Hire Employees

Hiring employees is a particularly important step in the launch process for your business. Depending on the type of business you own and its staffing needs, you may need to hire one or several employees to perform a variety of different services. And although exciting, having employees introduces a significant amount of administrative and tax burden on your business, which means it is important to have a solid framework for hiring, paying, and managing employees so that you can move forward with peace of mind. In this article, I will first differentiate between employees and independent contractors, then discuss how to hire employees, and finally address how to maintain compliance with tax and labor laws. Let’s jump right in!

Employees vs. Independent Contractors

An individual who provides services to your business can either be classified as an employee or an independent contractor. This classification is not personal preference; it is determined by analyzing the facts and circumstances surrounding your business’s relationship with that individual. It is extremely important to get this classification right because it affects the way you are expected to treat the individual under labor laws. It also determines whether and at what amount you are required to pay federal and state unemployment tax, whether you must pay the employer portion of the FICA tax, whether you must withhold employees’ FICA and income taxes, whether you must provide certain benefits, and so forth. At a basic level, you have more responsibilities as an employer with employees than you do for independent contractors, which is why small business owners (whether knowingly or unwittingly) often make the mistake of classifying employees as independent contractors. So, what factors help us make this decision?

Although you will often hear that this is a gray area (admittedly, it certainly can be confusing), we are not without guidance. The IRS has a lot to say on worker classifications, but the main piece of guidance I will reference is Publication 1779, which provides a simplified explanation of the criteria. In some cases, the choice will be clear, but in others, you may need further help. If the latter is true, you can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS can then issue a formal decision on whether the worker is an employee or contractor; keep in mind this determination will take a while, and so this is usually only used in rare instances where the employer wants to hire many of the same type of worker, but is unsure of how to classify the type of worker.

The three main categories of information you should consider when you are making this decision is: behavioral control, financial control, and relationship of the parties.

Behavioral Control: This refers to what degree you control the way the individual conducts their work. It also refers to whether you can control the substance of their work. In other words, you provide specific guidance about what work they are to complete. A higher degree of control indicates that the individual is more likely an employee than a contractor. For example, if you issue very specific details about how an individual is to conduct their tasks, including what tools or supplies are needed (especially if they are provided by your business), that person is more likely an employee. If you provide specific training for the task, that also indicates more of an employee classification. Directions about the substance of the work are generally more controlling than directions about how the work is to be done. For example, instructing someone about what they are to do is more controlling than instructing them about when and where they are to complete the work. By the way, the IRS is primarily concerned with the degree of control you could reasonably exert over the employee, even if you choose not to for whatever reason.

Financial Control: This refers to the financial aspects of the individual’s relationship to the business. If the individual has significant investment in their work, to the extent that their work is more of its own business, they are more likely an independent contractor. Following from this, if the individual has significant unreimbursed expenses, they are probably in business for themselves and not an employee. Furthermore, if the individual could incur a profit or loss, they are more likely an independent contractor. We are essentially testing for whether or not the individual is running their own business (whether they acknowledge the existence of their business is irrelevant for your purposes).

Relationship of the Parties: Some circumstances or agreements tend to indicate one classification over another. For instance, a circumstance where an employer provides significant benefits to an individual would indicate that the individual is likely an employee. Also, if there is any written agreement that spells out how both parties view the engagement, that could help make a classification if the information provided above does not result in a clear determination. You will want to keep this agreement in your records as supporting documentation if the IRS ever questions the status of the individual.

Tax Tip: The IRS’s Publication 15 (2025), (Circular E), Employer’s Tax Guide is a great place to begin your tax compliance research for employees and independent contractors alike. In most cases, employees are paid through a W-2, and independent contractors are paid through a 1099-NEC (non-employee compensation) if they were compensated more than $600 during the tax year. Both forms must be sent to both the appropriate individual and the IRS.

How to Hire Employees

Download my new hire checklist to use as you read through this section!

Once you have decided that you want to hire an employee, you can begin the process of thinking about what the role will include and create a job description. Your compliance journey starts on day one. There are federal and state agencies that govern hiring and employment practices, so you should be aware of their requirements when it comes to staffing your business. One agency to be particularly aware of during this phase is the US Equal Employment Opportunity Commission (EEOC), who create and enforce laws, many of which deal with discrimination in the workplace. Many of the laws surrounding labor are fairly common sense, but some can be broken, even with good intentions, so do your research before you begin the hiring process.

