Step Two: Operating a Business

Managing Employees: The Basics

Hiring | Termination | Government Regulation & Taxes

Unless you plan to run your business by yourself or with one or more partner(s), you will have to manage employees. If your business depends on its employees to thrive, remember these two rules:

1) Hire smart, capable people; and
2) Retain the smart, capable people you hire.

Hiring Smart, Capable People

Different people are suited for different types of occupations. If you need a mechanic for your auto repair shop, you will look for someone with different skills and interests than the CPA who is looking for an accountant to help with her tax preparation business. Write a complete job description of the position you want to fill. Thinking about and writing down the specific skills and attitudes needed to complete the job at hand will help you find the right person. Once you have your job description, you are better equipped to both find and hire your new employee.

You may already have the perfect person in mind or be able to fill your opening from a personal reference. If not, there are many ways to advertise for employees, including trade journals relevant to your field; Internet sites; and, of course, the help wanted section of your local newspaper. The method you choose will depend on the position you are filling. For instance, placing a “help wanted” poster in the window of your coffee shop may be all you need to do to get qualified applicants for the open counter position, but this method will probably not work if you are trying to hire a computer programmer.

For information on hiring:

http://www.businesstown.com/hiring/hiring-top.asp
http://www.businesstown.com/hiring/hiring-advice.asp

After completing the job description and finding one or more qualified applicants, the next step is making a job offer and hiring someone. You will probably want to interview your applicant(s). You may have a good idea of the applicant’s skills and experience based on his or her application or resume, but the interview will provide you an opportunity to get to know the person’s personality and level of enthusiasm. Do you click with your applicant? Personality and attitude are important factors to consider. You want to hire someone with whom you get along and who will function well in the position. For instance, someone with a friendly, outgoing demeanor would probably do well in a customer service position, whereas, an introverted person may perform well in a position as a bookkeeper. For sample interview questions, click here.

The following table (from NOLO.com) gives information on questions that can and cannot be legally asked during a job interview. Please note that these questions are not necessarily all-inclusive.

For further information on interviewing:

http://www.entrepreneur.com/amex/article/0,5742,303589,00.html
http://www.babyshopmagazine.com/fall00/hourly.htm

After the interview, always follow through and check references. It is a good practice to enhance your check of references with a background check. A background check is especially important for positions in security and law enforcement, health care, child care, and for positions that involve visits to customers’ homes or offices or where sensitive information will be handled. Be aware, however, that there are legal guidelines to follow when conducting background checks.

There are private companies that can conduct an affordable background check for you. Conduct an on-line search using the phrase “employee background checks” to find links to companies which do this type of work. Or look in your local yellow pages. Remember to check references of the company that you hire to do your background check!

Employment Background Checks: A guide for Small Business Owners

http://www.privacyrights.org/fs/fs16b-smallbus.htm

Keeping the Smart, Capable People you Hire from Quitting

Once you have a great employee working with your business, treat her or him as you would a great customer. Everyone is different, of course, and has different career goals and requirements, but, in general, your employees will want to be compensated, motivated and rewarded.

Compensation is the combined package of salary and benefits, including health insurance and time off. Be stingy with a good employee and it may end up costing you much more than the compensation would, both financially and in terms of the hassle-factor involved in finding and training a new person when your prized employee leaves for greener fields.

Motivating your employees will require finding out more about them, since different people are motivated by different things. Reviews provide a good forum for discussing issues such as motivation with your employees. They are also important for accountability and legal backup purposes. Keep records of your employees’ performance, including documentation of any needed discipline or reprimanding. Some people may need autonomy and control over a project in order to feel motivated. Others may require a certain type of work environment or an opportunity to take classes or receive training. Find out what motivates your employees and make sure you provide it for them.

Rewards are the good grades of the business world. Provide rewards, such as a share in profits or even something as simple as verbal recognition, to high achievers. Let them know they are doing a great job. Rewards help keep morale high.

For more tips on retaining employees:

http://www.zeromillion.com/business/employee-motivate.html
http://www.entrepreneur.com/article/0,4621,301301,00.html

Employment Termination

If you take the time to interview your potential employees and check their references, you will hopefully hire a great and loyal employee and never have to go through the rough job of firing someone. But what do you do if the person you hire steals from your business, is rude to your customers, is unreliable, or is not getting the job done?

For some offenses, such as stealing, immediate dismissal might be the best solution. In other cases, you may not need to fire someone, but just provide additional training or other assistance. For instance, perhaps an employee clearly is trying to do a good job, but is making mistakes. More training may be all it takes to turn this employee into a loyal and capable addition to your staff.

In other cases, you may wish to give a series of warnings to an employee who acts in an inappropriate way to give her a chance to change before taking the drastic measure of firing her. For instance, perhaps you have a policy that your employees always show up on time for work. If someone is perpetually late, you could start with a verbal warning. If the poor attendance continues, you could follow the verbal warning with one or two written warnings. Finally, as a last resort, you may decide to fire the employee.

