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So Ya Wanna Be a Boss?

Two young entrepreneurs share their tips for handling the legal steps involved with hiring help.

Do you have more business than you can handle by yourself? If so, it may be time to consider hiring help. But before you slap a "Help Wanted" sign on your door, it'd be wise to know a little more about the legal requirements involved in becoming someone's boss.

Brandon Ferguson, the 20-year-old owner of Thunder Rose Entertainment in Kyle, South Dakota, cautions new business owners to be sure you have all the paperwork in order before hiring your first employee. "Poor paperwork catches up with you," Ferguson admits. "My downfall was not keeping records right away."

Like many teen entrepreneurs, Ferguson got so involved running his mobile disc jockey business that he didn't take time to check into the legal responsibilities of being "the boss." He couldn't handle all the parties and dances by himself, so it seemed like a good move to hire four high school students to work for him part time. However, he hadn't really thought about all the details involved in paying his workers the $10.25 an hour he had offered.

At first, Ferguson simply reached into his pocket after an event and paid his helpers in cash from the $300 to $500 he had earned that night. Each person signed a receipt for the payment and was expected to take care of his own state and federal income taxes. However, it wasn't long before Ferguson realized he had no real authority over his helpers because they were only contractors. In order to expect them to work certain hours and follow specific rules, he had to behave more like a "real" boss, which included taking the legal steps to set up a payroll system and handle the taxes.

After seeking the advice of a payroll expert, Ferguson filed an application with the IRS and received an Employer Tax Identification Number. Then he had each worker fill out a W-4 form (Employee's Withholding Allowance Certificate), which provided him with their social security numbers and the information necessary to know how much tax to withhold from their paychecks.

Next, Ferguson set up a record-keeping system on his computer to track each employee's payroll and withholding taxes. For then on, after each gig, he cut a check for each employee, withdrawing the proper amount of income tax, social security and Medicare tax. "I thought all this would be more difficult, but it's really straightforward," Ferguson reports.

The money he withdraws in payroll taxes is paid quarterly to the state and federal governments. At the end of every year, Ferguson must create a W-2 form (Wage and Tax Statement) for each employee. This form, which reports the total wages paid and total taxes withheld, goes to the IRS as well as to the employee, who uses the W-2 to fill out his or her annual tax report.

More Than You Expected?
If all this payroll and tax responsibility sounds like more than you're ready for, you might want to consider 21-year-old Kevin Colleran's solution to this problem. Colleran is part-owner of three Internet companies based in Boston: BlabberForce Enterprises Inc., a marketing firm that helps companies access students on college campuses; ClubVibes.com, an online community of nightlife and entertainment information; and PhotoMasterpieces.com, which scans photographs and turns them into pictures that look like oil paintings.

Even with all his business experience, Colleran, a Babson College student, likes to keep things as simple as possible when he needs staff. Instead of hiring employees, he uses commission-based contract workers--all of them college students--who are hired to work on a single project at a time and are paid a percentage of the profits from their projects.

"Most students have school as their number-one priority, so they can't work set hours," Colleran explains. "Their incentive to work for us is that they can be entrepreneurial, develop some business skills, and have experience to put on their resumes. Working on commission allows them to be flexible and have an immediate reward, and we don't have to pay salaries."

When they're hired, Colleran's contractors fill out a W-9 form (Request for Taxpayer Identification Number), which provides him with their social security number or individual taxpayer ID number. After a project's completed, the contractor writes a brief report about his or her performance and hands in a contract signed by the client. Then Colleran pays the worker a commission, usually 10 to 25 percent of the total value of the contract.

If Colleran pays a contractor more than $600 in a year, he must fill out a 1099 form (Miscellaneous Income form) at the end of the year, which reports to the IRS how much money the worker was paid. The contractor is then responsible for paying the taxes due.

"Many entrepreneurs are terrible at keeping books," Colleran acknowledges. "If you need help, find someone who has good financial skills to help you--someone who will take care of entering all the numbers and writing the checks."

Whether you choose to hire contract laborers who only work when you need them like Colleran, or want to hire part-time employees like Ferguson, you'll quickly discover that managing workers is a full-time responsibility. Here are some important guidelines to follow:

  • Know the laws regarding taxes, payroll, fair hiring practices and workplace safety--and follow them carefully.
  • Whether you hire contractors or employees, be sure to get the right paperwork and forms filled out from the very beginning.
  • Hire a payroll expert to give you advice if you aren't sure how to set up your records correctly.
  • Always keep the tax money you withhold from employee's paychecks in a separate account from your operating funds, so you'll have it when comes time to pay.
Next Step
Avoid legal trouble before it happens. Visit YoungBiz.com and read "Teen Boss," an article that explains additional research you may need to do before you become an employer.
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