How to hire employees for small businesses

How to hire employees: Legality comes first

Not sure how to hire employees for a small business? Before you can scale into a profitable business, navigating the legal requirements of bringing on your first team members is essential.

Here's a breakdown of the key steps and documents you need to stay compliant:

• Employer Identification Number (EIN). Whether you're figuring out how to hire employees under an LLC or any other business structure, you'll need an EIN. Think of it as your company's social security number — it's a tax ID number that helps the IRS identify your business for tax purposes. You can apply for one online through the IRS website.

• Employment Eligibility Verification (I-9). Before you can officially welcome your first new hire, you need to make sure they're legally authorized to work in the United States. This is where Form I-9 comes in. Your new employee will need to complete this form and provide documentation (like a passport or driver's license and social security card) to verify their identity and work authorization.

• Other candidate tax forms. To ensure accurate tax withholding, your employee must complete a W-4 form, which provides you with their tax filing status and withholding allowances.

• State or local tax IDs. Tax obligations aren’t identical for every business — where your business is located will play a key role. Some states and localities require businesses to obtain separate and additional tax IDs, so make sure to check with your state's tax agency and local government.

• Employee handbook. Want to keep your team informed and aligned? An employee handbook is a great way to provide your team with clear and accessible information about your company's policies, procedures, and expectations. Try to include dedicated sections on workplace conduct (e.g., dress code, attendance, acceptable use of company property), benefits (e.g., health insurance, paid time off, retirement plans), code of conduct (e.g., any anti-discrimination or harassment policies), and pay and compensation (e.g., pay periods, overtime, performance reviews).

• Non-disclosure agreement. If your business deals with sensitive information, consider having employees sign a non-disclosure agreement (NDA) to protect your confidential information and trade secrets.

Keep in mind that this is just a starting point when it comes to managing employees — after all, employment laws can be complex and can change. It’s a good idea to talk to legal counsel, an HR professional, or your business manager to make sure you're on top of all your obligations.

It's also important to take some time to learn about employee rights. Employer.gov offers plenty of resources that can guide you on everything from minimum wage and overtime to workplace safety.

Report your new hires to your state employment agency

Submitting paperwork to the IRS is just part of the equation; most states require employers to report new hires to their state employment agency as well. This is typically done through a new hire reporting program, which helps states:

• Locate parents to establish and enforce child support orders.

• Detect unemployment insurance fraud.

• Track employment statistics and trends.

You'll generally need to provide the employee's name, address, social security number, date of hire, and your business information.

Obtain workers’ compensation insurance

While nobody wants to imagine their employees getting hurt on the job, accidents happen. That's why workers' compensation insurance is a key safety net. In a nutshell, it protects your employees by ensuring they receive necessary medical care and financial support if they're injured at work.

Importantly, it protects your business as well. If an employee suffers a work-related injury or illness, workers' compensation insurance can shield you from potential lawsuits and financial burdens.

Unsurprisingly, it’s a requirement in most states that businesses with employees must have this coverage.² You can usually purchase it through private insurance companies or, in some states, through a state-run program.

Need help? Your state's labor department or workers' compensation board can provide guidance on finding the right coverage for your small business.

How to hire good employees through a great hiring process

Wondering how to hire the best employees who go the distance? A well-designed hiring process does more than just help you find qualified candidates — it sets the stage for long-term success by improving employee retention from the get-go.

Follow these steps:

• Identify your sourcing channels. Will you post the job opening on major job boards like Indeed and LinkedIn? Or will you focus on niche job boards that cater to specific industries or skill sets? Think about where your ideal candidates are spending their time online.

• Assemble your hiring team. Who will be involved in the hiring process? Will it be a solo endeavor or will you involve HR managers, hiring managers, and department heads?

• Create your application evaluation process. Will you use applicant tracking software to manage applications? How will you conduct initial screenings? Make it easy for yourself (and candidates!) to move through the initial stages. Phone or video interviews can be a great way to get a feel for a candidate's personality and qualifications before moving to the next stage.

