Federal Requirements For Hiring Employees

Employer Identification Number (EIN)

The first step to hiring employees is to get a Federal Employer Identification Number, often referred to as a Tax ID Number, from the IRS. You can get your EIN online, over the phone, or by filing Form SS-4, Application for Employer Identification Number. The most efficient way to get your number is to apply online at www.irs.gov and get your number instantly. You can call the IRS to get a tax ID number, but that can be a hassle as wait times typically aren’t short. If you mail the form, processing takes four weeks. If you fax the form, processing takes four days.

Employee Records & Reporting

Keeping good records is just a good business practice. When you are well organized you are more efficient, and preparing tax returns and keep track of employees will be easier. The IRS recommends that you keep employment records for at least 4 years.

Form W-4

All new employees should fill out Federal Form W-4, Withholding Exemption Certificate when they are hired. By having your employees fill out this form, you will know how much income tax you should withhold from their pay. Your employee can claim exemption from income tax withholding on the W-4. Otherwise, the amount of income tax withheld is based on the employee’s filing status and withholding allowances. Keep a copy of the form for your records. It will remain in effect until the employee gives you a new one.

Form W-2

Every year you will need to report wages paid and taxes withheld to the federal government. Complete Form W-2, Wage and Tax Statement for each employee paid wages, salary or other compensation. You are required to enter your employee’s name and social security number on form W-2. You should verify this information when you hire your employees by viewing their social security cards.

Form I-9

Employers also must verify that their employees are eligible to work in the United States. You will need to complete federal Form I-9, Employment Eligibility Verification for your new employees. Part of the process is to review certain documents to verify that your employee is a citizen or can legally work in the U.S. You don’t need to submit the I-9 to any government agency, but you need to keep it in your records for three years after your hire date or one year after the date of the employee’s termination, whichever is later.

New hire reporting

Federal law requires all employers to report newly hired and re-hired employees to a state directory within 20 days of their hire or rehire date. It is a federal requirement, but each state has its own reporting mechanism. Usually, you can report new hires online. The information you report can be pulled from the W-4 form completed by your new employee. You are required to report the following information:

  • Your company’s name, address, and federal employer identification number (FEIN or EIN)
  • The employee’s name, address, social security number, and date of hire

You can find additional information about reporting new hires in each state at the Small Business Administration (SBA) website.

Meeting State Requirements

You also need to make sure your business meets state requirements. Usually, this means registering with your state’s departments of revenue and labor and obtaining workers compensation insurance. Failure to comply with state requirements can subject your business to fines and penalties.

State Income Tax Withholding

Depending on the state where your employees are located, you may or may not be required to withhold state income taxes. Most states have a personal income tax, but there are a few that don’t. Contact your state’s Department of Revenue for details.

Unemployment Insurance

Most employers will pay state unemployment insurance tax. Once you become liable for the tax, you need to report to your state’s department of labor or workforce services and let the state assess your tax rate.

Workers’ Compensation

Employers who meet certain criteria must obtain workers’ compensation insurance coverage for their employees. Requirements vary from state to state (see the SBA link below). Usually coverage is obtained through a private insurance provider, though some businesses can qualify for self-insurance. Contact your insurance agent for information on how to get the right coverage.

Learn More

The SBA is a great resource for new employers. You can find more information on your state’s state tax and labor requirements at SBA Pay Taxes Guide.