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Small Business: What You Must Do Before Hiring Your First Employee

Here's what to say (and not say) to job candidates, plus four steps to take before your first staffer reports to work

By Gwen Moran

You’ve gotten your business off to a successful start — so successful, in fact, that it’s time to hire your first employee. But staffing is a bit more complex than telling a qualified candidate, “You’re hired!”

When interviewing applicants, be sure not to overpromise. You don't want to say anything that will impair what's known as the "at-will" nature of employment; small businesses are typically free to hire and fire employees at will.

Also, be wary of inadvertently entering into a contract. Don't tell a candidate how long you expect him or her to work for you, unless you’re hiring the person for a specific period of time with a set end-date.  Spoken words can be binding.

(MORE: 6 Tips That Can Help Small Businesses Land Big Clients)

If you try to entice someone to leave another job by saying that you know you'll need the applicant's services for, say, at least two years, that "could be considered a commitment and could expose you to legal action if you fire the employee before that two-year period is up,” says Fred S. Steingold of the Ann Arbor, Mich., law firm Hamilton, Judge, Schroer & Steingold and author of The Step-by-Step Guide to Hiring Your First Employee.

During interviews, avoid asking questions about race, ethnicity, marital status, religion, sexual orientation and age. They could lead to accusations of discriminatory practices if you decide not to hire the candidate.

4 Steps to Take Before Hiring

Before you hire anyone, followthese steps:

Get (legally) briefed. You can get into hot water if you're not aware of key laws that apply to all employers, says Steingold. In particular, familiarize yourself with federal anti-discrimination laws and federal and state laws regarding minimum wage and overtime.

Eighteen states and Washington, D.C., have minimum wages superceding the federal $7.25-per-hour minimum wage. If you’re hiring in Michigan, for example, you must pay at least $7.40 per hour. (The nation's highest minimum wage: $9.04, in Washington State.) A good place to find information about legal requirements is your state’s Department of Labor site.

Figure out which benefits you'll offer. Will you provide health insurance? A retirement plan? Two weeks of paid vacation? Benefits like these will increase your costs and the total compensation package, but they'll also help you attract better candidates.

Keep in mind that if you have a SEP-IRA or SIMPLE IRA retirement plan yourself, you must offer the same type of plan to employees. You may also need to fund the employee's retirement plan, as I explained in a previous Next Avenue blog: "How to Choose the Right Small Business Retirement Plan."

Get three key forms. Prospective employers are required by the federal government to collect three forms from employees:




  • New Hire Reporting Form Each state has its own version of this form, designed to identify parents who are delinquent in child support payments. Get the right one by typing "[Your State], New Hire Reporting Form” into a search engine or by contacting your state Department of Labor.

Calculate all the proper tax withholdings. As an employer, you'll be responsible for withholding not only federal income taxes but also various other federal, state and local taxes — and then remitting them to the proper authorities.

Your state’s Department of Labor or Department of Taxation can assist you in calculating employee withholding at the state and local level.

Need help? Cloud-based computer programs such as Quickbooks Payroll ($236 per year) can calculate your tax liability for each employee.

Take the tax rules for employees very seriously: Federal and state authorities levy steep fines if you make mistakes. It’s a good idea to double-check your withholding plans with your accountant before putting that first hire on the payroll.

Better safe than slapped with a sorry penalty.

Gwen Moran is a small business authority and author of The Complete Idiot’s Guide to Business Plans. She has been running her own businesses since 1992 and was a national finalist in the U.S. Small Business Administration’s Young Entrepreneur of the Year awards competition. Read More
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