How costly is your first employee? (fees, insurance, small business, attorney)

[EscapeCalifornia]

How much BS and expense from the government (both Federal and California) is involved when expanding a business to include a single employee? Typically, what percentage of the employee's gross salary is it going to cost me in payroll taxes? I'm referring to the portion I'd pay, out of my own pocket, not the amounts withheld from their check. What other ongoing taxes, fees, etc would I be responsible for?

[dsnellen]

Originally Posted by EscapeCalifornia

How much BS and expense from the government (both Federal and California) is involved when expanding a business to include a single employee? Typically, what percentage of the employee's gross salary is it going to cost me in payroll taxes? I'm referring to the portion I'd pay, out of my own pocket, not the amounts withheld from their check. What other ongoing taxes, fees, etc would I be responsible for?

Step #1. Get a CPA and an attorney on your team. These are questions you should be asking them.

[sunsprit]

#2 Post is correct, you'll need professional services when you make this step. This is a business overhead expense that is far beyond what you need as a sole proprietor ... although if you've already filed as an LLC or Corp, then you have already obtained these services.

The immediate tax burden on your business will be having to obtain Workman's Comp Ins, UI Insurance (generally from your state pool, and your initial rates will be MUCH higher than they may be later when you have an account surplus and a track record for a few years). Of course, you get to match the employee's contribution for Fed programs (SS, etc), and you now have the tax reporting responsibility for withholding and making the payments for their income taxes (Fed and State, plus any local tax if applicable). So, in addition to the actual tax burden, you have expenses in the records, reporting and bookkeeping process ... and new silent partners in your business who will be on your doorstep in a heartbeat if you don't send them their money in a timely fashion.

[golfgod]

It's not as dire as "common knowledge" and the above posters make it out to be. Yes, it will take some time, maybe a couple of hours to set up and an hour per month to do the required paperwork. I was self-employed for most of my working life so I do know what I'm talking about.

You have to know that the employee is going to pay for himself before making that decision. IIRC the total, both sides, of SS and Medicare is about 15.2%, worker's comp is a matter of state rules.

sunsprit wrote;

partners in your business who will be on your doorstep in a heartbeat if you don't send them their money in a timely fashion

As they should be "on the doorstep" of any tax cheat in a heartbeat.

BTW, my CPA had some software that allowed her to do all my tax reporting and submission and charge me very little for the service. I always hated doing that stuff.

golfgod

[sunsprit]

Originally Posted by golfgod

It's not as dire as "common knowledge" and the above posters make it out to be. Yes, it will take some time, maybe a couple of hours to set up and an hour per month to do the required paperwork. I was self-employed for most of my working life so I do know what I'm talking about.

You have to know that the employee is going to pay for himself before making that decision. IIRC the total, both sides, of SS and Medicare is about 15.2%, worker's comp is a matter of state rules.

sunsprit wrote;

As they should be "on the doorstep" of any tax cheat in a heartbeat.

BTW, my CPA had some software that allowed her to do all my tax reporting and submission and charge me very little for the service. I always hated doing that stuff.

golfgod

I, too, have been an independent self-employed shop owner for most of my working life. Maybe I'm not "up to speed" as golfgod ... but it sure in heck took me a lot more than an "hour per month" to do the paperwork with weekly payroll employees.

golfgod's suggestion that your tax burden on that first employee is only your portion of the 15.2% of FICA is totally misleading .... simply due to the overhead expense you'll have with Workman's Comp and UI. These expenses are "rated" for various trades and professions, and can be a very significant addition to the hourly cost of your employee. If it's office work, not too much, but if you've got a trade, it's a substantial expense due to the "risk" factor.

My first employee in an auto shop cost me almost 20% of their hourly wage for those other taxes ... because it was rated as a very risky work. The only way that overhead expense came down a bit was when I'd had a business track record of no claims for several years and an "account surplus" built up ... which is an accounting method that the state uses to pay for the pool of claims that they have each year in your rated category, and then show that your proportionate share of that total has been exceeded in your "account". Essentially, the state is dunning you in advance for the possibility of a claim against your business, and they want the money on deposit in advance of that possible claim. OH, and for what it's worth ... when you close down that business, they don't refund the surplus of your money they've held, even though there's no employees left who can qualify for a claim after the waiting period from your last day of operation or their employment with you. I can put this in perspective ... I had clients with a family roofing business ... and their WC coverage was almost as much per hour as the wage paid!

