Employer's Quarterly Federal Tax Return. in addition to the state equivalents. Again, I’d invest in a good payroll system to automate this for you. For more information, visit IRS.gov.
New and existing employers should consult the IRS Employer's Tax Guide to understand all their federal tax filing requirements.
Step 8. Get Organized and Keep Yourself Informed
Being a good employer doesn't stop with fulfilling your various tax and reporting obligations. Maintaining a healthy and fair workplace, providing benefits and keeping employees informed about your company's policies are key to your business' success. Here are some additional steps you should take after you've hired your first employee:
Set up Recordkeeping
In addition to requirements for keeping payroll records of your employees for tax purposes, certain federal employment laws also require you to keep records about your employees. The following sites provide more information about federal reporting requirements:
Complying with standards for employee rights in regards to equal opportunity and fair labor standards is a requirement. Following statutes and regulations for minimum wage, overtime, and child labor will help you avoid error and a lawsuit. See the Department of Labor’s Employment Law Guide for up-to-date information on these statutes and regulations.