You have a lot of freedom as to what you include in a job description, but typically, employers will include the business culture, the job requirements (education, experience, technical + soft skills, etc.), job responsibilities, as well as the compensation package (pay, fringe benefits, etc.). A great job description is written in such a way that it attracts the type of talent you are looking for, while remaining transparent about all aspects of the job. You will then need to post or advertise this job description in some way, such as through job boards, your website, social media, physical signs, or even through word-of-mouth.

After you have received applications for the job, you should screen the individuals. This is usually done through interviews and job-specific technical exercises. You are paying this person and trusting them with important tasks, so you have every right to ensure they are the right fit for your business. Once you are satisfied with your selection, you should issue the employee an offer letter in writing to confirm the responsibilities of the role, the compensation package, and other details you need spelled out in their contract. Furthermore, you need to have the employee sign and fill out several tax and legal documents before they begin their work. These are detailed on the new employee checklist, but you should check with the federal, state, and local authorities to make sure you do not have any additional requirements.

Of course, you will then need to train and integrate the employee into your team. People have different ideas about how this process should work, but there is no specific “correct” way of training an employee. It comes down to the specific technical and soft skills you need from the employee, your business’ culture, and what you are trying to achieve. However, if you are hiring several employees for the same job, it is important that you standardize the way you deliver your training so that you can improve the efficiency of the training process and refine it over time. That being said, every employee is different, so the training needs of two employees in the same position can and will vary drastically.

How to Maintain Compliance with the Law

As I mentioned in the introduction, employees introduce a significant legal burden on your business. The best way to maintain compliance is to learn the rules for yourself, and to outsource complicated work to large companies or qualified individuals who know how to advise you. A great place to begin with regards to labor laws is the US Department of Labor website, specifically, its article summarizing the major laws it enforces. Outsourcing your payroll function to a specialized payroll company or individual who understands labor laws can save you a significant amount of money and time over the long run. Not to mention, you will have peace of mind knowing that someone who understands the law has your back.

With regards to tax law, it is once again so important to understand the law for yourself. Even if you outsource your payroll to a company like ADP, you are ultimately responsible for the payment and remittance of taxes. Payroll taxes are particularly important to pay attention to, because errors can accumulate relatively quickly and are often accompanied with IRS penalties and interest. So, when it comes to complying with the law, both on your own tax return and in withholding and remitting the taxes of employees, you need to understand your obligations. I would begin with some of the following issues:

1. If your income is subject to self-employment taxes, make sure you are setting aside money to pay these taxes, either through increased withholdings if you receive a W-2 from your business or other employer, or through estimated tax payments. Remember to take the employer portion as an adjustment to income on your tax return to reduce your tax liability.
2. Ensure you have received a valid W-4 from all employees and that you are withholding the correct amounts. You must also separately have employees fill out any state or local income tax withholding forms. Taxes withheld from employee paychecks are not income to your business; you should have a liability account that recognizes your obligation to the government authorities to remit these taxes. The government essentially views a failure to remit taxes as theft, and they will take it very seriously.
3. Make sure you are withholding the employee portion of FICA taxes, which include a 6.2% Social Security tax up to $176,100 (for 2025), 1.45% Medicare Tax, and an additional 0.9% Medicare tax for earners over certain thresholds ($200,000 for single, $250,000 married filing jointly, and $125,000 married filing separately).
4. Make sure the business is paying the employer portion of FICA taxes, which include a 6.2% Social Security tax up to $176,100 (for 2025) and a 1.45% Medicare tax. The 0.9% additional Medicare tax for high earners is not matched by employers.
5. Pay your federal and state unemployment taxes (FUTA & SUTA).
6. File all appropriate forms with all governing authorities, not just the IRS.
7. Please never, ever, use cash withheld from payroll taxes to fund business operations. It is illegal to borrow funds withheld from employee paychecks; these funds must be set aside somehow for payroll tax purposes. In other words, your cash account should never dip below the amount of funds that must be remitted for payroll tax purposes.

Having an accountant and payroll advisor to guide you through the set up and as a point of contact will be tremendously helpful. But never be too intimidated to learn the law for yourself. You can understand your labor and tax obligations for yourself and make informed business decisions as an owner. It just takes time and patience to learn, but that is part of business! I hope you found this article helpful.