Hiring your first employee can mark an exciting step for a small business owner: Your sales are increasing, work keeps coming in, and it’s finally time to think about adding to your team.
Ideally, your first employee is just as enthusiastic and committed as you. They share your vision and values, contribute critical skills to help you reach your business goals, and thrive in both the challenges and rewards of life at an early stage company.
To maximize your chances of finding the right fit, business owners must consider the business’s needs, as well as understand the legal and logistical requirements that go into making the first hire.
Are you ready to hire your first employee? 3 questions to ask
- What business needs will your employee meet?
- Can you afford to hire?
- Are you prepared to comply with applicable employment law?
Assessing your business needs, costs, and other obligations associated with hiring your first employee can help you make the right hire at the right time. It also increases the odds that your new employee will be a long-term fit for your organization—helping you achieve business milestones as you grow your company. Before you post a job ad, answer the following questions to make sure you’re ready to make your first hire.
1. What business needs will your employee meet?
There are two main reasons to add to your team:
- To increase internal capacity so you can continue to meet client needs and take on more work.
- 2. To obtain a specialized skill set associated with a new project or an ongoing area of business operations.
Start by identifying what type of help you need, the skills the person should have, and the timeline for hiring. Do you need a generalist who can immediately jump in and assist across multiple projects and clients, or a specialist who brings technical expertise?
If you’re experiencing a crunch due to a seasonal uptick in sales, consider what your needs might look like in three to six months. Your first employee may have a temporary role. If ongoing assistance is necessary after the project’s conclusion, you may be ready to add a permanent position to your team. If not, hiring an temporary employee or independent contractor can still help you meet temporary needs and augment your staff until you’re ready to make a full-time hire.
2. Can you afford to hire?
Hiring a new employee can be time- and cost-intensive. A growing business might stretch its budget to hire after running a cost-benefit analysis and finding that this is the best option to support long-term sustainability. For example, you might ask yourself whether you will be able to continue to grow revenue over the next six months without hiring.
Some employee-related expenses to consider when deciding if you can afford to hire a full-time employee include:
A common rule of thumb is that a business should spend no more than 20% to 30% of its gross revenue on salaries. Service businesses are an exception to this rule—they may spend up to 50% of gross revenue on payroll.
Calculate your gross revenue and perform a competitive salary analysis to see if the salary you can offer is competitive enough to attract and retain your desired type of employee. Determine if you can divert those funds to payroll without compromising other areas of your business operations.
Employers are responsible for paying federal payroll taxes, including the employer’s contribution to Social Security and Medicare tax funds, and federal unemployment tax (FUTA), which funds federal unemployment insurance programs. Some states also levy an additional state unemployment insurance tax (SUTA), which provides funding for state unemployment insurance programming.
Insurance and employee benefits
Every US state except Texas requires employers to obtain workers’ compensation insurance coverage. Some states also require employers to fund temporary disability insurance. In many states, this isn’t needed until you reach a certain number of employees, so check with your state’s Department of Labor to determine your requirements. Although the federal government doesn’t require businesses with fewer than 50 employees to offer health insurance coverage, some small businesses offer this benefit as part of an employee’s total compensation package.
Recruitment and hiring
The recruitment and hiring process takes time. The hours spent on these tasks can take you away from business development and other revenue-generating activities. Consider the value of your time when hiring, and think about whether you can afford to outsource it to a recruiter.
Training and management
Once you hire, you become responsible for managing your employee. In some cases, hiring a promising employee with less experience and training them yourself (or paying for training) can be a cost-effective option. If you can’t afford to spend time or funds on training and development, hiring someone with the skills you need immediately—albeit, for a higher salary—can be faster. Although you still need to provide daily management and supervision.
Equipment and workspace
Consider what equipment you’ll need to provide. Will your new employee work remotely from home, or will they require an office space? Calculate equipment and infrastructure costs and add those into your budget.
3. Are you prepared to comply with applicable employment law?
Covered employers are required to comply with local, state, and federal labor laws. Whether or not a business is considered a covered employer varies by jurisdiction and regulation type. Consult all applicable state, federal, and local labor departments to find out which laws apply to you.
