Accounting Considerations When Hiring Your First Full-Time Employee

1. Understand the Difference Between Contractors and Employees

The IRS classifies workers based on control over work hours, tools, and project execution. Misclassifying an employee as a contractor can result in fines, back taxes, and compliance issues.

‍

Key Differences:

• Employees: Subject to payroll taxes, receive W-2s, and are eligible for benefits.
• Independent Contractors: File their taxes, receive 1099-NEC forms, and typically control how they complete their work.

‍

Next Steps:

Before extending a full-time offer, review IRS Form SS-8 or consult with a payroll advisor to confirm proper classification.

‍

2. Set Up a Compliant Payroll System

Once you classify a worker as an employee, you're responsible for withholding and remitting federal and state payroll taxes, including Social Security, Medicare (FICA), federal and state income tax withholding, and potentially unemployment insurance and workers' compensation premiums.

‍

What You'll Need:

• Employer Identification Number (EIN) from the IRS
• State payroll registration accounts
• Payroll software or provider (Gusto, QuickBooks Payroll, ADP)

‍

Why It Matters:

Payroll mistakes can result in IRS penalties and damage employee trust. A reliable payroll system automates compliance and reduces administrative burdens.

‍

3. Budget for the Full Cost of Employment

The actual cost of hiring a full-time employee goes beyond salary. Businesses must factor in payroll taxes, benefits, onboarding costs, and long-term obligations.

‍

Common Additional Costs:

• Employer portion of FICA taxes (7.65%)
• Unemployment insurance premiums (varies by state)
• Health insurance or retirement benefits (if offered)
• Paid time off, training, and equipment

‍

Tip:

Plan for at least 1.25 to 1.4 times the base salary to account for total employment costs.

‍

4. Establish an Employee Benefits Policy

Offering benefits improves retention and enhances your competitive position in the labor market. Simple offerings like health reimbursements or a retirement plan require accounting setup and documentation.

‍

Common Startup Benefits:

• Health Reimbursement Arrangements (HRAs)
• SIMPLE IRA or SEP IRA retirement plans
• Paid vacation or holidays

‍

Next Steps:

Work with a CPA or HR advisor to determine benefit plans that align with your budget and growth goals.

‍

5. Update Your Chart of Accounts and Financial Reporting

Hiring your first employee affects your financial statements. Your general ledger should record labor costs accurately to ensure proper cost tracking and economic analysis.

‍

Best Practices:

• Create payroll-specific expense categories (e.g., salaries, payroll taxes, benefits).
• Segment labor costs by department or function if applicable.
• Reconcile payroll reports with bank transactions monthly.

‍

Why It Matters:

Detailed labor tracking helps evaluate profitability, manage budgets, and prepare for future hires or investor reporting.

‍

6. Prepare for New Tax Filings and Deadlines

As an employer, you now have quarterly and annual payroll tax filing responsibilities, including:

• Form 941: Quarterly federal tax return
• Form W-2: Annual wage statement to employees
• State-specific wage and withholding reports

‍

Next Steps:

Create a payroll tax calendar and ensure your accountant or payroll provider handles these filings on schedule.

‍

Conclusion

Hiring your first full-time employee is a significant step in your business journey. By preparing your accounting systems, understanding tax responsibilities, and planning for the full cost of employment, you can build a strong foundation for future growth.

‍

If you're looking for expert guidance to simplify your tax filing process, schedule a time with a Decimal expert at https://www.decimal.com/contact-us. We'll help ensure your finances stay compliant and ready to scale with your team.

‍