Hiring Your First Employee

Hiring your first employee can be a daunting task especially if you have never done it before. In this video, I’ll show you how to notify the state when you hire an employee, what taxes you have to account for, and worker’s compensation insurance.

Independent Contractor vs. Employee

Before we get to how to set up with the state and in your business we have to cover what an employee is and the difference from an independent contractor. An independent contractor is a person or entity that provides a service but is not an employee. There is a 3 part test that determines if you are really an independent contractor if all of these conditions are met:

​​1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work.

For example, if I hire a plumber to fix my sink, I don’t need to manage how they actually perform the work step by step. As long as my sink gets fixed, I shouldn’t really care what steps the plumber takes to resolve my issue.

2. The worker performs work that is outside the usual course of the hiring entity’s business.

So back to our plumber example if a business owner is hiring a plumber to fix a bathroom this condition would be true. If the retail store hires an “outside salesperson” they would not be an independent contractor because they do similar work as the current employees.

3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

This means the “independent contractor” must have a business in existence at the time work is performed. This means they should have a business license, or entity or provide services to other businesses or the public, otherwise, the individual is an employee.

EDD

Now that you know what an employee is, let’s get you set up as an employer to get them hired.

We need to set up your business as an employer so we will head to the State of California EDD and enroll as an employer. Fill out the information to set up your account and continue. Your account is now set up.

You can now log in to the e-services portal and you want to choose New Employer and then next. You will then select "Register for Employer Payroll Tax Account Number". Fill out all the information about your business and submit it.

You will be issued an eight-digit employer payroll tax account number (example: 000-0000-0), also known as a SEIN (State Employer Identification Number or State ID number). You will need to provide your employer payroll tax account number when filing tax returns and making deposits for taxes or filings.

Taxes

Our next topic about employees we need to cover is taxes. As an employer, you will need to withhold taxes from your employee paycheck and send it to the state of California and the IRS. Let’s get you set up to do that.

State

You already set up your employer payroll account with the EDD but you need to know how much to withhold from any given employee's paycheck. To determine this you will need to have an employee complete a DE 4 to know how much to withhold for Personal Income tax. The employee will need to complete the form and mark off any allowances they qualify for to accurately calculate payroll. You can check this guide for additional help.

You will need to notify the state that a new employee was hired by filing a DE 34. This is a report of all new hires who work in California to the New Employee Registry within 20 days of their start date. This start date is the first day the employee will work for pay.

Personal Income Tax isn’t the only one you have to worry about with employees. California UI formerly State Unemployment Tax (SUTA). This is an employer tax of 3.4% up to 6.4% based on employee wages with a maximum of $434 per employee per year.

Employment Training Tax at 0.1% of wages up to $7 maximum per employee per year. Finally, California State Disability Insurance at 1.1% on the first $145,600 in wages. 

IRS

The State of California isn’t the only entity you will need to contend with. Let’s set you up with the IRS.

If you haven’t already set up your business with an EIN to do your own taxes for an LLC or corporation you will need to set that up before becoming an employer. Check out our guide on filing your EIN online for free here.

Once you have the EIN and you are ready to hire an employee you need to make sure the employee completes the W-4, which will help you withhold the correct amount of income tax from each employee’s paycheck. Like the State of California, the federal government does require other employment taxes to be paid like medicare, Federal Unemployment Tax, and Social security. You can check out the resources about these taxes from the IRS here.

Insurance

All California employers must provide workers’ compensation benefits to their employees under California Labor Code. If a business employs one or more employees, then it must satisfy the requirement of the law. You must post the “notice to employees” poster in a conspicuous place at the work site, which provides employees with information on your workers' compensation coverage and where to get medical care for work injuries. You must also provide newly hired employees with a workers’ compensation pamphlet explaining their rights and responsibilities.

Commercial Insurance

As an employer will need to purchase workers’ compensation insurance from a licensed insurance company. An online rate comparison of the top 50 workers’ compensation insurers can be accessed on the California Department of Insurance (CDI) Web site at www.insurance.ca.gov.

State Funded

State Fund is a state-operated entity that exists in order to transact workers’ compensation on a non-profit basis. State Fund competes with private workers’ compensation insurance companies for business and also operates as the insurer of last resort if private companies are not willing to offer workers’ compensation insurance. You can get a quote for your business at https://www.statefunddirect.com.

Self Insurance

Self-insurance requires state approval, a net worth of at least $5 million, a net income of $500,000 per year, and the posting of a security deposit. Contact your broker or the state's Office of Self-Insurance Plans for information on how to self-insure. As a self-insured employer, you have the option of administering your own workers' compensation claims or contracting with a third-party administrator (TPA) to provide these services.

Conclusion

Hiring employees in California is one the biggest investments your small business will make with registering your business with the state, taxes, and getting workers comp insurance. If you have questions or need free 1-on-1 help with setting up your business as an employer, you can contact us here at the University of La Verne SBDC.

But what do you think? Are looking to hire your first employee and have you been hesitating because it’s been a confusing process? Let me know in the comments below.

https://lavernesbdc.blogspot.com/2023/01/HiringEmployee.html