Your sunless business is growing! You need to hire on help ASAP! You don’t know exactly where to start… Keep reading!
(Please note that this post contains general information and is not a substitute for legal or tax advice. For advice specific to your business, be sure to consult with a professional.)
First things first – Classification. Simply put… 1099s and W-2s are tax forms.
– A 1099-MISC is typically used to report payments made to independent contractors.
– A W-2 form is used for employees whose employer withholds payroll taxes from their earnings.
Your new hire is an employee if…
- You are hiring the artist as an employee of your business.
- You are determining their schedule, pricing, policies, etc.
- You are providing their equipment + supplies.
- You are responsible for withholding + paying payroll taxes.
Your new hire is an independent contractor if…
- The artist is self-employed and has their own business.
- The artist determines their own schedule, pricing, policies, etc.
- The artist purchases own equipment + supplies.
- The artist is responsible for paying + filing their own taxes.
Most times we find artists to be misclassified by business owners who are looking to avoid paying employment/payroll taxes – Big no-no! If you are hiring new artists who will be working for you, a formal employment is the only way to go. Read more about the differences between an Independent Contractor and Employee, here.
The Legal Stuff
After you have identified how your potential team members will be classified, next up is getting your business ready for your new hire.
1. Obtain An EIN (Employer Identification Number)
The IRS requires every business with employees to have an Employer Identification Number (EIN), a unique nine-digit number used for tax ID purposes. An EIN is basically like a Social Security number for a business. You can get an EIN by applying for one online. In addition, each state has a different registration process for getting a state employer identification number. Visit your state’s labor department website for more information.
2. Set Up Records For Withholding Taxes
Next, you will need to fill out paperwork to pay three different types of withholding taxes.
- Federal Income Tax Withholding
- Your new employee needs to complete Form W-4 (Employee’s Withholding Certificate), which asks them how much federal income tax to withhold from their pay. You then submit the form to the IRS.
- Federal Wage and Tax Statement.
- You will be responsible for filling out Form W-2 for every employee, detailing their earnings and taxes withheld for the year. You need to send a copy to your employees by January 31, covering the previous year. Then send Copy A of the W-2 forms to the Social Security Administration by the last day of February.
- State Taxes.
- Many states also have a state withholding form — find your state here to access the required form.
3. Run A Background Check
After you have held interviews and have selected your new artist, it’s a good idea to run a background check to help keep your business and customers safe. (PS: Applicants must always authorize your business to run a background check.)
Be aware that there are complex legal requirements and restrictions on background checks, many of which vary by state. Some states restrict the types of criminal history inquiries you can pull and when in the application process you can inquire about a criminal history, while others require that a role meet specific requirements if you are going to pull a credit history. (Some states and cities ban employers from asking about criminal history on job applications altogether). To comply with all of these requirements, businesses usually use a third-party agency to conduct background checks.
There are also regulations on how you can use the information from a background check. (For specific guidance or advice on background checks, consult with a legal professional.)
4. Verify Eligibility
It’s your responsibility to make sure all your employees are legally allowed to work in the United States. If you hire someone who doesn’t have the right employment eligibility, you could face fines, and even criminal penalties.
To help prevent this, here’s how to hire employees who are eligible to work in the U.S.:
- Before or on their first day on the job, your new employee needs to fill out section one of Form I-9, which includes their contact information, Social Security number, and employment eligibility.
- By their third day on the job, they need to show you valid documentation with their ID and employment authorization. This can be one document from List A (such as a U.S. passport or Permanent Resident Card), or one ID from List B (like a U.S. driver’s license) combined with another from List C (such as a Social Security card).
- In most cases, filling out the Form I-9 and reviewing the supporting documents is enough. But if you do business in certain states, you may be required to enroll in the E-Verify program. Find out more here.
- Employers don’t need to send Form I-9 to the federal government, but you do need to keep it on file for three years after the hire date, or for a year after the employee stops working for you, whichever comes later. You can learn more about Form I-9 from U.S. Citizenship and Immigration Services.
5. Report New Hires
You need to report newly hired employees to your state’s labor agency. For more information on your state’s requirements, check out the SBA’s New Hire Reporting Requirements.
6. Obtain Workers’ Compensation Insurance
Workers’ compensation insurance requirements for employers vary from state to state. Most states require employers to obtain an insurance policy for workers who are injured or become ill due to a workplace exposure. Be sure to review your state’s requirements and find a policy that suits your business. The National Federation of Independent Businesses (NFIB) also has a helpful guide.
7. Choose A Payroll Method
You will need to set up a system to pay your employees and to take care of payroll taxes. You can do payroll yourself, through an accountant, or through a payroll service.
My top recommendation for a payroll service is Gusto! (PS: This software will also assist you through the entire hiring process that we’ve outlined above and makes bringing on your first employee a piece of cake!
8. Display Workplace Posters
The Department of Labor requires that employers post certain notices in their workplace to inform employees of their rights and your responsibilities as an employer. These posters are provided free of charge. Some states have workplace poster requirements that you must follow in addition to the federal requirements. Visit the SBA’s Workplace Posters for specific federal and state posters you need for your business.
Hiring a new employee doesn’t have to be difficult – Just be sure to follow all guidelines and you’ll be building your team of superstar artists in no time!