Sometimes you may have an employee who breaks a rule (such as showing up on time), but does an exceptional job. In this case, you may wish to overlook a rule. The product, in this case, the work completed, may be more important to your business than the process, in this case, the time in which the employee comes in to work. Remember that people have different personalities and different requirements for a work environment in which they can perform their best. Another idea is to discuss with your employee reasons for his or her misconduct. In the case of the employee who is late, maybe the employee has another obligation, such as getting a child to day care or school. You may be able to work out an adjustment in your employee’s schedule. An employee with less stress and who feels that you are on his or her side will be more likely to work hard and remain loyal to you.

If all remedies fail and you do have to fire someone, there is no easy way around it. One way to fire an employee is to call the employee into your office or another private work area. Explain the reasons why you are letting him go. Point out the series of warnings that you offered, and give details on how a final paycheck will be made. Give the employee a letter of termination which you prepared ahead of time. Above all, make sure you are abiding by all legal requirements related to firing someone. If possible, try to end the meeting on a friendly note, with a handshake and a wish for luck.

Letting Someone Go when They are Doing a Great Job

Sometimes you may have to let a great employee go due to budgetary concerns. In this case, it will be in you and your employee’s best interest to maintain a good relationship. Providing an employee you must lay off with advance notice, a severance package and assistance in finding other work are three ways to help keep your relationship with your employee on positive footing. These steps will help your employee and they will help you maintain a positive image in the community. Also, if you need your former employee’s assistance later, he or she will be more likely to help you. As with firing someone, if you must lay someone off, be sure to follow all legal requirements.

Additional information on firing someone:

NOLO: Questions and Answers about Firing Someone

All Business Web Site: When you can Legally Fire Employees

Managing Employees: Government Regulations and Taxes (return to top)

An important part of managing your employees will take place behind the scene. Make sure you take care of all tax and regulatory requirements related to your employees to keep the engine of your business humming. These requirements exist at the federal, state and local levels. It is very important to follow all laws regarding employees. To help keep track of your decisions about employees and requirements related to employees, you may wish to access an "Employee Management Form." Consult with an attorney, as needed.

*Employers should be aware of the difference between independent contractors and employees. Classifying an individual as an independent contractor can make a big difference in terms of federal, state and local requirements; and federal, state and local taxes. According to the IRS, the following factors indicate someone is an independent contractor:

1. The worker hires, supervises and pays her assistants;
2. The worker is free to work when and for whom she wants;
3. The work is done on the worker’s premises;
4. The worker is paid by the job or on straight commission;
5. The worker has the risk of profit or loss;
6. The worker does work for several businesses at one time;
7. The worker’s services are available to the general public; and
8. The worker can’t be fired except for breach of contract.
(Source: IRS)

For more information, consult your local IRS field office.

Federal Requirements

General Federal Regulations

Employer Identification Number (EIN)

The Employer Identification Number, or EIN, identifies the business to the Internal Revenue Service and the Social Security Administration. It will appear on all business tax returns and all tax correspondence related to your business. Although sole proprietorships with no employees may not need an EIN, the Commonwealth of Virginia encourages all businesses to use one since the EIN is often used by state and local agencies as a means of cross-referencing businesses.

If you answer yes to any of the following questions, you will need an EIN:

• Do you have employees?
• Do you operate your business as a corporation or a partnership?
• Do you file any of these tax returns: Employment; Excise; or Alcohol, Tobacco and Firearms?
• Do you withhold taxes on income, other than wages, paid to a non-resident alien?
• Do you have a Keogh plan?
• Are you involved with any of the following types of organizations:
  • Trusts, except certain grantor-owned revocable trusts, IRAs, and Exempt Organization Business Income Tax Returns;
  • Estates;
  • Real estate mortgage investment conduits;
  • Non-profit organizations;
  • Farmers' cooperatives; or
  • Plan administrator

To apply for an EIN, fill out IRS Form SS-4. Application may be made by phone, fax, mail or on-line. For more information on applying for the EIN, visit the IRS web site.
Or you may reach them by phone at 800-829-1040.

Employee Eligibility Verification

The U.S. Department of Justice, Immigration and Naturalization Service requires all employers to complete an Employee Eligibility Verification Form (Form I-9) for each employee hired. This form provides proof that the employee is eligible to work in the United States. With increased fears about terrorism, this form has become more important in recent months.

Information on Employee Eligibility Requirements and the form I-9 is available on the Bureau of Citizenship and Immigration Services web site. If you do not have access to the Internet, you may call 1 (800) 870-3676 to have the form mailed to you.

Federal Tax Requirements (Note: The forms included in this section are current as of 10/01/06. You may check for changes to any of the forms on the Internal Revenue Service web site.)

