For many small businesses, there comes a time when you simply can't keep up with the workload on your own. Trying to do everything can result in added stress and burnout, and can even drag down your business profits.
If you've reached this crossroads, you're probably thinking of hiring some help. But hiring employees can be a big decision...perhaps bigger than you realize if you've never been an employer before. To help you make the best decision and reduce your stress, here is a brief guide to becoming a first-time employer in North Carolina.
The first thing you'll need to decide before hiring someone is whether you will be hiring them as an employee or an independent contractor. What's the difference? An independent contractor is treated as though they were their own business. You pay them an agreed-upon amount and they cover their own taxes, insurance, and expenses. This makes an independent contractor less expensive for most businesses.
However, before you run out and sign up an independent contractor, know that the IRS has specific guidelines about who can be classified as a contractor and who must be considered an employee. If you have control of when, where, with what, and by whom the work is done, the person is likely an employee. And misclassifying an independent contractor can be costly if the IRS or state determine that you must correct the error.
While most people think of employees in terms of the hourly wage or annual salary, there is a lot more cost to the employer than just that. In truth, related expenses can add 25% to 40% to the rate paid to the employee. These added costs may include:
• FICA payroll taxes paid by both employer and employee
• Unemployment insurance paid by employer
• Workers' compensation coverage paid by employer
• Health insurance and other benefits
• Accounting costs to file additional forms
• Costs of additional work space and/or equipment
Obviously, it's important to ensure that your business budget can cover all these costs...both direct and indirect. If you need help determining how much to plan for in the company budget, work with your
accountant or bookkeeping service to get specifics for your industry and region.
If you decide that you will, indeed, be hiring an employee, you will need to register with several agencies prior to the first payroll. The IRS issues Employer Identification Numbers through its official website. That EIN will allow you to file employer tax returns and pay withholding tax deducted from your employees' paychecks as well as your own payroll taxes.
In addition, in North Carolina, you will generally need to file with the Department of Revenue to pay any withholding for state income tax. North Carolina also requires that employers with three or more employees pay for workers' compensation coverage through the Industrial Commission. And the Division of Employment Security handles mandatory unemployment insurance coverage.
There are a few ways to keep costs and your time investment at a minimum. If you're a first-time employer, it's a good idea to hire a service to handle the payroll and tax filing requirements. Navigating the process of getting registered with all necessary agencies, filing the right forms on time, and calculating paychecks can be overwhelming and leaves a lot of room for error. At least for a while, it's often best to use experienced professionals.
Your accountant can also suggest some additional ways to reduce the burden. This might include hiring your own minor children, which in some cases can free you of the requirement to pay some payroll taxes. You may also want to keep your payroll under certain thresholds for oversight or additional costs from state agencies. Outsourcing some of your work--such as administrative tasks, bookkeeping, or advertising--to other companies may also help you avoid having to hire your own employees.
Understanding the full costs and requirements of being an employer will help you make the best decision for your business. And, even if it doesn't turn out to be the right moment now, it will prepare you to move forward with confidence when the right moment comes along.
