Congratulations—your small business finally has crossed the threshold where you have more work than you can handle on your own! Now you have a whole new list of things that you need to learn, including how you classify someone working for you and how you pay them (and IRS) correctly. Here are some things to consider.
1. Figure out if you are hiring employees or independent contractors.
This may be an easy decision or it might be one of those things that you haven't even considered yet. There are a lot of factors that get thrown into consideration together when classifying someone as an employee versus an independent contractor, with no one prevailing "bright line" rule that differentiates one from the other. Instead, there is a whole list of questions that you may want to consider in order to see how your new hires should be classified.
There are some advantages to hiring people as independent contractors—chief among them is the fact that you don't have to withdraw and hold any payroll taxes or submit them along with quarterly reports to the IRS. Independent contractors get a 1099 at the end of the tax year if they earn more than $600 and are responsible for their own taxes. However, you can't just decide to call someone an independent contractor if they don't meet the legal requirements.
The decision can be trickier than you initially realize. For example, if you are bringing one person on staff to work with you and you are essentially hiring them to work the register while you do more important things, that's pretty clearly an employee situation. There are no special skills involved and you exercise pretty much exclusive control over how he or she does the job and when he or she works. On the other hand, if you decide to expand your bakery by adding a wedding cake artist, and she is free to schedule her consultation with potential customers, negotiate a fair price for a cake, accept or deny a project and works whatever hours she needs to in order to make things happen with very little input from you, that's someone that could legitimately be considered an independent contractor.
2. If you hire employees, get a payroll service provider.
This can simplify your life tremendously. If you settle on hiring employees, not independent contractors, a payroll service provider can set up the appropriate payments for you for the IRS. The best thing is that they will keep track of the schedule so that you don't have to worry about missed deadlines with the IRS. They also relieve you of the responsibility of having to provide your employees with regular paychecks and pay stubs and they'll make sure that your employee gets the appropriate W-2 with the summaries of their gross and net incomes and withholding amounts.
It is important to pick a reliable payroll service provider because the responsibility for accurate payment falls back on you. If your payroll provider fails to do its job, the IRS will still hold you personally responsible for the tax debt, which cannot be discharged in bankruptcy.
If you're struggling with some confusion about the big steps your business is about to take, consider contacting an attorney who handles these sort of issues for advice. He or she may be able to help you determine how to classify your employee and choose an appropriate payroll service for your needs.