Having your business grow to the point where you have to hire employees is a mixed blessing. On the one hand, it means that you have become more successful and that you are earning more revenue – both highly positive things. On the other, it means that, in addition to attracting and retaining good employees, you also have a whole new batch of legal and financial obligations – obligations that can cause problems if you don’t meet them properly.
Below are some of the common legal issues that employers face, and how to deal with them.
Employees vs Independent Contractors
As an employer, you have different legal and financial obligations regarding employees vs independent contractors. For example, you are required to deduct state and federal taxes, and pay into unemployment and Worker’s Compensation for employees, but not for independent contractors. However, the IRS has very specific guidelines for what constitutes an independent contractor versus what constitutes an employee. If you list someone as an independent contractor when they actually qualify as an employee you could end up facing hefty penalties and fines – not only from the IRS, but also from state and local tax agencies.
Insured vs Uninsured
With the employer shared responsibility provisions, under the affordable care act, set to take effect in 2015, employers with 50 or more full-time employees will be required to offer “affordable healthcare coverage that provides a minimum level of coverage to their full-time employees (and their dependents).” Failure to do so can result in hefty fines and fees.
The IRS has more information regarding the regulations, and you can also find educational videos from organizations like the AICPA regarding the employer side of health care coverage.
Exempt vs Non-Exempt
In addition to whether or not someone is classified as an employee, you also need to specify if they are classified as exempt or non-exempt. The Fair Labor Standards Act (FLSA) specifies that all employees must be paid the federal- or state-mandated minimum wage (whichever is higher) as well as overtime if they work more than 40 hours per week, unless they meet certain qualified exemptions. Employees who are exempt must hold certain positions, and meet specific salary requirements and other criteria as outlined by the FLSA. If you don’t meet these criteria and are caught not paying overtime, or paying less than minimum wage, you could face hefty penalties and fees.
Payroll Deductions and Payments
As we stated before, you are legally required to make certain deductions from all employee’s wages. These deductions include payroll taxes — state and federal taxes, social security, and Medicare – as well as unemployment insurance, and worker’s compensation. If you offer health insurance and other benefits, then you have to deduct those as well.
When it comes to payroll taxes, the deductions are only part of the equation, you also have to pay those taxes according to the schedule specified by the IRS, and state and local tax entities, and pay them on time. Just like all of the other legal and financial obligations, failure to pay these taxes on time could result in hefty fines. Additionally, if the IRS suspects that an employer is using those deducted funds for anything other than paying the required taxes, the company could face criminal charges and penalties.
Making Sense of it All
The above are just a few of the things that you have to consider when you start hiring employees. It can be a lot to take in, especially if you have never had experience with it before. However, the truth is that employment laws change and update often, so even those with years of experience can get tripped up.
This is why it’s important to have qualified people, such as a business lawyer and a CPA, to help you meet all of your legal and financial obligations.