• Define the different selection processes. Will candidates go through multiple rounds of interviews? Will you conduct reference checks or skills assessments? You want the evaluation to be consistent and fair.

• Make the final decision. How will the final selection be made? Will it be a collaborative decision among the hiring team, or will a single person make the final call?

How to find qualified candidates for your open positions

Finding the right people for your small business may feel like an impossible task at times. There’s good news: today, there are more ways than ever to connect with talented candidates. Here are some ways you can find qualified candidates.

Steps to prepare and conduct effective interviews with job candidates

Depending on your hiring process, you may decide to interview candidates multiple times with different people in your organization. This is a great way to get a well-rounded view of who they are and how they might fit within your company culture.

However, make sure every candidate undergoes the same interview procedure to ensure the hiring process is fair and balanced. For instance, if candidate A has three interviews (with the recruiter, hiring manager, and department head), candidate B should do the same.

Whether you're figuring out how to hire employees for your business in general or tackling the challenge of how to hire seasonal employees, mastering the art of the interview is essential. Follow these best practices:

• Be prepared. Review the candidate's materials (resume, cover letter) in advance so you’re ready to tailor your questions and get a better sense of their qualifications.

• Ask engaging questions. Develop a list of open-ended questions to evaluate their skills and qualifications. Keep this list for every candidate you interview for the position.

• Provide context. Make sure the candidate has a clear understanding of the job responsibilities, the company culture, and any benefits or perks that come with the position.

• Encourage questions. An interview is a two-way street — encourage the candidate to ask questions about the role, the company, and anything else they're curious about.

Consider paid candidate skills tests

Want to see your candidates in action? Paid candidate skills tests provide valuable insights into a candidate's practical abilities, helping you identify those who truly shine in areas essential to the role.

In particular, paid candidate skills tests allow you to:

• Attract top talent. Want to attract the best and brightest? Show candidates you value their time and skills by offering paid skills tests. Top performers are more likely to be drawn to companies that recognize their worth from the start.

• Improve candidate experience. Paying for skills tests shows respect for your candidates and creates a positive hiring experience. It's a simple way to stand out from the crowd and build goodwill with potential hires.

• Get a realistic preview. Skills tests give you a glimpse into how a candidate actually performs. You'll learn about their creativity, problem-solving abilities, attention to detail, and how they handle pressure — all must-have qualities for success.

For example, if you're hiring a copywriter, you could ask candidates to write a sample blog with corresponding email copy and social media posts as part of a paid test. This gives you a direct preview of their writing style and ability to create compelling content. Or, if you're hiring a web developer, you might have them complete a coding challenge or debug a piece of code to assess their technical skills.

Remember: make sure your skills test is relevant to the job, give candidates clear instructions and deadlines, and offer fair compensation for their time and effort.

Perform reference checks

Running reference checks is one of the most important steps of the hiring process. It’s your chance to verify the information provided by the candidate, gain insight into their strengths and weaknesses, and ensure that they are a good fit for the position and your company culture.

Here are some example questions you can ask during a reference check:

• Can you confirm the candidate’s job title, role, and start and end date at your company?

• How would you describe their communication style and work ethic?

• How do they handle pressure and difficult situations?

• Can you discuss their strengths and areas for improvement?

• Would you rehire the candidate if given the opportunity?

• Is there anything else I should know about them?

Prepare the onboarding process

Onboarding could have the power to make or break your new hire’s experience and impression of your company. Make sure the process is as smooth and frictionless as possible.

Start with these steps:

• Send a welcome email.

• Share your employee handbook and highlight important policies, procedures, and benefits.

• Supply necessary forms and documents, such as tax forms, bank account information, and emergency contacts.

• Provide access to resources like shared drives and project management tools and supply a company computer (if necessary).

• Conduct an orientation session. Introduce the new hire to their team members and other colleagues.

• Discuss the new hire's long-term goals and how they can contribute to the company's success.

• Provide opportunities for the new hire to participate in company events and social activities.

