When you first formed your LLC, you may have been the sole owner of the company. Perhaps, at most, there were a few other members who you worked alongside to get your project up and running. But now that your business is successful, it’s time to consider hiring employees. As a young entrepreneur, you may not have any experience doing so. Fortunately, we’re here to provide you with a breakdown of everything LLC owners should know about hiring employees.
What Is An Employee?
Before detailing how to hire employees, it’s critical that you first understand what an employee is. According to Investopedia, “an employee is defined as any individual who is hired for wages or salary.” The company must pay taxes on an employee’s wages and could potentially have to pay health insurance as well.
This is noticeably different than an independent contractor. An independent contractor is also paid for work. However, independent contractors do not work for the company directly. They work for themselves and are paid by the company for services they provide. This is often done on a contractual basis. Most importantly, LLCs do not pay taxes on any monetary payment they make to a contractor. Independent contractors must pay the entirety of the tax burden.
Tax Prerequisites When Hiring Employees
If you’re interested in hiring employees, there are a few tax-related things you’re going to want to do beforehand. First and foremost, you must ensure that you have an employer identification number. You should have received this number when you formed your company, as it allows you to pay taxes and open a business bank account. However, if you don’t yet have an EIN, you’ll need to secure it immediately. It is mandatory to have an EIN when hiring employees.
You should also be mindful of the fact that you’ll likely need to secure a similar number at the state level. While the IRS issues the EIN, many states require companies to obtain additional numbers when filing state taxes. Each state is different. We recommend starting with your local Secretary of State’s Office to learn more about securing a state employer account number.
You’ll also want to establish a quality record-keeping system. The Internal Revenue Service can audit your company at any point within four years of filing. This means that your company must have records of employment taxes on hand for at least four years. You should establish where you plan to keep these records for safekeeping. Although the minimum requirement is four years, LLCs should expect to keep the records for at least six years, if not longer.
Lastly, LLC owners will also need to set up records that allow them to withhold taxes. There are three different withholdings with which they should be aware. The first is federal income tax withholding. To establish this, owners will need new employees to complete a Form W-4, otherwise known as an Employee’s Withholding Certificate. Employers will then need to complete a Form W-2 for each employee that they hire.
The Form W-2 outlines all wages that an employee has earned, as well as all tax they’ve withheld during the year. At the end of the calendar year – no later than January 31 – the LLC owner will need to send a copy of this form to the employee. They’ll also need to submit the paperwork to the Social Security Administration by February 28. The W-2 is unique to employees. If you were to hire independent contractors, you would need to complete a Form 1099.
Employees also have the option for state withholdings as well. State withholding forms are similar to the Federal W-2 and W-4 forms but are unique from local government to local government. Be sure to repeat the above process at the state level as well, based on your state’s requirements.
Other Employment Factors
Before LLC owners set up tax records for their new employees, they first must determine who to hire. After choosing the ideal candidate, there are a few legal requirements that LLC owners will need to fulfill. The most critical is ensuring that a potential employee is eligible to work in the United States. The first thing that owners should do is have the employee complete a Form I-9. This form includes information such as an employee’s eligibility and Social Security number.
In addition to the I-9, employees will also need to provide you with valid identification. The I-9 lists three columns of identifications that would suffice. Employees can either provide one item from List A, or a combination of one piece from List B and a second item from List C. Items on List A includes Permanent Resident Cards and passports. List B contains items like driver’s licenses, while List C includes things such as a Social Security card.
In specific scenarios, employers may also have to complete the federal E-Verify program. This is an added measure to ensure the information that employees provided is accurate. Some states mandate that employers run an employee’s information through the E-Verify system.
Although it is not required under law, LLC owners may want to conduct a background check on a potential hire as well. This is especially critical for small business owners who are hiring employees. As a growing company, their reputation is vital. Running a background check, otherwise known as pre-employment screening, allows you to protect:
- The company
Even though a background check is not mandatory, there are laws that employers must follow should they choose to conduct one. For instance, employees must authorize an employer to perform a background check. Many of the legal requirements are determined at the state level, so be sure to consult with the Secretary of State’s or Employment Office to learn more about the conditions surrounding background checks.
For example, some states limit the type of criminal history into which employers are allowed to look. Other states protect the credit history of prospective employees, allowing employers only to pull these records if the job meets particular criteria. LLC owners may want to look into hiring a third-party agency who specializes in conducting background checks.