Remember, these are expenses that you will pay for out of your overhead, there's no matching contribution by your employee. So, for you to make an accurate determination about how much this will burden your business, you need to contact the appropriate state agency and get a worker category for your employee's occupation and then the "cost" quote for their wage or income level.

Also, I'd disagree with golfgod that every business not making a timely tax deposit is a "TAX CHEAT". There's a lot of circumstances where a business simply doesn't have the cash flow to cover these expenses because they weren't aware of how significant they could be to their business. I've seen a fair number of new business start-ups fail because they were undercapitalized and didn't realize that they had a "partner" in their business that got paid first, by law ... and there was a substantial negative cash flow in the business due to all of those overhead expenses.

I've also got a very good small business accountant, and he's got software, too. Judging from his billings, he's put in a lot more than an hour per month to reconcile my employee expenses and advise me what my payments need to be. A lot of what your costs per that first employee may be will be dependent upon what type of business you're in ... golfgod was in the insurance business, and I've been in the automotive and industrial service businesses. There's a big difference in the risk of a paper cut to an office worker compared to a piece of equipment failing and injuring a worker .....

Anyway, the point of all this is to be very aware and fully prepared before hiring that first employee. You need to know all of these expenses in advance so that you can determine the cost to your business and evaluate fairly if there's a net benefit to your cash flow or not ... or if the need of the employee is a justifiable expense to growing your business.

[EscapeCalifornia]

I use QuickBooks and they have a payroll service that integrates with the program that can take care of all the filings pretty cheaply. But it's the worker's comp that scares me. The job in question would basically be office work with some lifting up to maybe 40lbs but would require driving their own car from location to location. I'm sure having someone drive kicks the rates up.

I'm a single-person business and have kept it that way intentionally due to all the horror stories I've heard about having employees. I'm currently working on restructuring things so that most of my work can be done through the Internet but some work will still require going out on-site. When I leave the state, I can still do the remote work just as easily but obviously can't make house calls anymore. I plan on building up business locally in the new state, but would like to keep things running here (and producing income) as long as possible.

One possibility is to hire someone to handle things here locally. I'd rather not hire a stranger and try to manage them from 1000 miles away so just about the only person I'd actually hire would be my sister in law. But if it's going to cost me a fortune in time, money, and liability just to have one employee, it doesn't seem worth it. Of course making her an independent contractor is more attractive but the government does everything possible to reclassify people as employees. To thwart that, I might just have people pay her directly for the on-site work so I never see the money. I'd do as much as I could remotely but send her out when needed.

[f_m]

Originally Posted by EscapeCalifornia

I use QuickBooks and they have a payroll service that integrates with the program that can take care of all the filings pretty cheaply. But it's the worker's comp that scares me. The job in question would basically be office work with some lifting up to maybe 40lbs but would require driving their own car from location to location. I'm sure having someone drive kicks the rates up.

Interesting story here. Yeah, in CA the rates for non office workers is higher, and may be among the highest in the nation. You would be better hiring someone as a contractor and giving them a 1099-MISC flat. Simplest thing to do.

24.4% hike urged in California workers' comp rates - Sacramento Politics - California Politics | Sacramento Bee

[EscapeCalifornia]

Originally Posted by f_m

Interesting story here. Yeah, in CA the rates for non office workers is higher, and may be among the highest in the nation. You would be better hiring someone as a contractor and giving them a 1099-MISC flat. Simplest thing to do.

24.4% hike urged in California workers' comp rates - Sacramento Politics - California Politics | Sacramento Bee

Great story there. As if California needs more reasons to lose employers. With all the expenses and headaches it's a wonder anyone does business in California.

Believe me, I'd love to do a simple 1099 independent contractor but I don't know if I could pass the IRS 20 questions. I could mostly structure it so she's an IC but I believe one of the rules states something to the effect that if she gets more than x% of her income from one source (ie ME) then she automatically gets classified as an employee.

[sunsprit]

With the requirement that your "employee" drive their OWN CAR from location to location on your company's business, I'd be very concerned about the can of worms that opens up for business insurance for you ... as well as possible insurance requirements for your "employee" using their personal car commercially.

You may well want to investigate with your accountant how to structure the services your business needs in an "independent contractor" basis. There may be some services that can be done for your business, and some that cannot without crossing the line into "employee" status. I'd be particularly concerned about the worker being in a position to make business decisions in your absence for the company.