The US Department of Labor enforces more than 180 laws at the federal level, including wage and hour laws under the Fair Labor Standards Act (FLSA), workplace safety and health laws as required by the Occupational Safety and Health Act (OSHA), and work leave requirements under the Family and Medical Leave Act (FMLA). Keep in mind, not all laws will apply to all businesses, but you should be aware of which may apply to yours.
How to hire your first employee in 4 steps
Once you’re ready to make a hire, it’s time to start the employee hiring process. Follow these four steps to hire your first employee:
1. Complete licensing and registration requirements
Before hiring your first employee, make sure all your state and federal business registrations and licenses are up to date:
Register your business with the state
If you haven’t already, register with the state and, if applicable, with your city or other local jurisdiction. You’ll need current registration and licensing to legally hire an employee and protect your business name, among other legal protections registering provides. This may be the first step.
Apply for an employer identification number (EIN)
An employer identification number (EIN) is a federally issued number the government uses to identify your business for tax and other purposes. You can apply for free online through the IRS.
Register as an employer with your state's labor department
Registering with your state’s Department of Labor is necessary once you reach a certain threshold for wages. At that point, you are subject to paying various taxes and benefits, such as disability and Federal Unemployment Tax (FUTA). The Small Business Administration maintains a list of state labor offices you can contact for more information. Depending on the state, you may also be required to register with the state’s unemployment office.
2. Prepare for employment law compliance
Make sure you check all your boxes when it comes to compliance with labor laws. Some basic steps to take include:
Display labor law posters
The US Department of Labor (DOL) requires employers to display labor law posters in the workplace—or provide them electronically to remote workers. Consult the DOL to determine which posters you should display and to obtain any applicable state posters.
Purchase workers’ compensation insurance
Figure out whether you will be required to provide workers’ compensation insurance. If so, research carriers and secure coverage before hiring.
Make a payroll administration plan
Decide how often you’ll pay your employees, what kind of accounting and payroll software you’ll use, and how you’ll withhold and file taxes—federal income tax and state income tax, if applicable. A human resources or tax professional can help develop a payment processing and tax withholding plan and comply with applicable state and federal law.
Create an employee handbook
Successful professional relationships are all about clear expectations and communication. Before bringing on your new hire, spend some time outlining your expectations in an employee handbook. Include paid time off, sick leave, review processes, and requirements for professional conduct.
3. Advertise, interview, and make an offer
Start by creating a job description that includes key job responsibilities and qualifications, compensation and benefits information, and steps about how to apply. Some states require employers to disclose salary ranges in job postings, so check with your state DOL to make sure your postings are compliant.
Advertise your open position by posting it to your website, sharing it on your professional and personal social media accounts, and posting it to job boards. You can also share with members of your professional network and request referrals—and even reach out to recommended contacts who might be a good fit.
As you receive applications, you can schedule brief screening calls and select three to four qualified candidates to advance to a more in-depth interview process. You may also conduct reference checks or ask them to perform a skills test. From there, identify a finalist and extend an offer.
4. Hire your new employee
Once a candidate accepts an offer, you’re ready to officially hire your new employee. Here are a few steps to take to ready them for the job:
- Issue an employment contract. Work with your HR consultant or attorney to draw up an employment contract for you and your new employee to sign.
- Collect forms. Collect new hire, benefit election, and tax forms, which may include form W-4, the Employee’s Withholding Certificate, Form I-9 (to verify US employment eligibility), and the W-2.
- Report your hire. Report your new hire to your state’s Department of Labor to maintain compliance and allow your state to enforce and existing child support orders, if applicable.
- Initiate payroll. Initiate payroll, making sure to withhold from employee wages the necessary payroll taxes.
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How to hire your first employee FAQ
How much revenue should you have before hiring your first employee?
A common rule of thumb is that a business should spend no more than 20% to 30% of its gross revenue on salaries.
Is onboarding necessary for a new employee?
Yes, at a bare minimum, the employee onboarding process includes understanding the functions of the job, training on how to use existing workplace systems, and making sure employees know who to contact with job-related questions.
How do I set up payroll for my first employee?
Payroll processing can be complex. An HR consultant can help you set up and manage payroll system, but in general, follow these steps: Select payroll software Collect W-4s Establish a payroll schedule Withhold and pay taxes File tax forms and submit employee W-2s