FORTUNE Small Business:

Prepare to hire your first employee

Get hiring documents right - or suffer the consequences later.

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(FORTUNE Small Business) -- Dear FSB: I am opening a new office. What documents am I going to need to prepare in order to hire my first employees?

- Denise Haney, Orem, Utah

Dear Denise: The paperwork you'll need depends on what type of employee you plan to hire, according to Ken Fakler, managing director of the SBDC in Orem, Utah.

In the eyes of the IRS there are two types of employees: regular employees and independent contractors. If you decide to hire independent contractors, "be sure they qualify as subcontractors, and not as employees, and you have to take taxes out," says Fakler. "The IRS has pretty specific rules about this, one being that you can't pay them hourly." Check with the IRS before making your decision because they can come back and charge you for back taxes if they determine that your hire is an actual employee and not a subcontractor. Start at the IRS web site, which outlines the basic differences between independent contractors and employees and links to more detailed information.

Though you don't need to pay pension benefits for regular part time employees, the state of Utah requires that you file documentation for and pay worker's compensation insurance on every employee, full or part time, "even your children," says Fakler. "The only people you don't have to pay it on are the company owners," says Fakler. "You're not required to provide medical insurance for employees, but if your company does offer this benefit, "most insurance companies classify an employee who works 29 hours or less as 'part time,'" he says.

Employees and Taxes
In Utah County, employers must take federal and state income taxes, FICA and Medicare deductions from employees' checks. "You'll have to pay seven percent FICA (Federal Employment Contributions Act tax, the payroll tax) on employees, as well as Utah unemployment taxes. This can go from between half a percent to eight percent of total payroll. That can be very, very costly," he says. "Employees are expensive. Keep in mind that whatever you pay the employee, add another 15-30 percent for taxes and benefits and that's what it will cost you, the employer."

As soon as you hire an independent contractor, have them fill out a W9 form to keep on file, says Fakler. At the end of each year, you'll provide copies of a 1099 Form to the subcontractor and to the IRS. Actual employees must complete W4 forms, recording their deductions and exemptions. At the end of the year, you provide employees with a W2 form. This form reports an employee's annual wages and the amount of taxes withheld from his or her paycheck. The Orem SBDC office has document packets prepared for employers who are ready to hire employees and subcontractors. "They contain everything from tax forms to background check and drug testing forms," says Fakler. "Or, you can go to the state's web site and file," says Greg Panichello, Utah State Director of Small Business Centers. "You can find information about unemployment insurance and taxes on the site as well as actually registering new employees. It's a powerful tool. Utah's a very business-friendly state."  To top of page

What was your experience hiring your first employees? Share your stories.

A quick question from FSB: For a future story, we would like to find business owners who routinely sleep no more than 4 to 6 hours per night. If you're a night-owl entrepreneur, write to Anne Fisher at afisher@fortunemail.com and tell us how you adapted to your current schedule.

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