• Schedule follow-up meetings to track the new hire’s progress.

How to hire employees as a sole proprietor

If you're a sole proprietor used to wearing all the hats, hiring employees can be a huge step. But transitioning from a one-person show to a team leader requires a shift in mindset and a solid understanding of the unique considerations that come with hiring.

Here's what you need to know about how to hire employees as a sole proprietor.

Legal and tax obligations

Just like any other employer, you'll need to obtain an Employer Identification Number (EIN) from the IRS, comply with employment eligibility verification requirements (Form I-9), and handle payroll taxes correctly.

However, there are a few additional things to keep in mind as a sole proprietor:

• Liability. As a sole proprietor, you and your business are legally considered the same entity. This means you're personally liable for any debts or legal issues arising from your business, including those related to your employees.

• Taxes. You'll report your business income and expenses on your personal income tax return (Form 1040), including any wages paid to employees.³

• Retirement plans. While you might not be eligible for traditional employer-sponsored retirement plans like a 401(k), you can explore options like a Solo 401(k) or a SEP IRA to save for retirement and offer retirement benefits to your employees.

HR considerations

Don't skip the HR basics just because you're a sole proprietor. Establishing clear policies and procedures, even simple ones, can save you headaches down the road when it comes to preventing misunderstandings and fostering a positive work environment.

Take the time to create an employee handbook, review workplace safety requirements, and familiarize yourself with anti-discrimination and harassment laws.

Health insurance

Want to attract and keep top-notch employees? While you're not legally required to offer health insurance as a sole proprietor, it can be a powerful perk when trying to attract potential candidates.

Consider options like small group health insurance plans or professional employer organizations (PEOs) to offer competitive benefits.

How much does it cost to hire employees?

Hiring employees is a smart investment, but it's important to go in with your eyes wide open. Here's a breakdown of the costs involved in bringing new talent on board:

• Recruitment costs. Job posting fees on job boards or recruitment platforms, background checks, skills assessments, and time spent by your hiring team on screening and interviewing candidates.

• Onboarding costs. New hire orientation and training materials, technology setup (computer and software), administrative costs (payroll setup and benefits enrollment).

• Compensation and benefits. Salaries or wages, payroll taxes (Social Security, Medicare, federal and state unemployment taxes), employee benefits (health insurance, retirement plans, and paid time off).

• Ongoing costs. Performance management and training, employee development programs, payroll processing fees.

How to train new employees

So you've found the perfect candidates — now it's time to unleash their full potential. A comprehensive training program is essential for setting your new hires up for success and empowering them to shine in their roles.

Here's how to train new employees in a way that gets them excited, engaged, and ready to contribute from day one:

• Develop a structured onboarding process: Share a clear onboarding plan that guides your new hires through their first days and weeks. Think: welcome aboard emails, team introductions, company policy overviews, and hands-on training with essential tools and systems.

• Provide clear job descriptions and expectations. No one likes to be left guessing. Your new hires should have a crystal-clear understanding of their roles and responsibilities — this means providing them with detailed job descriptions, clearly communicating performance expectations, and setting them up with a mentor or buddy.

• Offer hands-on training. Give new employees opportunities to shadow experienced team members, work on real projects, or participate in simulations. This hands-on experience helps them gain confidence and apply their skills in a real-world setting.

• Provide ongoing support and feedback. Don't leave new employees to fend for themselves. Offer regular check-ins, provide constructive feedback, and create a supportive environment where your new hires feel comfortable asking questions and seeking guidance.

• Set employee performance goals. Help your new hires understand how their work contributes to the bigger picture. Work together to establish clear, measurable, achievable, relevant, and time-bound (SMART) performance goals.

• Foster a culture of learning. Provide access to resources like online courses, mentorship programs, or industry conferences to help new hires expand their skills and knowledge.

Now that you’ve experienced the hiring process, explore these tips to manage your employees. Plus, get more helpful resources to run your business, from cash flow management to growth strategies.