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Small Business Guide to Hiring Employees

There comes a point when a small business owner hits maximum capacity, the business can no longer scale, and it is time to hire the first employee. Hiring employees can help a small business push through that ceiling and help it continue on its growth trajectory. Hiring that first employee sounds daunting, but with research and planning, it can be executed smoothly.

Everything Small Business Owners Need to Know about Hiring Employees

In this guide, we’ll discuss:

The purpose of this guide is to provide an overview of the hiring process for small business owners and startups. From legal requirements through the talent acquisition process, you will have a clear framework of how to hire employees and make that first hire. We also touch on employee retention since having your employees frequently churn can harm the business. At the end of the guide, we will cover capital options on how to fund the hiring of new employees.

Requirements for hiring employees

There are several requirements - some legal, some business policy - a small business needs in place before hiring employees. Some legal requirements are state-specific which means the small business owner will need to do independent research to confirm the requirements in their state. Let’s unpack the requirements a small business owner must meet:

  1. Obtain an Employer Identification Number (EIN): An Employer Identification Number (EIN), or Federal Tax Identification Number is used to identify a business entity. To apply for an EIN online, visit the IRS’s web page for more information.

  2. Obtain a state or local tax ID: Similar to the Federal EIN, individual states also require a tax ID. Visit your state’s revenue department website or tax department website for additional information on how to obtain a tax ID.

  3. State department of labor: Familiarize yourself with the laws and rules of your state’s department of labor. For additional information, find and review your state labor office website. You will likely need to register for a state unemployment insurance (SUI) account number and file quarterly unemployment compensation reports.

  4. Calculate tax withholding: Small businesses will need to take out both state and federal taxes from the employee's paycheck. Issue every new employee a W-4 so that you can withhold the correct tax from your employee's pay. A payroll system can assist with the administrative burden.

  5. Compensation plan for holidays, vacations and leave: Determine your small business's policy for paying your employees on holidays, vacations, and leave. Your state might have specific laws in place regarding minimums.

  6. Select payroll system: A payroll system can ease the administrative burden with all the complexities of issuing paychecks, withholding, taxes, etc. Small business owners can use a payroll system to manage everything to do with the process of paying employees and filing employment taxes. You can also track worked hours, calculate wages, withholding taxes and other deductions, print and deliver checks, and pay government employment taxes.

  7. Purchase worker's compensation insurance: Workers' compensation insurance protects the business when its employees get a work-related injury or illness by covering medical expenses. Without it, small business owners would have to pay for their injured employees' medical bills out of pocket.

  8. Payroll taxes: Employers are required to make federal payroll tax payments to the government, as well as file the proper reporting and informational returns. There may be state requirements as well which can include income tax (paid by the worker), unemployment tax (paid by the employer), and possibly local taxes.

  9. Issue I-9s: An I-9 form is used to verify the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must properly complete Form I-9 for each individual they hire for employment in the United States. The form asks for information such as a social security number, address, and documentation like a passport or driver’s license.

Full-time vs part-time

You need to decide if the employee you plan on hiring is going to be full-time or part-time. Typically the difference between the two is defined by the number of hours an employee works each week. Full-time employment is usually defined as at least 40 hours per week, and part-time employment is usually a minimum of 20 hours per week. However, the company can decide what constitutes part-time employment and how many hours it requires. For example, if a company decides that part-time employment is 30 hours or less, those employees might not be eligible for medical and other company benefits and incentives. The U.S. Department of Labor’s Fair Labor Standards Act (FLSA) does not address part-time employment. Whether an employee is considered full-time or part-time does not change the application for the FLSA.

Independent Contractors

The small business must determine whether the employees providing services are employees or independent contractors. Independent contractors are responsible for their federal payroll taxes and can have a lighter administrative burden than full-time or part-time employees. However, top talent might prefer to work as a full-time employee to be eligible for benefits like health insurance and retirement plans.

Talent acquisition process start to finish

The talent acquisition process is involved and has many steps from writing a job description to interviewing candidates to job offers, and more. For small businesses, the owner might be able to handle this process from start to finish. However, as the company grows in size, it might present a challenge. Let’s break down the talent acquisition process:

  • Hiring Plan: A hiring plan details what positions you need to hire based on company goals. Small businesses that are planning to hire their first employee might not need a full-blown hiring plan until the business is ready to scale and they have a human resources department in place to support talent acquisition. A starter hiring plan should simply detail the interview process. For example, how many interviews do you plan on conducting, what interview questions will you ask, what makes a candidate successful beyond their ability to do the job, do you want them to submit a cover letter along with their resume, and when would you like the candidate to start? This initial hiring plan framework can be built on as the small business grows.

