By J’Nan Ensz, managing member of Accounting and Business Consulting LLC in Beatrice, Nebraska; Jessie Eby contributed to this blog.
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Many small businesses begin as a mighty team of one or two and quickly recognize the need for additional help. In addition to executing the tasks for the business, you’re probably also running behind-the-scenes jobs such as cleaning and maintenance, finances, marketing, and more. Do you think it’s time to add an employee or two to the mix to help share the load? Whether you’re thinking about hiring soon or later on down the road, there are a few things to keep in mind.
1. Can you afford to hire an employee?
The most important thing to consider is whether you can afford to pay an employee. Although it may be nice to get an extra set of hands, that could create financial strain. It’s important to be realistic with your financial projections and err on the conservative side. Refer to your business plan and financial records to determine whether now is the time to hire, or if you need to hold off and continue to grow the business for a while.
2. How much does it cost to hire an employee?
Understanding the cost of an employee is a little more complex than simply considering their salary. What most people don’t realize is that you won’t simply be paying their wage; you’ll also need to account for payroll taxes. Whatever you plan to offer as a wage, you can expect to add about 10% to cover payroll taxes. It’s a good idea to set up a separate bank account to hold this additional 10%, plus the employee’s withholding. This will help you be sure you’ve set aside enough money when it’s time to pay taxes.
What are payroll taxes?
Payroll taxes include FICA, Medicare, state unemployment, and federal unemployment. It can be hard to get a solid estimate of your state unemployment taxes, as it is determined by the line of business you’re in. If it’s a profession with a higher turnover rate, your unemployment taxes will be greater.
What is workers’ compensation insurance? Does your business need it?
Workers’ compensation covers employees in case of accidental injury on the job and is a requirement for all employers, no matter the line of work. If you have employees, you are required to carry workers’ compensation insurance. Premiums vary based on the level of risk associated with the job.
3. What kind of employee do you need?
No two businesses are alike, and employment needs can vary. Determining the volume of work you have available and the amount of money you can offer can help you discern the type of employee you’re looking for. In addition to considering the needs of your business, there are also strict labor laws to be aware of that will help you determine the type of employee you can hire.
Salaried employees
A salaried employee is one who earns a set amount of money regardless of hours worked. Salaried employees must earn at least $35,568 in the state of Nebraska, the current salary threshold determined by the Fair Labor Standards Act. You can learn more about the Fair Labor Standards Act here. Typically, salaried employees are also offered a benefit package that includes paid time off (vacation and sick days) and health care coverage.
Hourly employees
An hourly employee is, as it sounds, paid based on the hours they work. They must be paid overtime if they work more than 40 hours in a week. Generally, part-time employees are paid hourly. Hourly employees are often not offered paid time off or health care coverage.
Exempt vs non-exempt employees
Additionally, there are exempt and non-exempt employees. An exempt employee is exempt from the Fair Labor Standards Act overtime regulations and therefore is not eligible to receive overtime pay. These employees are often salaried and typically hold administrative, professional, or executive roles. A non-exempt employee is typically paid hourly and earns a salary of less than $35,568 annually. Non-exempt employees must be paid overtime when their weekly hours exceed 40.
Employees vs independent contractors
As mentioned before, if you have an employee, you’ll need to account for payroll taxes and workers’ compensation in addition to the wages you plan to offer and any benefits you plan to provide. Although they may be part-time or full-time, they would be working solely for you while they are on the clock, and you would be in charge of their training and supervision.
An independent contractor has their own business, files their own taxes, and does not receive any benefits from you. Generally, you would not be required to carry workers’ compensation. However, there are rules that determine whether you’re allowed to treat someone as an independent contractor. Also, generally speaking, an independent contractor is going to fulfill duties that don’t generate income for your business, but rather help you maintain it. Some examples of this would be hiring a weekly cleaner, outsourcing your website maintenance, or working with a designer. Be aware that the IRS has nine criteria that determine whether someone is truly an independent contractor.
4. How to hire an employee
Before hiring an employee, you’ll need them to fill out an application. Generic application templates can be found online, but if you need an application with more specific questions that relate to your business, you’ll want to consult with a human resources specialist. There are certain things you cannot ask on an employment application and verbiage you should avoid using. A human resource professional can guide you to ensure that you’re complying with all labor laws.
Once you’ve hired your employee, they will need to complete a W4 and a form I-9. The W4 is a tax form that allows your employee to indicate how much should be withheld from their check for federal taxes. The form I-9 is used to verify the employee’s identity and confirm they are either a U.S. citizen or that they’re allowed to work in the U.S.
5. Avoiding compliance issues
As a small business owner, you’re probably pretty resourceful and scrappy—your entrepreneurial spirit is likely the reason you’ve made it this far in your business. We know it’s tempting to try to tackle your finances and bookkeeping, but once you add employees to the mix, things get more complex. There are many compliance issues to be aware of and it’s always smart to have a professional on your side. We suggest finding trusted financial and human resources professionals for guidance.
You can find Nebraska’s labor standards at dol.nebraska.gov.
The Center for Rural Affairs offers personal, one-on-one business assistance to entrepreneurs and small business owners across the state. Our business specialists and consultants can work with you virtually or in-person on business planning, financial goals, and more. To request an appointment, please email [email protected].
