Hiring Your First Employee? How to Do It in 5 Steps

If you're trying to grow your business, you'll need to think about hiring your first employee.
Rieva Lesonsky
By Rieva Lesonsky 
Edited by Sally Lauckner

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Technology has made it easier than ever to run a successful business all on your own. But for those small-business owners hoping to grow their companies, at some point you’ll likely need to consider hiring your first employee.

But how do you know when the time is right, and how do you do it when the time comes? Here are the questions you need to ask yourself and steps you need to take for hiring your first employee.

Questions to ask before hiring your first employee

Are you busy enough?

If your business has a lot of ups and downs in terms of cash flow — for example, if you own a seasonal business — there are probably times when you’re totally swamped and other times when you’re twiddling your thumbs. During busy times, you might be tempted to hire employees. Not so fast!

Before hiring your first employee, you must have enough steady work to keep them busy even during the slow times. Otherwise, you’ll have to let the employee go — which is unpleasant for both of you. Also, make sure the steady work is something you're willing to delegate and can train someone else to do.

If you don’t have adequate work for an employee on a steady basis, hiring temporary employees, outsourcing to independent contractor or taking on an intern is a better solution for those times when you need extra help.

On the other hand, if you’re consistently busy and frequently have more work than you can handle — for example, if you’ve actually had to turn down clients or refer them to other businesses — then you’re probably ready to hire.

Do you need an employee in order to take your business in a new direction?

As your business grows beyond the fledgling stage, you’ll want to expand into new areas — possibly including areas you lack the experience, time or skills to tackle effectively.

For example, a jewelry designer who sells their wares online might decide they want to get them into retail stores nationwide, too. If they're not good at sales or can’t realistically travel around the country on sales calls while still maintaining the rest of the business, hiring an employee to take charge of sales might be the best way to achieve those expansion goals.

Are you financially ready?

Hiring your first employee isn’t cheap. First, there’s the cost of advertising the position, possibly running background checks and the cost of the time spent reviewing resumes and interviewing candidates.

Once the employee comes on board, their hourly wages aren’t the only expense you’ll have to deal with. You may need to buy new equipment for the person, like a computer and workstation. You’ll also have to pay social security taxes, Medicare taxes, payroll taxes and state unemployment taxes. If you plan to offer employee benefits, such as health insurance or a 401(k) plan, know that benefits can cost 20% of the employee’s wages or more. Finally, you may need to buy workers’ compensation insurance.

Your business’s cash flow is a deciding factor in whether or not you’re ready to hire. You’ve got to have enough cash in your accounts on payday to cover payroll — you can’t ask employees to wait a couple of extra days to get their paychecks because your customers haven’t paid you yet. (If you ever find yourself without adequate cash to make payroll, a short-term loan can help you get over the hump, but this isn’t a solution you should turn to on an ongoing basis.)

Are you ready to deal with red tape?

As soon as you start the hiring process, you’ll have to comply with state and federal anti-discrimination employment laws when advertising the job, interviewing candidates, testing them and making your offer. The red tape only gets more tangled once your first employee comes onboard:

  • You'll have to pay your employees the minimum wage (either the federal minimum wage or one set by your state, whichever is higher).

  • You must maintain records of employee time worked, wages paid and overtime.

  • You’ll need to follow workplace safety regulations and may be required to purchase workers’ compensation insurance.

  • Finally, any employee benefits you offer also have to comply with federal regulations.

If you prefer a simpler solution to your employment needs, outsourcing to independent contractors could be the route for you. Visit your state labor department website for more information about state employment laws; see the Department of Labor website for federal labor laws.

Hiring your first employee: Steps to take

Before you hire your first employee, you need to have covered some bases. Here are the steps you need to take:

1. Obtain your EIN

You might already have an Employer Identification Number, but if you don't, this is the absolute first step you need to take before hiring your first employee.

2. Get your taxes in order

Once you hire your first employee, you'll be responsible for withholding part of their salary or pay, Medicare and Social Security tax payments and sending it to the IRS.

As an employer, you need to keep up your employment tax records for at least four years. You'll also need to make sure you're prepared to pay the right taxes after hiring employees. You'll have to arrange your federal tax withholding, federal wage and tax statement and state taxes.

3. Set up your insurance

Make sure your business insurance includes workers' compensation insurance before you hire your first employee. This is important for all businesses, especially businesses where employees will be doing manual labor.

Hiring your first employee isn’t a decision to be made lightly. By asking yourself the questions above, you can make an informed choice — one that helps grow your business.

4. Write a job description and post the opening

Once you have your tax and insurance ducks in a row, it's time for the exciting part of hiring your first employee: Getting great candidates through the door!

Your first step is to write a job description.

You want your job description to get seen, of course, so your next step is to post the description on prominent job sites. There are so many hiring sites available these days. It's important to make sure that the one you work with is likely to get users with the backgrounds you're looking for.

Also consider sharing the job description with your network, as referrals can be a great source of high-quality candidates.

5. Interview and hire

When interviewing, make sure you're getting a well-rounded idea of who these candidates are. Make sure you're also conducting a fair interview process, asking all candidates the same questions — this will help you compare apples-to-apples when you need to make a choice. You should also brush up on questions you should ask and questions you cannot ask for discrimination purposes.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

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