All big businesses were once small businesses. Many were small mom and pop shops or one-person operations. You may be in a situation now where sales has improved and you are thinking about hiring your LLC’s first employee. Congratulations! That’s a great accomplishment but, now that you will wear the hat of an employer, there will be new responsibilities to be aware of.
A good starting point when determining if, or when, to make your first hire is your budget. Make a list of tasks that you will want the new hire to take on and then determine what other employers in your area are paying similar employees.
Determine a range that you are able to afford and give yourself a little breathing room as candidates will likely want to negotiate their salary. Another reason to budget a little extra for this new hire is for promotion. If your new employee comes in and does a great job you will have the extra money to reward them with a bonus or increase in pay.
Offering Benefits to Your LLC Employees
What about benefits? Will you offer them and if yes, which benefits will you provide? It’s no secret that many employees stay with their employers due to benefits. In fact, according to the Society of Human Resource Management (SHRM) 56% of employees said that having employer-sponsored health benefits was a key factor in them staying at their jobs.
If you are just starting out offering some benefits may be too costly but there are other strategies that will allow you to help cover some of your employee’s medical costs. If health insurance is out of reach perhaps you may be able to offer other coverage such as dental or vision. Even an employee earning minimum wage should receive some additional benefit for working with you that is above and beyond just their hourly pay. By providing more than just a basic salary you can make your company more attractive to employees and help retain them.
Sole Proprietorship or Disregarded Entity LLC
An LLC, by definition, is a Limited Liability Company. It is a legal business entity established at the state level. Typically documents are formed with the Secretary of State’s office. An LLC can provide personal asset protection in the event your employee(s) does something wrong or your business is sued.
Anyone can be a sole proprietor. You do not even need to form an LLC to start a business although in some municipalities you may need to register your business with your local county clerk’s office. A disregarded entity is a business that is not separate from its owner for tax purposes. The owner would report the LLC’s income and expenses on his or her own personal tax return.
Many people are surprised to learn that the Internal Revenue Service (IRS) does not recognize LLCs. If a business is set up as an LLC the owners must let the IRS know how that LLC is to be taxed. Some of examples of federally-recognized entities include corporations, partnerships and sole proprietorships.
Can Every LLC Hire Employees?
Setting up an LLC does not restrict you from hiring employees. The IRS looks at several factors to determine whether someone that you hire is an independent contractor or a bona fide employee. There is less paperwork involved in hiring someone as an independent contractor for your LLC. You would have them fill out a W-9 to provide their information. However, if you hire someone as an employee you need to make sure that they have proper work authorization in the United States. The employee must show you, the employer, documents providing their identity. The I-9 , Employment Eligibility Verification, has a list of acceptable documents the new employee is expected to present to you.
You will need to familiarize yourself with the payroll taxes obligations when you hire your first employee. Most employees have some amount of money withheld from their paycheck for federal income tax, state tax or city tax. The money withheld must be paid to the proper government tax offices and payroll tax returns filed to report those payments. Here are some of the more common forms that you, as the employer, will likely be responsible for filing:
Most employees pay a combined 7.65% of their salary towards Social Security tax and Medicare tax (also referred to as FICA) through their payroll withholdings. Employers must pay 7.65% towards Social Security and Medicare. Those withholdings are typically paid to the government quarterly but may even be monthly if the amounts are large enough. The Internal Revenue Service is serious about employment taxes so if you do decide to hire an employee be sure to pay them through a legitimate payroll service and file all the related tax returns by their due dates.
LLC Partnership (2 or More Members)
Unlike a sole proprietorship where there is only one owner an LLC can have multiple owners. In an LLC the owners are called LLC members. By default when two people carry on an activity regularly, and with the intent to make a profit, they are in a partnership. This is true even if they do not file paperwork to become an LLC. When a partnership is formed a separate tax return should be filed to report the activity in the LLC.
Define the Job Roles and Responsibilities
Have clear responsibilities for the new employee. This person should know what their job duties and what is expected from them. Disclose in your job ad which skills are most important and what the hours will be. If you believe that overtime will be necessary at times, spell that out early and discuss it during the interview. Be transparent. Doing so will save the time and hassle of having to re-hire and re-train.
Get your EIN
The IRS will require that you have an employer identification number (EIN) to be entered on Form 941, the federal payroll form used to report wages paid to employees. State withholding and state unemployment are often handled by separate departments. Expect to register with each of them so your LLC will have unique identifying numbers that will also be required when submitting your payroll returns. Most states will require that you inform them within a few weeks of hiring your first employee. You can get an EIN online by filling out Form SS-4. Once your request is process the IRS will send you confirmation of your employer identification number by mail.
Workers’ Compensation Insurance
It doesn’t end there. Workers’ Compensation provides financial benefits to employees who were injured while on the job. As an employer you may need to have this insurance coverage. Some states mandate Workers’ Compensation when you bring on your first hire. Others require it only after the employee has more than one employee so you will want to check the laws in your particular state. However, if you find that you need to have Workers’ Compensation you should secure the coverage BEFORE you hire. Failure to have this important insurance in place can result in fines or more serious penalties.
Things to Consider Before Hiring LLC Employees
Before hiring your first employee, research the local market to determine what the going salary is for the position. What are similar businesses paying? What benefits are they offering? One of the worst things you can do is put a job ad where the compensation is below market rate. It will not look good for your business and will usually attract candidates who are less than ideal.
Another thing to consider is your budget. Give yourself extra cushion to afford unforeseen expenses. If things go well can you safely afford their salary? Will your business have enough revenue not only to pay the new employee now but also for future pay increases or bonuses?
Provide New Hire Employee Forms
Many states will require that you inform them of any new employees that you hire. If you hire someone to handle process your payroll they should also be able to file the forms necessary to report your new hire to the state agencies.
How to Pay and Report for Independent Contractors
You may hire someone as an independent contractor. An independent contractor is someone who is not your employee. Generally, if someone is an independent contractor you do not have control over their work or their hours. You hire them for a job and they do it under their own discretion.
If your business is an LLC and you hire independent contractors you should have them complete Form W-9 so that you have their employer identification numbers. This is important because the law states that if you pay independent contractors $600 or more in a given year then you must report the payments both to the IRS and to the independent contractors. In most cases it is their responsibility to pay taxes on what they earn. However, if they earn more than the threshold and do not give you a W-9 then you may have to withhold taxes from those independent contractors.
Unlock Your LLC’s Growth Potential with the Right Employees
Hiring employees requires careful thought and there are several things to consider. Some business owners find it easier to hire someone as an independent contractor instead of hiring an employee. There are rules that you will need to familiarize yourself with if you go that route. Nevertheless, if you decide to hire your first employee you should now be familiar with what you will need to get started. It could be a great decision to help propel your LLC to the next level.
Disclaimer: Information provided on this website is for educational purposes only. Tax situations vary. Please consult your tax professional to determine what is best for you.