  • Writing the Job Description: The job description details eligibility for the job and signals to potential employees what type of experience they need to qualify. Responsibilities, objectives, key performance indicators (KPIs), objectives and key results (OKRs), required skills and qualifications, and preferred skills and qualifications for the job should all be included in the job description. Writing a clear and accurate job description and job title should attract qualified candidates for the job. Keep in mind that you can use a job description as a template for future job openings. There is nuance involved with writing job descriptions so it’s a good idea to have at least one other person review it before it is posted. For example, you might unintentionally use a word or phrase that could cause a qualified candidate to self-disqualify.

  • Posting the Job: Once the job description is complete, you can post about the open position on the company’s website, popular job boards like Indeed and LinkedIn, and also on the company’s social media channels for visibility. Also, make sure all company team members are aware that you are hiring and ask them for referrals. Sometimes the best candidates can be referred to a small business by its existing employees.

  • Review Submissions: Monitor your inbox for candidates submitting their applications for your job posting. Review their application and resume to determine if their skill set might be a good fit for the new role.

  • Create a short list: Narrow down the job application submissions to a short list of 5 potential candidates.

  • Interview: Follow up and set up interviews with each of the candidates. Typically the first-round interview is a phone screen to make sure both the small business and the candidate are on the same page. After the phone screen, it is up to the small business to determine the number of interviews required to make sure the candidate is a good fit. Depending on the type of job, you might want the candidate to undergo a skills evaluation, complete a personality assessment, or conduct a presentation. For example, if a small business is hiring a Java developer, it makes sense to have the candidate demonstrate their skills to ensure they know how to code Java.

  • Selection: After the interview process, it is time to make a selection and extend a job offer letter to the right candidate. Before extending an offer, prepare for negotiation on things like salary, time off, and benefits. It might not happen, but it is a good idea to know how you will respond if it happens. For example, are you going to make your initial offer your first-and-best offer or will you intentionally make an offer with a lower salary than budgeted?

  • Background check: Depending on the industry the small business operates in, you might be required to conduct a background check on the new employee. Typically in these situations, successfully passing a background check is required to be eligible for employment. For example, in the state of New York, the employers must get written permission from the potential employee to conduct a background check and notify them if the employer intends to disqualify them based on the report.

  • Onboarding: Once the candidate has accepted the offer and a start date is selected, you will need to plan out their first day, the first week, the first month, the first quarter, etc. Setting your new employee up for success is critical. During the onboarding process, you will need to present the employee handbook and have them complete any Federal or state mandatory workplace training. For example, the state of California requires anti-harassment training for all employees at businesses with at least five workers.

At the early stages of hiring, an entrepreneur can likely handle the talent acquisition process. But to effectively scale, the business will eventually hit a point where it needs to hire its recruiters and talent acquisition professionals.

Considerations for employee retention

Creating a positive work environment, good culture, and providing good benefits is key to having your employees stick around. High turnover can signal that something is broken with the employee experience. It is beneficial to the business to retain its employees as hiring can take a lot of time and energy, new employees will have a learning curve, and there is no guarantee that who you hire will be a good fit. So when you find someone good, keeping them is important. Here are considerations for employee retention:

  • Safe work environment: Employees expect a work environment that is positive, safe, harassment-free, and generally not toxic. Harassment can occur in remote work environments too.

  • Company culture: Company culture starts at the top. The senior leadership team drives what type of culture they want in their business and should be making hiring decisions based on two factors: 1) Can this job candidate perform the duties that are required? and 2) is the job candidate a culture-add? Note the difference between culture-fit and culture-add. While the employee must fit in with the existing culture, you should also consider how the employee will add to it.

  • Benefits: Providing your employees with industry-leading perks, health and wellness benefits, and evolving and changing them as time goes on, is a key component to retaining employees.

  • Pay: Competitive pay and retirement options, and improving upon them, are important factors to employee retention.

Capital options to pay for new employees

Hiring employees for your small business can be a challenge as there are many steps and it is time-consuming. Additionally, you have to pay your new employee's salary, benefits, and all the associated taxes which require capital. There are two ways to pay for a new employee: 1) with cash flow from the business, or 2) by obtaining capital from a lender:

  • Cash flow: Small businesses with strong cash flow can use it to fund the administrative costs and overhead of bringing on an employee, freelancer, or vendor.

  • Funding from a Small Business Lender: Whether from a traditional financial services institution or an online lender, there are many options to obtain capital to fund the expense of hiring an employee. Each of these options has its qualifications and requirements, for your continued research, we have provided links to learn more about each option:

Both of these options are valid and it's ultimately up to the small business operator to determine the best course of action when it comes to funding a new hire. However, keep in mind that you can use a combination of both of these things simultaneously to fund a new hire. Check out this article for more insight on how much it cost to hire a new employee.

A Brief Recap

Hiring new employees can be a big challenge for small business owners. Whether it is identifying all the fees associated with maintaining employees or simply finding the right person, the hiring process is a challenge from day one.

However, at the same time, hiring your first employee can be an exciting step in growing your business. It can lead to bigger and better things down the road.