Back in the early ’90s I was the owner of a small computer networking company. I didn’t have any employees at the time and it was nice to not have to manage other people. I was a sole proprietor and it paid the bills and I was happy with that.
If you’re in a similar situation then this article is not for you. If however you’ve started to make some real money and have read my article on why you should incorporate, then this article will tell you exactly what you need to hire yourself as your first employee.
Technically any officer of the corporation must also be an employee, so you could do all the employee paperwork right away if you wanted to, but I typically have enough to think about in those early stages and don’t bother with the employee paperwork until I have to do my first payroll.
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When Should You Do Your First Payroll?
I’ll be the first to admit that payroll is a bit of a pain to do so count yourself lucky if you don’t need it yet. However, as my article above explains, once you start making some real money with your business you can increase your profits significantly just by incorporating, which means you may have to do payroll too. That’s when you’ll have to hire yourself.
Let’s first be super clear about when NOT to do payroll.
- If you’re a C-Corp and don’t have any other employees and don’t want to take any money out of the business for personal use, OR
- If you’re an S-Corp and your company isn’t yet making a significant profit.
If these 2 situations change then you probably do.
Why do you have to do payroll if your S-Corp starts generating a significant profit? Remember that an “S” election on your corporation causes the company profits to trickle down to you as the owner and shows up as income on your personal taxes. One of the main benefits of this is the avoidance of Social Security and Medicare taxes, but of course the IRS knows this and has created the “reasonable salary” rule to cover it.
You can probably get away with disbursing a small amount to yourself every year, but anything significant is going to be a red flag unless you also get a paycheck. As an officer of the company, you are automatically the first employee, and the moment you have to write yourself a paycheck you are also required to have the employee paperwork in order too.
If you’re setting up your employee file just for yourself you only need the mandatory items that I’ll cover first. There are some additional items you’ll need or want to have if you’re hiring someone else and I’ll list those out at the end.
Required: The Federal I-9 Form
The first item you’ll need for any employee is your federal I9 form. This form is from the US Citizenship and Immigration Services and basically declares your eligibility to work in the US. You can find the form and information on it at their website here: https://www.uscis.gov/i-9.
You don’t actually need to file this form with the government, but you do need to have it on file at your company. The rules around that, as taken from their website, are that employers must:
- Have a completed Form I-9 on file for each person on their payroll who is required to complete the form;
- Retain and store Forms I-9 for three years after the date of hire, or for one year after employment is terminated, whichever is later; and
- Make their forms available for inspection if requested by authorized U.S. government officials from the Department of Homeland Security, Department of Labor, or Department of Justice.
The I9 has two main sections that need to be filled out: an employee section and an employer section. Let’s take a look at each in turn.
The I-9 Employee Section
This section is pretty standard and an image speaks 1000 words. After you fill out your name, address, social security number and contact information you’ll need to select a box that declares your citizen/residency status in the US. The vast majority of employees in the US will be citizens, but you might run across others as well.
A noncitizen national of the US is “An individual born in American Samoa, certain former citizens of the former Trust Territory of the Pacific Islands, and certain children of noncitizen nationals born abroad.” I suppose if you are one you will know.
If you are a lawful permanent resident or an alien authorized to work you should have a USCIS number or one of the other numbers indicated on the form above. I have many friends in the I.T. sector who have come to America from other countries to work here. Some become citizens and some don’t.
Regardless of your citizen status you should know that you are not allowed to discriminate against any candidate on the basis of their citizenship status as long as they are authorized to work here. The law is pretty clear on this:
It is illegal to discriminate against work-authorized individuals in hiring, firing, recruitment or referral for a fee, or in the employment eligibility verification (Form I-9 and E-Verify) process based on that individual’s citizenship status, immigration status or national origin.
Form I-9 Instructions
Make sure the employee (or you in this case) signs and dates the bottom of the employee section.
