Chapter 1
Deciding Whether to Hire an Employee

When Hiring an Employee May Not Be Wise............................... 3

What an Employee Can Do for Business...................................... 4

Perform Routine Tasks.............................................................. 4

Increase Business Hours........................................................... 4

Add New Skills........................................................................... 5

Expand the Business................................................................. 5

When You Can’t Do It All Yourself................................................. 6

Options Other Than Hiring an Employee...................................... 7

Adding a Co-Owner................................................................... 7

Leasing a Worker....................................................................... 8

Hiring an Independent Contractor.............................................. 8

Referring Out Excess Business............................................... 11

Comparing Your Options......................................................... 11

Assessing the Cost of Hiring an Employee................................. 13

Myths About Being an Employer................................................. 15

Myth 1: Firing an Employee is Legally Risky.......................... 15

Myth 2: Employers Must Comply With Dozens of Regulations 16

Myth 3: Employers Must Pay for Costly Benefits................... 18

If you’re used to running your business lean or alone, you have lots of company. More than 20 million businesses—about 70% of all the businesses in the United States—have no employees. The great majority of these small businesses are owned by one person, or perhaps two or three, who handle the required tasks on their own—from filing the startup paperwork to dealing with daily details that keep the concern going. In addition to producing goods or services that are the lifeblood of the business, these entrepreneurs’ days can be filled with a host of activities from the exciting to the mundane: reeling in prospective new customers or clients, writing marketing copy, ordering supplies, sweeping the front entryway.

Some business owners decide from the start that they can’t do all the work themselves; they hire an employee as part of the start-up process. But most businesses start out without employees, running lean until they see how the enterprise develops. And many small business owners never hire anyone to help.

Some owners are content for their businesses to remain tiny—and for them, it makes little sense to hire an employee. If you think this might be your situation, this chapter will quickly help you decide whether it is best to stay employee-free.

But it’s possible that you may not realize that having an employee can help your businesses grow—and make your life easier. Or you may simply be held back by a fear that hiring a worker is complicated and likely to create painful legal and accounting headaches. If so, you may be needlessly depriving yourself of the opportunity to reap higher profits from your business, and to establish a more efficient and fulfilling operation.

As you read this book, you’ll soon learn that if your business could benefit by adding an employee, a fear of hiring is misguided. Anyone with the intelligence and gumption to create a business is perfectly capable of becoming an employer—and of doing so without the expensive help of lawyers, accountants, or human resource specialists.

If you’re just starting a business and you’ve decided to hire an employee from the get-go, this book will lead you through the process so that you won’t stumble along the way. If you’re already in business and you—and any co-owners—are scraping by without any extra help, you’ll learn how having employees can help your business thrive, and how to take the steps required to bring the first one on board. And finally, if you’ve already hired an employee but aren’t sure whether you’ve followed all the necessary steps, this book will serve as a reassuring checklist, enabling you to spot and correct any missteps you may have taken.

When Hiring an Employee May Not Be Wise

Making the leap from entrepreneur to employer is not for everyone. You may have understandable and legitimate reasons not to hire an employee, or at least to hold off for the present. For example, you may:

•  not know what the demand will be for the goods and services your new business will offer

•  feel it’s prudent not to expand too quickly

•  be able to cover business overloads by working extra hours, or occasionally calling on family members to help

•  not have the time, patience, or desire to train and supervise another person

•  despise extra paperwork, even in small amounts

•  be reluctant to reveal trade secrets or other sensitive information to a nonowner, or

•  not have space for an employee.

The information in the book will help you analyze whether hiring an employee is a good step to take now or in the future. (See “Options Other Than Hiring an Employee,” below.)

What an Employee Can Do for Business

If you own or co-own a small business, you’re probably reading this book because you’re considering hiring your first employee. When pondering whether to make the move, consider what an employee may be able to do to help you and your business.

Perform Routine Tasks

Many business owners find that adding an employee relieves them of the drudgery of doing mundane tasks, such as entering data or updating customer lists. Others relish help with more sophisticated duties, such as calling potential customers or billing clients. The key is to acknowledge that you enjoy and excel at some tasks more than others, and that having other people to help can free you to make the most productive and satisfying use of your own time and talents.

