When an LLC hires its first employee, it transitions from a simple business entity to a formal employer. This shift introduces new administrative and legal responsibilities distinct from the LLC’s core operations. Becoming an employer demands a structured approach to compliance with federal and state labor and tax laws. Successfully navigating this transition requires attention to legal requirements, documentation, and establishing internal systems to manage a workforce.
Initial Compliance Setup for New Employers
The initial administrative steps involve formal employer registration with government bodies. The foundational requirement is obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This unique nine-digit number serves as the LLC’s federal tax identification and is necessary for all payroll filings and tax deposits.
Once the federal EIN is secured, the LLC must register with the state department of revenue for state income tax withholding. Employers must also set up an account with the state’s labor department for State Unemployment Tax Act (SUTA) or Unemployment Insurance (UI) contributions. These state-level registrations confirm the LLC’s status as a legal employer and allow it to remit required employment taxes.
Distinguishing Employees from Independent Contractors
Correctly classifying each worker as either an employee (W-2) or an independent contractor (1099) is a crucial early legal determination. Misclassification can lead to severe penalties from the IRS and state agencies, including fines and back taxes. The IRS uses a common law test examining the facts of the relationship across three main categories to determine a worker’s status.
IRS Common Law Test Categories
The first category is Behavioral Control, which examines whether the business controls how the worker performs the job, such as setting work hours or providing detailed instructions. Financial Control focuses on the business aspects of the worker’s job, including unreimbursed expenses, investment in equipment, or the ability to realize a profit or loss. The Relationship of the Parties considers factors like the permanency of the relationship and whether the worker receives employee benefits. If misclassified, the LLC could be liable for FICA taxes that should have been paid, plus additional fines.
Required Hiring Paperwork and Documentation
Once a worker is classified as an employee, the LLC must collect specific documentation to comply with federal and state regulations.
Mandatory Hiring Forms
The Form I-9, Employment Eligibility Verification, is mandatory to confirm the employee’s identity and legal authorization to work in the United States. The employee must complete the first section on their first day, and the employer must certify the documentation within three business days.
The Form W-4, Employee’s Withholding Certificate, informs the employer how much federal income tax to withhold from the employee’s wages.
A formal, signed offer letter detailing compensation, start date, and job duties should be issued to establish the terms of employment.
State-specific new hire reporting forms must often be submitted to a designated state agency shortly after the hire date.
Setting Up Payroll and Tax Withholding
Payroll requires the employer to accurately calculate, withhold, and remit various employment taxes. The employer must withhold federal, state, and local income taxes from the employee’s gross wages based on the Form W-4. The employer must also withhold the employee’s portion of Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare.
FICA taxes include Social Security (6.2% for both employee and employer) and Medicare (1.45% for both parties). The employer must match the employee’s FICA contributions, effectively doubling the tax liability. These withheld and matched taxes must be deposited with the IRS on a monthly or semi-weekly schedule, depending on the total tax liability. Many businesses use an outsourced payroll provider to manage these complex calculations and reporting requirements.
Securing Necessary Employer Insurance
Hiring employees mandates securing specific insurance coverage to protect both the workers and the business. Workers’ Compensation insurance is mandatory for nearly all employers in every state, often effective from the first day of hire. This insurance provides medical benefits and wage replacement for job-related injuries or illnesses, protecting the business from related liability lawsuits.
Coverage is generally required once the first employee is on the payroll. Additionally, the LLC must contribute to the State Unemployment Insurance (SUI) fund via the state registration process. Some states also require employers to provide State Disability Insurance (SDI) for non-work-related illnesses or injuries.
Establishing Essential Workplace Policies
The LLC should establish clear internal guidelines to manage the workforce and mitigate legal risk beyond government compliance. A comprehensive employee handbook is the most effective way to communicate these expectations and standardize procedures.
Key Handbook Policies
Anti-discrimination and anti-harassment policies must define prohibited conduct and outline a formal procedure for reporting complaints.
Compensation policies must detail adherence to wage and hour laws, including overtime rules, and explain the company’s approach to paid time off (PTO) and leave.
Disciplinary procedures and a code of conduct should be established to ensure employees understand the consequences of failing to meet expectations.