Hiring Employees as an LLC
Your business has grown and you’re ready to hire your LLC’s first employees. Now what?
The hiring process goes beyond advertising the position and finding the right person. Becoming an employer means new tax obligations, new registration and posting requirements, and much more. But don’t worry—here’s everything you need to know about hiring employees as an LLC.
Who Counts as an LLC Employee?
As an employer, your LLC employees are the people for whom you pay wages, withhold income tax and employment taxes, pay unemployment taxes and purchase workers’ compensation insurance.
However, not everyone who performs work for your LLC is (or can be) an employee.
While “who counts as an LLC employee” seems like a straightforward question,taxes, contractors, and other factors can muddy the waters.
Can an LLC Member be an Employee?
Whether or not an LLC member is an employee depends on your LLC’s tax classification.
With default tax classification, the members (owners) of your LLC are not considered employees. Any income the LLC makes is distributed to members. Members report profits and losses on their personal taxes, and income is subject to self-employment taxes. But the LLC does NOT put members on payroll, withhold taxes, or pay unemployment taxes.
For an LLC that has elected to be taxed as an S-corp or C-corp, members who perform major services for the LLC are considered employees. Major services are typically day-to-day operations, not one-time services that might suit an independent contractor. For service-providing members, you’ll need the whole employee song and dance: payroll, withholding, unemployment taxes, and workers’ compensation insurance.
Employees vs. Independent Contractors
Members and employees may not be the only workers providing services to your LLC—there could also be independent contractors.
Unlike employees, contractors don’t get a salary and don’t require setting up payroll, withholding or insurance. Instead, contractor fees generally qualify as business expenses and are deductible from the net income of the LLC. If you pay a contractor more than $600 a year, however, you’ll likely need a W-9 to get the contractor’s TIN (taxpayer identification number), so you can complete a 1099 form to send to both the contractor and the IRS (due by January 31st).
Employees and contractors are defined differently, and the IRS does not look kindly on businesses that misclassify employees as contractors. So what’s the difference?
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Need someone to file your LLC’s annual taxes or run an audit? You might hire an independent contractor. Need someone to manage weekly inventory orders? Unless you have default tax classification and a member willing to take on the task, you’ll likely need to hire an employee.
Ready to Hire Employees for Your LLC?
Employees require payroll, withholding, unemployment insurance and more. Here is a guide to setting up your LLC to hire employees.
Businesses that hire employees are required to register for an Employer Identification Number (EIN) with the IRS. You’ll need one to file documents (like tax returns) with the IRS, and your employees will need your EIN to file their own taxes. You can apply online on the IRS website.
Almost every state requires you to have workers’ compensation insurance in case any of your employees are injured on the job. Why? Workers’ compensation insurance covers injured employees’ lost wages, medical expenses, and even death benefits for your employee’s family should your employee pass on.
Worker’s compensation insurance requirements vary from state to state, but generally, you’ll need it by the time your employees start work. Most states allow worker’s comp insurance to be purchased through private insurance providers, and some provide state-funded programs as an alternative. But some states, like North Dakota and Ohio, require businesses to get coverage through the state.
Once you’ve hired your first employee, you’ll need to register with your state’s labor department and pay your state’s unemployment compensation taxes. Some states (like Louisiana and New Jersey) will allow you to register with their department of labor online when you submit your articles of organization. To find out where you need to register, see the Department of Labor’s list of state unemployment insurance tax agencies.
Once hired, your new employee will need to fill out an Employment Eligibility Verification form (I-9) from the IRS and a Withholding Allowance Certificate (W-4). Businesses must use an I-9 form to prove the identity and work authorization of their employees. Your employees fill out the W-4 to to let you know their filing status, if they’re claiming any dependents, and if they’d like other adjustments made, like deductions and additional withholding. If your state has withholding, you’ll also provide employees the state’s W-4 equivalent, available from the state tax department.
Payroll is how your business pays employees, keeps track of their earnings, and withholds federal and state payroll taxes. After you’ve determined how much you’ll pay your employees, you’ll need to set up a payroll schedule. How often will your employees get paid? Once a month? Weekly? Bi-Weekly? Be sure to check with your state’s labor agency to see which pay days and/or pay periods you can use.
The IRS requires you to withhold federal income taxand social security and Medicare taxes for both your LLC and your employee.Your LLC will deposit this money to the IRS through their electronic funds transfer either monthly or semi-weekly (where funds are due shortly after payroll, which could be weekly, every other week, twice a month, etc.). Determining how much to withhold for each employee depends on the information on their W-4. The IRS provides an Income Tax Withholding Assistant for employers to help determine how much to withhold from each employee’s paycheck.
And unless you’re operating your business in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, you’ll need to set up withholding with the state’s tax department too.
While not required, employment contracts and employee handbooks protect employer and employee. These documents should make the company’s expectations clear. An employment contract should include a job description,along with the employee’s classification, expected work schedule, compensation, benefits, time off, sick days, and severance information. Employee handbooks and employment contracts help set clear expectations and head off miscommunication.
The Department of Labor (DoL) and your state’s labor office require employers to post different notices for their employees, depending on what type of business they run. These notices cover topics like minimum wage requirements, medical leave, and labor standards. The DoL provides PDFs of workplace posters on their website and information on poster requirements.
What if your employees work from home? One-time notices can be sent by email. Notices that would be continuously posted on-site must be available (without requested permission) via a website, shared network drive, or shared file system.
After Your LLC Hires an Employee
After hiring, you’ll need to:
- Retain Hiring Records. Federal law requires that you keep all application records—the job description, advertisements, resumes, cover letters, pre-employment screening materials, and offer and rejection letters—for at least 1 year after filling the position.
- Create Personnel Files. You should create a file for each employee you hire to maintain documents like the employee’s original job application, W-4, and sign-up forms for benefits. Any employee medical records should be kept confidential and locked away in a different file. I-9 forms should also be kept in a separate file.
- Report New Employees. The Office of Child Support Enforcement (OCSE) requires business to report new hires so that child support agencies can locate a parent who owes child support and issue an income withholding order. You will need to report basic information on new and rehired employees to a state agency (see the OCSE’s list) within 20 days of hiring. Some states require new hires to be reported sooner. Alabama, for example, requires reporting within 7 days.
FAQs
Plan on the process to take a month or two, if not longer. The Society for Human Resource Management reports that the average time it takes to hire an employee is between 36 and 42 days. Your hiring pace will depend on where you’ve posted your opening, the position you’re trying to fill, and your company’s hiring process.
The Society for Human Resource Management reported in 2016 that it took an average of around $4,200 to hire a new employee. Of course, you can decide how much money you’d like to spend on advertising your job and how much time you want to invest in recruitment and hiring.
In states where workers’ comp insurance is required, employers can be fined or jailed for not being insured. These employers are also more vulnerable to lawsuits from employees injured on the job. The only state that doesn’t require private employers to purchase workers’ comp insurance is Texas, but opting out can make it difficult to win lawsuits filed by injured employees. Uninsured employers who face lawsuits may also be liable for punitive damages.
As mentioned above, LLC owners (members) may be considered employees if the LLC has elected to be taxed as an S-Corp or C-Corp. In this case, the members that perform major services for the LLC are considered employees and must be paid a reasonable salary.