Example: Ann has been in the apartment rental business for five years, and now owns 35 units in eight different buildings. She is feeling worn down by having to do everything herself and would like to spend more time on what she likes to do best: finding additional properties and fixing up the units she owns so that she can get more rent from them. Ann hires an assistant to help with settling new tenants, collecting rent, and maintaining the properties.

Increase Business Hours

There’s a limit to how much time you can personally devote to being on the job. Adding an employee can make it possible to increase business hours to serve customers at times when you can’t, or would prefer not to be, on call.

Example: Tom has a kiosk in a shopping mall where he sells decorative craft items. Because he wants to spend time with his family, Tom has limited his hours to 48 hours a week. But he laments missing potential business from shoppers who pass by when his kiosk is closed. Tom hires an employee to run the kiosk in the evenings and on Sundays.

Add New Skills

Your particular talents and skills determine—but may also limit—what you’re able to offer to customers and clients. By hiring an employee, you may be able to complement your own skills, which may make it possible for you to offer a wider range of products and services to potential customers—or even change the nature of your business to make it more profitable.

Example: Jaime and Betty, both of whom are accomplished copywriters, formed a small company offering copywriting services to high-tech businesses. They’re doing well, but realize that they can attract even more clients if, in addition to imparting their finesse with words, they can promise visually appealing print and online products. They hire their first employee—a graphics designer who has experience in creating eye-catching written material.

Expand the Business

Once you become established, you may find yourself turning down lucrative new business because your time and resources are too tapped. Hiring an employee can increase your capacity—and your bottom line.

Example: Rita provides daily janitorial services for a small office building. The building’s owner is about to buy a second building nearby and would like to have Rita take over the janitorial responsibilities there as well. Rita would welcome some additional income, but knows she can’t handle all the additional work by herself. The solution: She hires an employee whom she’ll train and supervise, making it possible for her business to handle both properties.

Home-Based Businesses: Check on Zoning First

Local ordinances often divide cities and towns into zones such as residential, office, retail, and industrial. If you live in a residential zone and have a home-based business, be sure to check your community’s zoning ordinance, which is available at your city or town hall or online. The ordinance may affect your decision to hire an employee.

While some ordinances are silent on the subject, others limit employees to family members or people living in the home, or only permit one or two employees who are nonresidents. And some completely prohibit adding an employee.

In addition to public zoning ordinances, you may also have to comply with private regulations concerning having a business in your home, especially if you live in a condominium or planned development. These private regulations may be found in Covenants, Conditions, and Restrictions (CC&Rs) that apply to your neighborhood or condo development. They may also appear in your deed or in a document called Building and Use Restrictions.

If you’re a tenant rather than an owner, you should also check to see whether your lease contains any restrictions on having an employee.

When You Can’t Do It All Yourself

There’s no specific rule for when it’s time to consider hiring your first employee. But there may be early indicators that you’d be wise to take the plunge and bring in another worker to help make your business operate more efficiently or lucratively.

Heed this warning, for example, if you increasingly:

•  are too busy to take on work that you’d love to have

•  get complaints from customers and clients about missing promised delivery dates

•  feel the need to expand your business hours

•  want to broaden the products or services your business provides

•  yearn to rid yourself of some of the work that’s drudgery so you can spend time on more pleasant and profitable activities, or

•  lack time to take a vacation or attend to your own health or family matters.

Many of these concerns can be alleviated simply by hiring an employee to share the load.

Options Other Than Hiring an Employee

If you’re feeling frazzled or you’re losing out on possible profits because you lack needed help in running your business, you may be able to address the problem—at least partially—by taking steps other than hiring an employee.

Adding a Co-Owner

If you’re the sole owner of the business, you can bring in another person as a partner to share the work and the business concerns. And if you already have a co-owner or two, you can invite another one to join you.

