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Hiring the first employee is an exciting milestone for any small business owner. You can start delegating tasks and focus on taking your business to the next level. But hiring also comes with a host of new responsibilities, from following employment laws to setting up payroll to navigating benefits packages.
If you’re wondering how to hire your first employee, taking a step-by-step approach can help you prepare your finances and meet your legal obligations. Here’s how to navigate the process and find the right person for your business.
Key Points
• Having a consistent workload available signals that your business may be ready to hire its first employee.
• Your budget must support more than your first employee’s wages alone, since costs will include employment taxes, payroll costs, equipment, and training expenses for the new hire.
• When you’re hiring your first employee, legal and tax requirements include obtaining an employer identification number (EIN), registering with your state’s new hire system, setting up payroll, and verifying work authorization.
• A strong job description with a clear title, company overview, responsibilities, required skills, schedule, and benefits may help attract qualified candidates to apply to your company.
• Onboarding a new employee can involve completing paperwork, setting up payroll, sharing equipment, reviewing company policies, and establishing goals and expectations for the role.
When Should I Hire My First Employee?
When exactly you should hire your first employee depends on your business stage and growth goals, but here are a few signs that it might be time:
• There’s a consistent workload for a new hire: Make sure your business has enough ongoing work for a new employee, rather than just a temporary upsurge in tasks.
• You have the budget for an employee: Your company’s annual revenue must be able to support the expense. Not only will you need to cover wages, but you’ll also have additional costs like employment taxes, payroll costs, equipment, and training.
• Your business is lacking certain skills: You might hire an employee who can bring specific skills in marketing, technology, operations, or another area you need to grow your business.
If you’re turning away new opportunities because you have limited bandwidth, hiring an employee could give you some breathing room and the chance to expand. Some business owners start with part-time employees or independent contractors if they don’t have the workload or budget yet to support a full-time hire.
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Steps to Hire Your First Employee
If the time is right to hire your first employee, these are the steps for navigating the process.
Step 1: Get Your Legal and Tax Obligations in Order
Your first step to hire your first employee is to ensure that your business meets legal and tax requirements. Some actions you’ll need to consider taking include:
• Obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS)
• Signing up for your state’s new hire registration system
• Getting paperwork to withhold federal income tax from your employee’s paycheck (they’ll fill out Form W-4)
• Setting up a payroll system
• Determining whether you need workers’ compensation (this varies by state, but is usually required)
• Reporting payroll taxes on a quarterly or annual basis
• Preparing Form I-9 to verify that your employee is legally authorized to work in the U.S.
Some employment laws vary by state, so your specific steps may vary depending on where you operate. You can also check out the Employer’s Tax Guide from the IRS for guidance on federal tax filing requirements.
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Step 2: Determine What You Can Afford
Your next step is putting together a realistic budget for a new hire. Taking on an employee is a long-term financial commitment that involves more than just paying wages. You’ll also need to cover costs like:
• Payroll taxes, including Social Security, Medicare, and unemployment taxes
• Equipment and supplies
• Office space
• Software
• Training
You might also consider offering benefits like health insurance, paid time off, or a 401(k) match. Review your budget to make sure you’re prepared for the full long-term costs of a new hire.
For additional funds or to cover a gap in cash flow, some businesses turn to financing options such as small business loans or lines of credit.
Step 3: Write a Job Description
A strong job description can help you stand out from competitors and attract qualified candidates to your company. Start by summarizing the role and clearly describing what the job involves.
Include details like:
• Job title
• Overview of the company
• Key responsibilities
• Required skills and experience
• Work schedule
• Location requirements
• Any benefits or perks
You might also include information on salary or pay range. Some states now require companies to disclose salary information in the job posting or if a candidate requests it.
Step 4: Post the Job and Screen Applicants
Once you’ve crafted your job description, you could post it on your company website, online job boards, or a professional networking site like LinkedIn. You might also share it in local business networks or communities that are specific to your industry.
