I’ve been freelancing for several years, but my writing business really took off in 2016. Between sending clients invoices, marketing my services, and managing social media accounts, I didn’t have time for much else. Even if I wanted to pursue better-paying projects and come up with innovative new ideas, there weren’t enough hours in the day.
I knew I needed help, but I didn’t know where to start.
I hired an independent contractor at the end of the year, and I was shocked at how intensive the process was. Sure, I made plenty of mistakes along the way, but I learned a lot from the experience, too.
This new hire checklist has everything you need to know about hiring for your small business of side hustle.
When is it time to hire employees?
When you launch a small business, you often do everything on your own. You’re in charge of the marketing, accounting, administrative tasks, and the actual work. But eventually, your business can grow so big that you just can’t juggle it on your own any longer.
Hiring staff can be a wise decision, but it’ll cost you. Before you post a help wanted ad, evaluate your current profits and calculate if you can afford a new person on your current income.
While you only need to pay an independent contractor’s invoices, an employee is more expensive. Consider the cost of salary, taxes, and health benefits in your analysis. If your employee will need supplies such as a computer, that can add your cost, too.
Also consider how a new person will impact your potential for growth. If you hire someone to handle administrative tasks, that frees up time for you. You could do more big-picture projects or pitch new clients, which can lead to more income.
If hiring someone new means you can secure new contracts, it may be worth the expense and paperwork.
Do you need an employee or independent contractor?
Independent contractors are very different from employees. It’s important to understand the difference, too. If you don’t, you can end up in trouble with the IRS. The consequences for misclassifying an employee can cost you in tax penalties and fees.
- have multiple clients
- maintain a separate business check account
- invoice clients for the work they complete
- keep their own business records
- typically use their own equipment
Many small business owners start out with independent contractors because they’re cheaper and more flexible than employees. They’re also easier to manage from a legal standpoint. You only need to worry about collecting and paying invoices.
- work for just one employer
- tend to have set hours
- are issued equipment by the employer
If you hire an employee, you generally must withhold income tax, Social Security, and Medicare taxes on the wages you pay them.
If you only need occasional help or project-based assistance, an independent contractor is likely the best fit. But if you need regular support for set hours each week, an employee may be a better option.
New hire checklist for hiring independent contractors
The process for bringing on an independent contractor is simpler than hiring an employee, but there are still tax rules to follow. Follow these steps to ensure you handle everything appropriately:
1. Have them fill out a W-9
To work with independent contractors, you must have them complete a W-9 Request For Tax Payer Identification and Certification Form. Contractors must supply a tax identification number, such as a Social Security number or an Employer Identification number.
2. Collect their resume and contract
In addition to a contractor’s W-9 form, you also should collect their resume and a contract of their services for your records. While the government does not require this step, it’s helpful to have these documents handy in case of a tax audit.
3. Set up a payment system
Paying your independent contractor is simple. You can choose to pay them by project or an hourly rate, depending on the terms you agreed to. In most instances, you don’t need to withhold taxes from their pay.
Set up a payment tracking system (bookkeeping software can be helpful) to manage invoices and record your payments.
4. Report payments at tax time
You must track your payments to your contractor for the year. For every independent contractor that you paid $600 or more during the year, you have to report those payments to the IRS. You do so by filing a 1099-MISC. You also need to send a copy to the contractor for their records by January 31 of that tax season.
New hire checklist for hiring employees
If you decide that hiring employees in necessary to grow your business, complete the following steps:
1. Get an Employer Identification Number
Before you can hire anyone, you need to have an Employer Identification Number (EIN) from the IRS. An EIN is necessary for filing your taxes and other documents.
To get an EIN, you must have a valid tax identification number, such as a Social Security number, and your business must be in the U.S. While there are many services that will open an EIN for you, it’s cheaper to do it yourself. You can apply for an EIN online for free.
2. Set up a system to record tax withholdings
Running your own business means you have a lot more tax obligations and forms. Setting up a good record-keeping system now can help you in the long run. The IRS requires business owners keep records of employment taxes for four years.
You will need the following withholding tax forms once you hire staff:
- Federal income tax withholding: New employees have to submit a withholding exemption form, more commonly known as a W-4, to their employer. The business sends it on to the IRS.
- Federal wage statement: The IRS requires you to submit any wages you paid and taxes you withheld for each employee. You file the report using a W-2 form.
- State tax statement: Depending on where you live, you may have to submit forms to the state about wages and taxes.
3. Verify employee eligibility
As an employer, the federal government requires you to verify if an employee is eligible to work legally in the U.S. Within three days of hiring a new person, the employee has to complete an I-9 form.
As part of that process, you need to review their identification — such as a birth certificate or driver’s license. You can verify their identification online with E-Verify.
4. Register with your state’s reporting program
The government requires employers to report new hires to the local state reporting directory within 20 days of the new employee’s date of hire. To find your state agency, visit the Department of Health & Human Services website.
5. Get workers’ compensation insurance
If you have an employee, you must have a workers’ compensation insurance coverage. This requirement provides necessary protection in case of an injury or other on-the-job issue.
Rules vary depending on your state and industry, so check on your state government’s website for specific requirements.
6. Post notices
The government says employers must post certain notices in the workplace to form employees of their rights. The Department of Labor requires you to hang posters relating to the Fair Labor Standards Act, the Occupational Safety and Health Act, and more.
To find out which posters you need for your business, enter your information in the FirstStep Poster Advisor tool.
7. File your taxes
If you have employees, you have to submit the Employer’s Quarterly Federal Tax Return (form 941). This form shows wages you paid that are eligible for withholding, Social Security, and Medicare taxes.
There may be other forms that you need to file, depending on your location and business type. As your business expands to hiring staff, it’s a good idea to work with a professional accountant with small business experience to help you navigate the process.
Hiring employees or independent contractors can be a smart way to grow your business and save you time, but the process can be frustrating and intensive. Use this new hire checklist to learn how to hire employees and navigate through the appropriate procedures.
For more information on handling your business, find out how a business bank account can help your side hustle.
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