Disadvantages of adding a co-owner. The downside of having co-owners is that you’ll have to share the profits, so that you and any current co-owners will each receive a smaller share of the pie. And the more owners you have, the greater the chances that you won’t see eye-to-eye on some issues; management disputes can be draining.

Advantages of adding a co-owner. First and foremost, you don’t have to worry about having enough money in the till to cover periodic paychecks. In fact, you’ll likely have fewer cash worries in general, since a co-owner will usually bring an infusion of cash as the price of owning a piece of the business.

Also, you’re not likely to get stuck with half-hearted help. A co-owner has a stake in how well the business does, and almost certainly will work harder than an employee would.

Leasing a Worker

Many employment agencies have a roster of experienced employees you can lease. Technically, a worker hired through such an agency won’t be an employee of your business, but an employee of the agency.

In such arrangements, the agency handles all the necessary paperwork—including cutting the checks to pay the worker’s wages and cover employment taxes. If the worker turns out to be a bad fit for your business, you’re usually free to terminate the lease at any time, which can feel easier than firing an employee you have personally sought out and hired.

If the worker is a stellar match for your business, you’ll probably be able to hire him or her after a time.

Disadvantages of leasing an employee. The employment agency makes money by charging for its efforts—which usually involve advertising for qualified workers, screening them, and handling paychecks for you—so it will tack on a hefty fee. You’ll typically pay more for leasing help than if you hired a worker directly, though this might not be true if your alternative is to pay for a protracted search for the right employee.

Another possible drawback is that a leased worker is less likely to form bonds of loyalty with your business than an employee you search out and mentor.

Advantages of leasing an employee. By going through a leasing agency, you avoid the time, effort, and expense of a prolonged search for the right employee.

In addition, you don’t have to deal with pay checks and employment taxes. And you can easily end the relationship if the leased employee is a dud.

Hiring an Independent Contractor

An independent contractor is someone who performs services for others but does not have the legal status of an employee. Most people who qualify as independent contractors have their own trade, business, or profession. They’re in business for themselves.

The IRS prefers to have workers classified as employees because it believes that independent contractors are relatively unreliable when it comes to paying taxes. If you treat a worker as an independent contractor, and the IRS classifies that person as an employee, you’ll be liable for employment taxes for the worker, and may also be charged a penalty for your erroneous actions.

Under IRS guidelines, whether a worker is an employee or an independent contractor depends largely on how much control you have over his or her work. If you direct or control the result of the work but not the means and methods of getting it done, the worker is probably an independent contractor. But if you instruct the worker on how, when, or where to do the work, or what tools or equipment to use, or if you provide training, the IRS will likely classify the worker as an employee. The same is true if you provide benefits such as health insurance. On the other hand, if the worker serves several customers or clients—not just your business alone—the balance may shift toward an independent contractor relationship.

Example: Liz has a bookkeeping service that she runs out of her home. She works for several small businesses. Every week, she stops by each of her clients’ businesses to pick up the raw data she needs to do her work. Then she returns home to prepare invoices, compute business taxes, balance the books, and provide financial statements. She bills each client at the end of the month based on the amount of work she’s done. Liz is an independent contractor.

Example: Joe is a bookkeeper. He works half-time at Hali’s company, Fleetwood Security Services. The company provides a workstation for Joe, along with a computer, bookkeeping software, and all supplies. Hali closely supervises Joe and pays him a set amount of $1,600 every two weeks. Joe is an employee.

Disadvantage of hiring an independent contractor. Be aware that you’ll probably have to pay an independent contractor a higher hourly rate than you would pay an employee doing the same job. The reasoning for this is that you will not be providing the worker with traditional benefits and amenities, such as health insurance or a workspace; the independent contractor will be responsible for securing and paying for them, instead.

Advantages of hiring an independent contractor. Hiring an independent contractor can get you the services of an experienced, hopefully low-maintenance worker while saving on overhead and paperwork.

If a worker truly is an independent contractor, you don’t have to worry about payroll taxes, workers’ compensation, or unemployment fees, or even about providing traditional employee benefits such as vacation. And as mentioned, you generally won’t need to provide the worker with a workspace, equipment, or supplies.

