Making the decision to hire employees is a significant step for any business. As an employer, you must comply with employment rules and regulations and adhere to the requirements and deadlines for withholdings, payments, and reporting.
We recommend that you utilize the professional guidance of an accountant for tax questions as well as to assure compliance with all tax-related matters. The notes below will help you prepare for hiring employees.
Your Employer Identification Number (EIN)
Before hiring your first employee, you need an Employer Identification Number, also known as your tax ID number.
Applicable Laws
If you plan to hire employees, learn the rules that apply to your business. Federal laws, depending on your sales volume and number of employees, may supersede state laws.
Consult with the state and federal Departments of Labor to learn more. If you are unsure of your obligations, an attorney’s guidance can be useful in assisting you to meet legal requirements.
Difference Between Employees and Independent Contractors
When a business hires employees, the business generally must withhold income taxes, pay federal and state unemployment, and withhold as well as pay Social Security and Medicare taxes on each employee. In contrast, if a worker is classified as an independent contractor, these responsibilities are eliminated or are shifted to the worker.
Properly classifying a worker as an employee or independent contractor is extremely important. Misclassification of a worker may result in significant financial liabilities.
Many businesses assume they can reduce their expense and paperwork burden by arbitrarily classifying their workers as independent contractors. However, proper classification is based on strict Internal Revenue Service guidelines, not on employer preferences.
Review IRS publication 15-A, The Employer’s Supplemental Tax Guide, for more information.
Employee Eligibility Verification and Withholding Allowance Forms
As an employer, you are responsible for verifying the legal employment eligibility of each new hire. You should have new employees complete the Form I-9, Employment Eligibility Verification.
Additionally, employees must also complete the Form W-4, Employee’s Withholding Allowance Certificate.
Retain both forms in your records. The forms along with additional information are available on the IRS website.
Payroll Responsibilities
Employers have several responsibilities relating to employee payroll expenses. Be certain you understand the federal and state income tax withholding requirements as well as Social Security/Medicare withholding.
Furthermore, as an employer, you are responsible for paying your portion of Social Security and Medicare taxes, federal unemployment taxes (FUTA), and state unemployment taxes (SUTA). Employers must also comply with quarterly reporting requirements as well as the requirements for the frequency of payroll tax deposits.
Here are some resources to help you:
- The Arkansas Department of Finance and Administration outlines state income tax withholding requirements in this document: Starting a New Business in Arkansas (PDF)
- IRS Publication 15, Employer’s Tax Guide contains information regarding Social Security and Medicare tax requirements.
- Employers are required to file a W-2 form with the Social Security Administration for each employee and furnish a W-2 to each employee in order to report wages earned. For more information, review Instructions for W-2 and W-3 published by the IRS.
- Information on state unemployment insurance can be found on the Arkansas Department of Workforce Services website.
Workers’ Compensation Insurance
All employers, regardless of the number of employees, should contact the Arkansas Workers’ Compensation Commission to determine if they are legally obligated to provide workers’ compensation insurance coverage for their employees.
Workers compensation insurance is purchased by the employer from an insurance provider. Employers must also comply with workplace posting requirements and must comply with procedural and documentation requirements in the event of an accident in the workplace.
For additional information, visit the Arkansas Workers’ Compensation Commission website, awcc.state.ar.us.
Federal Patient Protection (PP) and Affordable Care Act of 2010 (ACA)
Regardless of your decision to offer health insurance, if you’re planning to hire employees you’ll likely be subject to rules and regulations set forth by the federal Patient Protection and Affordable Care Act of 2010. To avoid penalties for non-compliance, visit healthcare.gov to learn more about your rights and responsibilities under the Affordable Care Act.
Adequate Employee Records
Just as you should keep good records for all operational aspects of your business, plan to practice good employee recordkeeping. The IRS recommends employers keep employee records for at least four years. However, some records may be retained indefinitely.
For guidance, visit the IRS website.
