Today’s guest post is by Kristin Deese, founder of Catalyst Consulting, a small business consulting agency. She founded Catalyst after nearly two decades of leadership and management experience in various industries. With a knack for creating structure out of chaos, identifying roadblocks and how to get around them, dreamers and creative spirits are her favorite clients to work with.
She believes strongly that we all have innate strengths and weaknesses, and when we collaborate with others who build us up where we are not our strongest, we are able to achieve things we haven’t even dreamed of yet.
If you’re a small business owner, at some point you’ve probably wondered if you are ready to hire an employee. Hiring can be scary and stressful, especially if you aren’t sure if you can financially support the addition of an employee to your team. This brief guide will help you get started.
Measuring the workload
The first step in hiring an employee is figuring out if you even need one. How much work are you consistently doing? Do you often feel like you have more work than you can handle? Do you feel a little bit of panic when you get new clients or customers because you’re not sure if you can support them?
Do you need to hire full-time or part-time?
If at this point you’re pretty sure you need some help, next you need to figure out what kind of employment you’re offering. Is it full-time or part-time? If part-time, how much?
Tracking your time is one of the most important steps to determining how many hours you need to hire for. It’s also highly recommended to outline your processes to identify what tasks you would be able to hand off to someone else to support you with. Think about creating checklists for your often-repeated daily, weekly and monthly tasks.
What will your new employee do?
A useful brainstorming exercise I like to use to help identify which tasks you may want to focus on delegating first is the Like/Dislike quadrant. In the top two boxes, you’ll write down things you like to do, and things you are good at. The bottom two boxes will be things you hate doing and things you’re not good at. This often helps to visualize and identify trends. Sometimes you’re good at things that you absolutely hate to do, and those things can be passed along to your future team.
|Things I Like Doing ||Things I’m Good At|
|Things I Hate Doing ||Things I’m Not Good At|
So now, you have an idea of what you need. But can you afford it?
Calculating the finances
To ensure you are financially stable enough to support an employee, you will need to make sure you know what your current budget and cash flow status is, as well as your future income prospects in your pipeline. Adding an employee should do one of two things: (1) bring in additional income; or (2) free up time for you to create more income for the business.
What will my first employee cost?
You will need to determine how much to pay your employee or contractor, which can be tricky. Searching for similar jobs in your area can be a great place to start to see what other businesses are paying for the same type of role. You can also search for “average pay in <my state>” or “average pay for <my job title>” to get some ideas.
Know what minimum wage is… then expect to pay more.
The federal minimum wage is currently $7.25 as of 2021, but many individual state minimum wages are higher, and California & Washington are significantly higher: $14 and $13.69 respectively. In many cases, in order to be competitive and to attract high caliber candidates, you will need to offer much higher than the minimum wage for your location. For more details on state minimum wage information (as of July 2021) click here.
Don’t forget about taxes and insurance.
If you are planning to hire a W-2 employee, you will also need to consider additional expenses for taxes and insurance, which can vary somewhat state to state. A general rule of thumb is to add 25-40% on top of the salary to allow for the additional cost. For example, if you want to pay someone $15 per hour, you would calculate for approximately $18.75-20 total per hour. Your accountant should be able to help you with this process, and may also be able to help you with processing payroll. For additional information on additional tax and insurance costs, the SBA has a helpful article here.
A good rule of thumb for the question: Can I afford a new employee?
You should have a budget in place to effectively manage your income, expenses, and profitability. If you have been able to consistently bring in enough income (and have it set aside) to cover the cost of an employee for at least 6-12 months, that is generally going to be sufficient. Everyone has different levels of comfort when it comes to taking financial risks, especially with their business, so it is highly recommended to discuss your plans with your accountant prior to making any commitments.
Contractors vs. Employees
When hiring, it’s critical to decide if you’re going to hire an actual employee (who will receive payroll and a W-2), or a freelance contractor. This can make the difference between a successful first hire or not.
Freelance contractors can be a great “soft start.”
Freelance contractors (1099) are a great way to start adding to your team, especially if you aren’t quite ready for a full-time employee. Contractors are not your direct employee; they are their own business, and as such are responsible for their own taxes, insurance, etc. One of the primary differences between an employee and contractor is that you can tell a contractor what you want to have done, but not when or how – other than what’s agreed upon in your service contract. You aren’t able to say, “I need you to work Monday-Friday from 9:00am to 2:00pm”. You can say, “I need this project done to these specifications by X date”, and those terms will generally be outlined in the contract. When and how they get the project done is up to them.
Legal Tip: The IRS may scrutinize contractors to make sure they’re not really employees, for whom you should be paying the IRS employment taxes. When the IRS decides a contractor was actually an employee, they typically impose tax penalties and interest. While giving your contractor freedom to work when and how they like is critical, the IRS may also look at other factors, so be sure to consult with legal counsel to make sure your contractor really is a contractor, and your contracts with them support that.-Devon Thurtle Anderson, Skepsis Legal Business Attorney
Employees carry less legal risk, but more paperwork and financial work.
W-2 employees are an actual employee of your company. You are responsible for taxes, insurance, and possibly benefits (depending on your state). When someone becomes your employee, you are then able to dictate when, where, and how the job gets done.
So which should I choose?
Both options have pros and cons that often boil down to flexibility and financial commitment. You may also be able to hire an experienced freelancer who can jump in and help you more quickly and effectively than hiring an employee that you may need to train in certain areas.
Hiring your first employee can be the biggest step many business owners take. It can be scary – but it doesn’t have to. Set yourself up for success by getting a great payroll provider to handle the complicated taxes and accounting for you, and make sure you work with your attorney to get strong employment contracts in place to support both you and your new employee.
Skepsis Legal is here to help. If you have any questions, don’t hesitate to book a consultation with us today.