The I-9 Employer Section
The employer section is all about verifying the documentation that the employee brought to prove their work eligibility. It can be a little confusing, but essentially they just need to bring either one document from column A (List A), or a document from List B and another from List C. The list of acceptable documents as of June 2023 are in this graphic below:
If you have a US Passport that is by far the easiest, but any document from List A works. In my youth prior to getting a passport, I used my driver’s license and my social security card, and before that my school ID and Social Security card. Whatever is provided just make a photocopy and stick it in the file with the I-9.
The employer section itself looks like the image below and is just a place to write the information from the documentation the employee provided. Don’t forget to fill out the employee name at the top and your information at the bottom.
Required: The W-4 – Employee Tax Withholding
Another mandatory form that must be filled out and kept with the business is the federal W-4. This form tells your employer how much of your paycheck you want withheld for federal tax purposes. I know you don’t want to pay taxes, but the form is mandatory so just do it.
I thought about posting a picture and instructions, but honestly the IRS did a pretty good job with those and there isn’t much to clarify. Since you’re self employed the only thing I can tell you is that whatever you put down will probably be wrong, but that’s okay. You should update your W-4 at the beginning of every year and I would take that opportunity to adjust it to match your tax situation from the previous year or to match expectations for the coming year if you think they’re going to be quite different.
Here’s the official link: https://www.irs.gov/pub/irs-pdf/fw4.pdf. I would make sure you email or print deliver it to all your employees every year. People need to be reminded to keep it up to date and your annual notification will be appreciated. If you don’t get an updated one back it’s okay to keep operating on the last one you received for each employee. The IRS made a significant change to the tax code with the Tax Cuts and Jobs Act of 2017 and published a new form in 2019 for the 2020 year forward, but it’s only required if you need to make changes after 2019.
May Be Required: State Tax Withholding Form
The last piece of paperwork you need – at least when hiring yourself – is your state tax withholding form. This is similar to the federal W-4, but for your state. Not every state requires one and not every state even has personal income tax, but as I live in California we of course have it and require a form DE 4.
This form used to be optional in CA and you could get by with just your W-4 only, but ever since those federal changes in 2020 the new DE 4 is mandatory. It’s really just a half page of information and not that hard to fill out so I won’t post the image, but for those in CA you can get it here: https://edd.ca.gov/siteassets/files/pdf_pub_ctr/de4.pdf.
Probably Required: State New Hire Reporting
In most states you must report any new hire to the state New Employee Registry. This is mandatory even if you’re only hiring yourself. In California this can be done online on the Employment Development Department (EDD) web site for the New Employee Registry (NER) Program.
The NER program is a confidential system that receives information on all new hires and rehires of all employees and Independent Contractors in the state. This information is used by state and federal agencies to locate parents who are delinquent in their child support payments and to establish, modify, or enforce child support obligations. The NER information is also used to aid in reducing Unemployment Insurance (UI) benefit overpayments by allowing ineligible UI
claimants to be detected more quickly.
Yes it’s just one more thing you have to do, but this is a program I fully support. If you owe child support you pay it, and if you are making false UI claims then you should be stopped. UI insurance prices go up for all companies when there is fraud so go ahead and register your new employees. It’s mandatory anyway.
Optional: Other Paperwork to Consider
The list below is of other paperwork you might want to offer based on whether your company provides these benefits or not. When you’re just hiring yourself you can offer a lot less to yourself, but many states require some of these be offered to your employees, and others you may want to offer anyway:
- Employment Application: If you have a standard application and testing process you can file that away in the employee’s file.
- Employment Agreement or Offer Letter: Once you’ve offered a job to an applicant and they’ve accepted it’s important to keep a record of exactly what is expected from both the employer and the employee. This covers such things as job duties and compensation and probably needs its own article later.
- Employee Handbook: This is another publication that your company can offer to employees. It can contain information about the company culture and benefits of working here as well as a code of conduct. It also probably needs its own article.
- Benefits Enrollment Forms: Do you offer medical, dental, vision or life insurance? What other benefits might you offer?
Wrap Up
The bottom line is that there are really only 2 forms that are mandatory in every state: the federal I-9 and the federal W-4. In most other states there are withholding forms and new hire reporting requirements also. All other paperwork is probably optional.
So when you’re making enough money to pay yourself, remember to hire yourself! And congratulations!