Your dog business is doing well. You have more work than you can handle and it’s time to think about the next step. Congratulations!
You’ve probably got some questions: Do I hire an employee or an Independent Contractor? What’s the cost of bringing someone on? What’s involved in setting up a payroll? Where do I start?
On the surface, hiring an independent contractor seems easier and less costly, but it isn’t necessarily the right way to go. The IRS has strong opinions about how you classify your new worker because of the impact on taxes paid, so you need to make sure your decision will make the tax man happy.
What’s the Difference Between an Independent Contractor and an Employee?
An employee is defined as someone whose i) behavior is under the control of the employer, meaning they are told when, where, and how to work; (ii) whose financial relationship with the company is controlled by the employer; and (iii) whose services represent a key activity of the business.
Can these same factors apply to an Independent Contractor? The answer is yes, but it depends on the degree to which these things apply and the facts and circumstances of each situation. It’s tricky because there are no black and white rules. Looking at the overall relationship between the two parties is essential to getting it right. Getting it wrong can be very costly to the business owner, so it’s best to talk to a tax professional before taking someone on as an IC.
How Much Will Hiring Someone Cost?
This is often the $64,000 question. Not literally of course, but the numbers can be scary. There are several taxes and costs associated with hiring an employee. Although the federal taxes will be the same regardless of the state you live in, state taxes and workman’s compensation insurance differ. In general though, in addition to the hourly rate you pay the employee, you are also responsible for the following taxes and costs:
- Federal Social Security Tax: 6.2% of gross wages
- Federal Medicare Tax: 1.45% of gross wages
- Federal Unemployment Tax: 0.6% of gross wages up to $7,000
- State Unemployment Tax: Varies by state. For example, new employers in CA pay 3.4% of wages up to $7,000
- Workman’s Comp Insurance: Varies by carrier
- Payroll Processing Fees: Varies by provider
So let’s take a look at an example. Assume you are a new employer in California and want to pay your employee a wage of $15/hr. Your hourly cost for this employee will be as follows:
+ $1.16/hr. for Federal Taxes (Social Security, Medicare and Federal Unemployment)
+ .51/hr. for State Unemployment
+ The annual premium for Workman’s Compensation divided by 2080 (the standard number of hours a
full time employee working 40 hours a week will work in a year)
+ Any annualized payroll processing costs, again divided by 2080
Now, before you decide never to hire anyone, there is some good news, too. These costs come with tax benefits in the form of deductions for wages paid, payroll taxes, and other related costs. Working with your CPA or tax professional can help you subtract these savings from the expenses above to identify the true cost of hiring an employee.
What’s Involved in Setting Up a Payroll?
There are several administrative requirements you must adhere to when setting up a payroll:
- You are required to have an Employee Identification Number. While most LLCs and other forms of entities already have one, sole proprietors must apply for one when they intend to hire their first employee. You can complete an SS-4 form online at irs.gov. Good news: It’s free!
- You must apply for electronic submission of all Federal taxes. This can be done electronically.
- You must apply for a state identification number and electronic submission of state withholding and disability from your employee as well as the state unemployment tax you are responsible for. This generally requires a dialogue with your state employment division and can often be done electronically once the requirements are determined. (I know it sounds complicated, but they’ll walk you through it and people do it all the time.)
- You must obtain worker’s compensation insurance and determine how the premium must be remitted as well as reported to the state. Contacting your state Department of Labor is often helpful in this regard as many states offer Worker’s Comp insurance. Another option is to reach out to the company who carries your professional liability insurance policy.
- Obtain certain documents from your employee. Proof of citizenship as well as Form W-4 are required, but many states including California require additional reporting on new employees and other forms may be required.
- Determine the correct amount of Federal and State withholding for your employee based upon their completed W-4 Form.
What Do I Have to Do Once My Employee is On Board?
Luckily the up-front work in the previous section only has to be done once. (Phew!) But that doesn’t mean you’re done, as there are federal and state payment and reporting requirements to stay current with. This is where most small business owners make mistakes and where getting outside assistance is particularly helpful to set up a regular payment and reporting schedule to keep you on top of everything.
- Payment requirements:
- Each reporting period, all payroll taxes (both Federal and State) must be remitted (paid) electronically.
- Federal reporting requirements:
- Form 941 quarterly
- Form 940 annually
- Form W-2 for each employee
- Form W-3 for tax reconciliation
- State reporting requirements:
- Unemployment reporting monthly or quarterly
- Disability reporting monthly or quarterly
- Workman’s Comp reporting monthly or quarterly
You can see how easy it would be to miss a thing or two, but it’s really not quite as complicated as it looks. Your CPA can set up a system that keeps you in good stead with the IRS and your state.
Where Do I Start?
Contacting your state employment division and department of labor is often the first place to start. That’s where you’ll get all the necessary information about your state’s specific requirements.
Next, the IRS website www.irs.gov contains helpful information about the Federal requirements as well as forms necessary to start hiring employees.
Payroll processing companies, CPAs, or your tax preparer are also valuable resources not only in helping you determine what you need, but in helping prepare or administer your payroll.
Hiring your first dog business employee can be a daunting and overwhelming experience both from a cost and administrative perspective, but it’s well worth it when your business is ready to grow. Knowing the costs and requirements at the outset are powerful factors in making good hiring decisions—and for managing your time and expenses more effectively to enjoy the maximum benefit from your new hire and the growth he or she makes possible.
Marie Poliseno is the Managing Partner of Dollars & Scents Accounting Services. She is a Certified Public Accountant (CPA) as well as a professional dog trainer (CPDT-KA) and honors graduate of the SFSPCA Academy for Dog Trainers (CC). To work with Marie on your financial and tax matters, e-mail [email protected] or visit www.dog-pro-cpa.com to learn more about her services.