Hiring an Employee or a Contractor

Preparing to Hire

Thinking of staffing up? Here’s how to get started

You have several steps and decisions to make before you start looking for employees. This information will help you sort through the process: from applying for an Employer Identification Number to choosing a payroll option.

Classify workers correctly: independent contractors vs. employees

What’s the difference between an independent contractor and an employee? It’s important to classify workers correctly. For payroll tax purposes, workers are generally classified as employees or independent contractors. Whether a worker is an employee or an independent contractor depends on the amount of control the employer has over the worker. What’s the difference between an employee and an independent contractor? A worker’s classification has certain payroll tax implications. Basically, for employees, you pay payroll taxes (like Social Security), but for contractors, you don’t have to. A few simple questions can help you determine whether the person you’re hiring is an employee (and will need a tax form W-2) or an independent contractor (and will need a tax form 1099).

  • Will the work be performed on company premises?
  • Will the individual work only for you?
  • Will you provide tools for your worker to do his or her job?
  • Do you control the hours the person works?

If you answered “yes” to any of the questions above, odds are you’re hiring a W-2 employee and not a 1099 independent contractor. For more detailed information on how to classify a new hire, check out the IRS’s Publication 15-A. While it’s tempting to pay someone as an independent contractor since it’s less expensive, it could get you into trouble later. In fact, the IRS has started cracking down on employers who classify their workers incorrectly. Read the article at the Wall Street Journal.

Get your employer identification number

In order to do business, you will need to get a number that identifies your business to the government. There are a few identification numbers you typically must have as an employer — one from the IRS called an Employer Identification Number (EIN), one from your state revenue department, and one from your state employment department—and you need to check with local jurisdictions as well.

  • The federal Internal Revenue Service requires employers to have an identification number called an Employer Identification Number, or EIN. The government uses this number to identify your business and track your federal payroll taxes. If you don’t already have one, you can apply for an EIN online — it’s actually quite easy.
  • Your state government usually requires a separate ID to track state payroll taxes — usually one for unemployment insurance tax and one for withholding tax if it’s applicable to your business. These numbers, like the EIN, will also be used to identify your business when you do things like pay taxes. Consult your state’s employer website to learn more about specific requirements in your state.Some local jurisdictions may also require an ID as well. Consult your local government offices or website for details on specific requirements.

Payroll 101

What is payroll? As an employer, you have specific payroll responsibilities that are required by federal, state or local agencies. Payroll can be complicated. But there are essentially 3 main jobs for employers in doing payroll:

  1. Paying employees (and withholding the right taxes from paychecks)
  2. Paying payroll taxes (both taxes withheld from employees’ paychecks and taxes employers pay on behalf of their employees)
  3. Filing tax forms

To learn more about payroll, check out this Payroll 101 Guide

Choose a payroll method

When it comes to running payroll, we make it easy for you to choose the option that’s right for your business. There are 3 basic ways to do your payroll —by yourself, by yourself with the help of software, or by outsourcing to a third-party service. Use the chart below to figure out which method is right for you.

Do it yourself by hand
Do it yourself with payroll software
Outsource payroll to a third-party service
Pay Employees

you do it all manually

  • track time worked;
  • calculate taxes;
  • create paychecks yourself.
  • You enter time worked into the software.
  • The payroll software calculates taxes automatically.
  • You print paychecks (or pay employees by Direct Deposit).
  • You report time worked to the payroll outsourcer.
  • The payroll outsourcer calculates taxes.
  • The payroll outsourcer typically delivers the paychecks.
Pay the Government
  • You calculate taxes manually and keep track of when taxes are due.
  • You make payments by mail or electronically.
  • The payroll software calculates taxes automatically and can remind you when taxes are due.
  • You make payments by mail or electronically.
  • Some software services or accountants can handle payments for you.
  • The payroll outsourcer calculates taxes and keeps tracks of when taxes are due.
  • The payroll outsourcer typically handles the payments for you.
File Tax Forms
  • You fill out forms manually.
  • You file by mail or electronically (in some states).
  • The software fills out the forms at the click of a button.
  • You can file electronically or print and mail.
  • Some software services or accountants can handle tax filings for you
  • The payroll outsourcer completes the forms.
  • The payroll outsourcer handles the tax filing.
Choose the Option that Suits Your Company Best
For business owners who are highly cost-conscious and who have the time, expertise, and willingness to handle administrative payroll tasks manually.
For business owners who want to save time by automating as much of the payroll process as possible, while still maintaining control. The cost of software is modest compared to the time savings.
For business owners who want to fully delegate payroll and tax filings. The cost of outsourced payroll can be higher than that of payroll software, but services may be more extensive.
When you’re ready, learn more about Intuit Payroll Solutions. Intuit offers several options (including solutions that work with QuickBooks) that let you pick how involved you want to be with your business payroll.

Find out how much hiring an employee really costs

How much does it cost to hire an employee? It’s more than just paying a salary. For every employee you hire, you are responsible not only for each employee’s compensation but also for each employee’s associated payroll taxes. Let’s say you hired a W-2 employee named Nick, and you wanted to pay Nick $10 per hour. On top of all the deductions taken from Nick’s paycheck, you, as the employer, will also have to pay payroll taxes and other expenses (also known as liabilities). The table below gives you an idea of what those payments might look like:

Percentage of employee’s gross wages that the employer must pay
Social Security
Federal + state unemployment insurance
2-6% (this varies — 4% is typical for new employers)
Workers’ Compensation insurance (varies depending on insurance provider and type of work being performed)
Other local payroll taxes (depends on location)
1-2% (local taxes paid by the employer are usually a flat fee per employee ranging from $2-$4 or a percentage of total payroll for all employees)

So, for every $10 you pay Nick, it will actually cost you about $11-12 dollars per hour to employ him. Keep in mind that this is roughly how much it will cost before offering any employee benefits, providing any work supplies (like a computer) or spending time training him. As a general rule of thumb, depending on your state and local laws, payroll taxes can add 15% or more to the total cost of hiring an employee. SOURCE: Intuit Payroll

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