In addition, you might enjoy the flexibility of the arrangement, and the fact that you don’t have an ongoing commitment to the worker. You can pay the worker for services only as needed, rather than having to write paychecks even when business is slow.

See an Expert

Resource

You can also consult IRS Publication 15-A, Employer’s Supplemental Tax Guide, available online at www.irs.gov.

If you’re still unsure about whether a person meets the IRS criteria, you can complete and submit IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, also available at the IRS website.

Referring Out Excess Business

If you have more business coming your way than you can comfortably handle, one solution may be to make a referral arrangement with a business similar to yours that can deliver comparable goods or services to meet the needs of your potential customers or clients. As commonly structured, you and the other business owner would agree to pay a referral fee for business you send one another. This can be a flat fee for each customer you refer, a commission based on a percentage of what the customer pays, or a combination of both.

Disadvantage of referring out excess business. The negative side is obvious: You won’t be able to earn the full profits from the excess business.

Advantages of referring out excess business. The referral arrangement might allow you to reap some benefit in the form of goodwill: Some potential customers or clients may appreciate that you pointed them in the right direction. And in the future, when your business has grown, they may return to you.

Also, while you pay nothing out-of-pocket, you may get a referral fee—and actually make some money on the business you are forced to turn away.

Finally, you don’t have to supervise a worker or tend to employment paperwork.

Comparing Your Options

Now that you know some of the alternative options to hiring a worker as an employee, the following chart may help you decide whether one of them fits your needs.

Assessing the Cost of Hiring an Employee

Ideally, hiring an employee will free up some of your time and energy and increase your business’s profitability. But before you act on this vision, it would be wise to do a realistic cost-benefit analysis to ascertain whether it makes financial sense to bring an employee on board.

It’s impossible to know exactly how much adding an employee will help raise your profits—for example, if it would enable you to take on a promising new client or keep your business open on weekends—so you’ll have to make an informed guess. Then comes the other part of the equation: estimating how much it will cost you to hire someone.

Some expenses will be the same, no matter what the nature of your business. These include:

•  standard wages

•  the employer’s share of Social Security and Medicare taxes

•  unemployment tax, and

•  workers’ compensation insurance.

Beyond these basic costs, you may want to offer health care insurance or other benefits. (See Chapter 4 for a complete discussion.)

In addition, you might cover the cost of other tangible work-related expenses, such as:

•  business cards

•  work stations

•  computers

•  phones

•  pagers

•  parking spaces

•  vehicles

•  uniforms

•  professional dues

•  seminars or other educational opportunities, and

•  travel expenses.

Businesses differ greatly, so you will not likely need to cover all the costs on the list. And you will likely get the chance to make sure the working relationship is solid and beneficial before extending beyond the basics to covering an employee’s expenses such as professional dues and educational costs.

Several other factors may help offset the costs of having an employee.The first is that you may be able to make more efficient use of existing equipment. For example, if you are only using a truck half time to make deliveries in your current business, you may use the truck full-time once you hire an employee—and can double the amount of deliveries you make to produce more income.

The second factor is that having a $12-an-hour employee perform some of the work that you’re currently doing can free you up to do more work that will bring in $40 an hour. Finally, employment costs are deductible from your business’s gross income when computing its income tax, which reduces the amount of the tax you will owe. (See Chapter 12 for a detailed explanation of deducting employee expenses.)

The key idea is that you should run the numbers—mostly estimates at this point—to test whether hiring an employee will help or hurt your bottom line.

TiP

Myths About Being an Employer

Many business owners wait longer than they should to hire help because of misconceptions—myths, actually—about the nature of being an employer. Three common myths are examined below, along with the reasons why fears associated with them are usually overblown.

Myth 1: Firing an Employee is Legally Risky

You may have read newspaper and magazine accounts of employers who fired an employee, got sued for wrongful discharge, and had to pay tens of thousands of dollars in damages. Better to run the business by yourself, you may think, than be exposed to such a nasty lawsuit. But the reality is that the law is quite favorable to employers.