Once several people have applied, your next step is to screen the candidates to pick the ones you want to move forward in the hiring process. The screening process may involve reviewing resumes and cover letters, having short phone calls, or requiring a pre-employment questionnaire or test.
Aim for consistency in the screening process so you treat each applicant fairly.
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Step 5: Interview and Select Your Candidate
Interviewing candidates can help you learn more about an applicant’s skills and experience and assess whether they’d be a good fit for your small business. Prepare questions in advance that can help you understand how they communicate and how they would contribute to your business goals.
Look for qualities that are important to the role, like flexibility, accountability, discipline, or resilience. You might ask behavioral questions that pinpoint how the candidate dealt with specific situations in the past, such as overcoming an obstacle or coping with a challenge.
You might also ask for references and confirm a candidate’s availability and salary expectations.
Step 6: Make an Offer and Onboard Your New Hire
Once you’ve picked your new hire, you can send them an official offer letter. This letter should contain all the terms and conditions of the role, including:
• Job title
• Compensation
• Start date
• Work schedule
• Any benefits or other employment terms
You could also include a deadline for accepting or declining the offer. Assuming the candidate accepts, your next step is onboarding them to the business. Onboarding could include:
• Completing paperwork
• Setting up payroll
• Sharing equipment or other tools
• Going over company policies
• Explaining workflows and processes
• Setting goals and expectations
A thoughtful onboarding experience can help your employee feel more confident in their new role and set them up for success.
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Common Mistakes to Avoid When Hiring Your First Employee
When you’re hiring your first employee, make sure to avoid these common mistakes.
• Hiring before you’re ready: Your business should have sufficient revenue and a consistent workload to support the new hire.
• Missing legal requirements: You’ll need to stay compliant with federal and state tax requirements and employment laws.
• Underestimating the costs: A new hire costs more than just wages. Prepare to pay required payroll taxes, purchase equipment, and pay for workers’ compensation in some states.
• Misclassifying your employee: Mixing up an independent contractor with an employee could result in costly penalties.
• Writing a vague job description: Unclear expectations could undermine your search for the right candidate.
• Rushing into a hiring decision: Take the time to interview multiple qualified candidates so you can find the best fit.
• Skipping the onboarding process: Investing time into welcoming and training your new employee upfront can help them succeed in the long run.
The Takeaway
Hiring your first employee can ultimately free up more of your time and help your company become more productive, but it calls for careful planning first. You’ll need to review your legal responsibilities and budget and create a thoughtful hiring and onboarding process. With the right preparation, you can find a candidate who can help launch your business into its next stage of growth.
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FAQ
What forms do I need to hire my first employee?
To hire your first employee, you’ll need Form W-2 for federal income tax and Form I-9 to verify the new hire’s identity and eligibility to work in the U.S. You may also need state-specific forms, such as a form to get a state tax ID. Businesses must register new employees with their state.
How much does it cost to hire your first employee?
The cost of hiring an employee will be higher than the employee’s wages alone. You’ll also have to factor in the costs of job board listings, payroll taxes, workers’ compensation (if required), equipment, and any other costs that go into the hiring process. If you choose to offer benefits like health insurance or a 401(k) match, those will be an additional expense.
Should my first employee be full-time or part-time?
When deciding between a part-time and full-time first hire, think about your business’s workload and budget. If you only need limited support or are operating on a tight budget, a part-time employee offers more flexibility. If you have enough work and revenue to support a full-time role, you may opt for a full-time employee who will be dedicated to a core role in your business.
Do I need payroll software before hiring my first employee?
You’re not required to use payroll software, but having a system in place can be helpful before you hire your first employee. Payroll software can automate the process of sending out paychecks, withholding taxes, and following compliance requirements.
What’s the difference between hiring an employee and a contractor?
Employees usually work a set schedule under the direction of a business and have taxes withheld from their paychecks. Independent contractors typically work on their own schedule and handle their own taxes. Businesses issue a W-2 to employees and 1099-MISC to independent contractors.
Photo credit: iStock/ABRAHAM GONZALEZ FERNANDEZ
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