Hiring Your First Employee

By: Michael | Published: September 3, 2010 | Filed under: Small Business Advice

So, you think you’re ready to start expanding an take on your first employee? Congratulations! Before you do, check out the following critical information that will help the process go as smooth as possible.#1 Getting the Technicalities Correct: Is it an Employee or a Contractor?The IRS is beginning to take “worker misclarification” extremely seriously. This occurs when your company indicates that they are utilizing the services of a third party contractor to get out of having to pay into disability, social security and payroll taxes. Hiring a contractor would also force that person to file their own taxes when they are due. When you have an employee, the company is required to withhold that tax from each paycheck and pay it directly to the IRS.According to the IRS, they determine how a worker should be classified based on three characteristics. First, they are concerned with how much control the employer has over the party in question. If you have the ability to dictate what the employee should be doing and when, they are no longer classified as a contractor. Additionally, if the job requires specific training, it is very difficult to classify it as working with a contractor at that point. Next, the IRS is concerned with who determines the payment schedule. If the employer has full control over determining when and how the party is paid, they are seen as an employee.The IRS indicates that if you have the ability to specifically dictate what the person in question should be doing, and when, they are most likely going to be classified as an employee. In contrast, if you only have the ability to dictate the end result that you are looking for from the person and make payment based solely on said end result, it is a contractor.So now that the IRS has laid out in clear terms their expectations for what makes an employee vs a contractor, they are expecting full compliance from employers. Like any other time the IRS wants compliance, they enforce it by threatening large penalties for failure to comply. In this case, companies that are found guilty of worker misclarification are required to pay all back payroll taxes, a misclarification penalty and an additional penalty since you technically completed the wrong forms.#2 Get Everything in Writing Up FrontA plethora of employee problems can be avoided through simple prevention. The easiest way to do this is simply write up a document outlining what you expect from your employee and what you need to prohibit them from doing. Having this from the get go can save a lot of time and frustration in the future if they claim they didn’t know about a policy. For example, if you don’t want your new hire to discuss certain aspects of the company, have them complete a non-disclosure agreeing to that. Chances are they will not have any objection as long as the terms of the agreement are reasonable.