In nearly every state, the basic legal rule is that employment is “at will.” This means that you are generally free to fire an employee at any time
for any reason—or without any reason. You don’t have to show that you had good cause to let the employee go. If you treat your employee fairly and give reasonable warning that his or her performance is not up to par, you needn’t lose sleep over the possibility of a lawsuit; the risk is minimal. (For details on troubleshooting problems with employees, see Chapter 13.)

Myth 2: Employers Must Comply With
Dozens of Regulations

If you’re like most small business owners, you bristle when the subject of government regulation comes up. That’s understandable. As an entrepreneur, you’re likely to be a free spirit who likes to operate without handcuffs.

Chances are, however, that even if you have no employees on staff, your business is already controlled by a number of local and state regulations. For example, if you have anything to do with food preparation, you may need a health department permit—and may have to put up with periodic inspections. If you’re involved in construction work, you probably have to get municipal permits for each project you undertake. And in some types of businesses you may be required to secure a trade or professional license from the state.

The burdens of complying with laws and regulations will scarcely increase once you become an employer. There are some simple paperwork requirements during the hiring phase. (See Chapter 7 for complete details.) Once your employee is on board, you’ll have to account for and send in payroll taxes. (See Chapter 11.) In addition, you’ll have to observe the minimum wage requirements, including overtime pay rules. (See Chapter 3.) And you’ll have to comply with your state’s workers’ compensation law, which amounts to no more than buying insurance. (See Chapter 9.) But in most cases, that’s it.

Your Main Legal Responsibilities as an Employer

A single-employee business must comply with the legal mandates listed below. Each is covered in detail in later chapters.

Wages and hours. Generally, you must pay employees at least the minimum wage, plus time-and-a-half for overtime work. (See Chapter 3.)

Nondiscrimination. You must not discriminate against an applicant or employee on the basis of race. This applies throughout the employment process—including hiring, pay, benefits, and firing. In some states, you must also avoid discriminating on the basis of gender, religious beliefs, or national origin. (See Chapter 2.)

Credit investigations. You must get written consent from an applicant before you order a credit report. Then, if you don’t hire the applicant, you must give certain information about the report. (See Chapter 6.)

Worker verification. You must verify that your employee is legally authorized to work in the United States. (See Chapter 7.)

New hire reporting. You must report your new hire to a state registry so that parents who aren’t paying required child support can be located. (See Chapter 7.)

Payroll taxes. You must withhold income tax and Social Security and Medicare taxes from your employee’s paycheck. Also, you must pay the employer’s share of Social Security and Medicare taxes. (See Chapter 10.)

Safe workplace. You must provide safe working conditions for your employee. (See Chapter 9.)

Workers’ compensation insurance. You must buy workers’ compensation insurance in case your employee is injured on the job. (See Chapter 9.)

For more in-depth information on these topics, see The Essential Guide to Federal Employment Laws, by Lisa Guerin and Amy DelPo (Nolo).

Myth 3: Employers Must Pay for Costly Benefits

Health care insurance, employer-funded retirement accounts, paid vacation time: These can all loom large as burdensome expenses. But the fact is that these benefits are not required by federal law, and hardly ever specified by state law. You may choose to offer one or more benefits to your employee, which can help you attract and keep well-qualified candidates. But they’re a choice—not a mandate. And most of the costs of these benefits are tax-deductible. (For more on this topic, see Chapters 4 and 12.)

Risks of Hiring an Employee “Off the Books”

It’s no secret that some small business owners evade their legal responsibilities by hiring an employee “off the books.” They pay the employee in cash and don’t deduct income taxes or the employee’s share of Social Security and Medicare taxes. In addition, they don’t pay the employer’s share of Social Security and Medicare taxes. They ignore the unemployment tax and they don’t bother to buy workers’ compensation insurance.

Skirting the law may be convenient for both the employer and the employee, and it may save both of them a few bucks. But it’s a dangerous game. When caught, the employer faces tax liabilities and penalties. And if the employee is injured on the job and there’s no workers’ comp insurance in place, the employer may have to pay for the employee’s medical expenses and some salary replacement.

The best course is to avoid informal hiring and to play by the rules.