Help! I Can't Do It All Myself! STEPS FOR ADDING EMPLOYEES TO YOUR PAYROLL
by Patti Dowse

WHAT WILL IT COST YOU?

Costs will vary depending upon where you live and what products you make. For example, workers' compensation will obviously cost more for a lumberjack (about 50 percent of wages) than for an office worker (about 5 percent). Here's what it cost me for six employees in 1998: Workers' Compensation: 8 percent of all employees' earnings. SUTA (State Unemployment Tax): 7.9 percent of the first $7,000 each employee earns. Like other types of insurance, your rates go up if you have a lot of claims. FUTA (Federal Unemployment Tax): 0.8 percent of the first $7,000 each employee earns. FICA & Medicare: The employer and employee each pays 7.55 percent of the first $68,000 each employee earns. Total cost (for my business): 24.35 percent of each employee's wages. (This assumes that I pay SUTA & FUTA on all wages.) So, if I am paying my employee $8 per hour, I need to figure an extra +/-25 percent, or $2. So, my labor cost is really $10 per hour. And, to be sure to cover my expense of keeping these employees, I must consider that they are not making products 100 percent of their paid time (they sweep up, they inventory materials, discuss how to do their work, etc.). So I add another $2 to the "cost" to me to pay for this "unproductive" time for each employee.

When demand picks up, many craftspeople realize that they can't handle it all by themselves, but they don't feel they can justify hiring a full-time employee.

To remedy this, and to avoid the paperwork that accompanies (by law) hiring employees, many craftspeople hire what they call "independent contractors."

However, unless the people you've hired 1) work at their own pace in their own space, 2) use their own tools and 3) do similar work for other businesses, then they are considered by law to be employees, not independent contractors. (There is more to these rules, but this is a quick way to judge.) It's usually the third condition that gets people.

The reason for these rules is that if you were able to call anyone you hire an independent contractor, you would get out of a lot of required paperwork and employer taxes, so nobody would ever hire real employees!

But hiring an employee is usually more necessary and more feasible than you might think, because you can increase your sales enough to cover the added expenses. It is important to quantify the costs, though, to be sure to cover them when pricing products.

If you are thinking about hiring employees, or have some illegal "independent contractors" and want to make them legal, here are the steps you need to take (some may vary in your state). While this may sound overwhelming at first, it's really not bad. (But, if you'd rather not deal with the paperwork at all, see the sidebar below for another option!)

1. Get a Federal Employer Identification Number (EIN). For this, you need an SS-4 application. Call the IRS, or check with your bank or accountant's office. The EIN is required for withholding federal income tax and unemployment insurance. The bank will help you with this when you open your business bank account, if you don't already have one.

Getting your EIN takes between one and two weeks, or you can do it over the phone. (The number to call is on the application.) If you are going to do your own payroll, you'll need the booklets that show you how much to withhold.

LEAVE IT TO SOMEONE ELSE: HIRE A PAYROLL SERVICE

If the mere thought of the paperwork, taxes and payroll management involved in hiring employees is enough to keep you working solo for the rest of your life, you might want to do what I did -- hire a payroll service. At first, I thought I was pathetic because I "cheated" and used a payroll service. Then I went to a Maine Governor's Conference on Small Business. Governor Angus King was a businessman for many years, and in his keynote speech, he listed his top 10 recommendations for small businesses. ... One of them was: "Hire a payroll service!" Working with a payroll service There are several ways to work with a payroll service. Some services have access to your bank account; if yours does, make sure they are bonded (insured in case they abscond with your funds). My payroll service works like this: When we hire a new employee, we have them fill out the W-4, I-9, and employee "record" sheet. I make a copy for our office files, then mail originals to our representative, Carla, at Beta Business Services (207-924-5504, serves Maine businesses only). On Monday mornings, we phone in the hours worked for each employee. Carla's computer knows their hourly wage and withholding information. They have a ream of our checks to print and mail to us each week. I sign them and hand them out. Each month, Carla sends me the 941 coupons already filled out, so I just have to write the check and give both to the bank when I make my regular deposit. All those government forms that give me the creeps are sent to Carla, who fills them out and either files them or makes sure I do. What does it cost? Last year, with six employees, I paid Carla $520! That's right, $10 per week. No overdue forms (and late fees), no middle of the night panic attacks, and everything done correctly. Carla even did our 1099s (forms for legal subcontractors, like the accountant, reps, etc.). To find a payroll service near you, check the "payroll preparation services" section of your local "Yellow Pages." For me, the cost was well worth it!

2. Call your state's Department of Labor and request an application for tax registration. This is required to withhold state income tax and pay your state unemployment insurance. (Requirements vary by state; some states don't even have a state income tax.) Again, you'll need withholding booklets.

3. Get W-4 forms from your accountant or the IRS, and have each new employee fill them out (these are easy).

This is the information that will go onto your employees' W-2 forms at the end of the year for their tax returns. It's a good idea to have your employees fill out new W-4 forms each year in case addresses or names change.

4. You will need to pick up Form I-9, which is used to verify that your employee is a citizen, from your accountant or bank. These forms are required by law; as an employer, it is your responsibility to confirm that you are employing a legal citizen.

5. Workers' compensation insurance -- don't let anyone work without it! It is a law in most states to have workers' compensation for your employees. You can get this from your insurance company. There's a minimum charge (charges may vary by state), so your costs will tend to decrease as you hire more employees, and they may be high if you have only one employee.

6. Make or get employee history cards. I keep a record of all statistics (start date, salary changes) and any other important employee information (disputes, injuries, etc.).

Periodic duties