There are three different federal tax requirements for employers:

1. Income Tax
2. Social Security and Medicare (FICA)
3. Federal Unemployment Tax (FUTA)

1. Income Tax

Employers must withhold income tax from each employee’s paycheck throughout the year. The amount withheld will vary based on pay rate, marital status, and exemptions. Each employee must fill out an IRS W-4 form before they begin employment. In return, employers must send an IRS W-2 form to each employee showing payments and withholdings no later than January 31 of each following year. By February 28, employers must furnish the Social Security Administration with copies of all of their employees’ W-2 forms, as well as the IRS Form W-3 (Summary and Transmittal Form). The Social Security Administration submits the data to the IRS. The table you use to compute how much tax to withhold is on page 34 of IRS Publication 15, Circular E, Employer’s Tax Guide (Revised January 2006).

Employers deposit the withheld tax either monthly, or semiweekly according to the total payroll amount, and submit it using Form 941.

If you are a new employer and have never filed 941 forms, you are a Monthly Schedule Depositor for the first calendar year of your business unless you are a special exception to the rule. Monthly Schedule Depositors should deposit taxes from all of their paydays in a month by the 15th of the next month, even if they pay wages every week.

Employers with prior payrolls and taxes of $1,000 or more per quarter must determine if they make either Monthly Schedule Deposits, or Semiweekly Schedule Deposits. This determination is based on your Form 941 taxes during a four quarter Lookback Period. (Source: IRS web site.)

IRS Publication 15, Circular E, Employer’s Tax Guide (Rev. January 2003) provides the following information to help employers determine if they must make monthly or semiweekly deposits.

“Your deposit schedule for a calendar year is determined from the total taxes (not reduced by any advance EIC payments) reported on your Forms 941 (line 11) in a four-quarter lookback period. The lookback period begins July 1 and ends June 30 as shown in Table 1 below. If you reported $50,000 or less of taxes for the lookback period, you are a monthly schedule depositor; if you reported more than $50,000, you are a semiweekly schedule depositor.”

More information about this process is available on the IRS web site.

For further instructions on W-2 and W-3 forms and filing, click here.
For a copy of the W-2 form, click here.
For a copy of the W-3 form, click here.
For a copy of the W-4 form, click here.
For a copy of the Form 941, click here.

For more tax information related to businesses, consult the IRS web site. Or you may consult the Fredericksburg Office of the IRS at 615-C Jefferson Davis Highway, Fredericksburg, VA 22401; phone (540) 899-9450.

Keep in mind that tax laws change frequently, and you may wish to consult an accountant, attorney or tax expert. For recommendations on experts, contact the Center for Entrepreneurial Development in Richmond, VA, at 804-521-4320.

2. Social Security and Medicare (FICA)

The employer and employee share the Social Security and Medicare (FICA) tax. The employer withholds the employee’s share from each paycheck; the employer must then match this amount.

Small businesses (reporting $50,000 or less in payroll taxes the prior year) must pay federal income and FICA taxes monthly; large businesses pay these taxes twice weekly. The payments are made with Coupon 8109-B directly to a bank. In addition, these taxes are filed four times a year on Form 941 (pdf).

For a copy of the Employer’s Tax Guide (Publication 15) (January 2003 version), click here. This informative guide contains much information to guide you regarding taxes and your employees.

3. Federal Unemployment Tax (FUTA)

Funds from the FUTA and the state unemployment tax provide temporary financial relief to those who become unemployed through no fault of their own. Contrary to popular belief, employees do not contribute to the FUTA: employers are responsible for paying 100% of all unemployment taxes. The FUTA amount is based on an employee’s wages. Employers get credit towards the FUTA based on what they pay to Virginia for state unemployment taxes (see state unemployment tax below).

Employers file the FUTA annually on Form 940. It must be paid at least by January 31 of the following year or quarterly on Coupon 8109 if a higher payroll requires it.

Commonwealth of Virginia Requirements

Upon starting a business in Virginia, it is necessary to register your business with the Department of Taxation using form R-1. This form can also be accessed on line through the Virginia Department of Taxation web site.

With regard to taxes and tax forms, it is important to note that the forms included with this CD are current as of 10/01/06. Because tax forms do change, you may wish to consult the Virginia Department of Taxation's web site for changes to any of these forms.

The Commonwealth of Virginia requires businesses to be responsible for five different types of monetary requirements:

1. Income Tax
2. Unemployment Tax
3. Retail Sales Tax
4. Workers’ Compensation Insurance
5. Miscellaneous Taxes
   

1. Income Tax

Employers must withhold a portion of their employee(s)’ income for Virginia’s income tax. Employers register for this tax with the State of Virginia using Form R-1. If your withholding liability for the month is less than $100, your withholding tax payments are due quarterly. If your withholding liability for the month is $100, but less than $1,000, your withholding payments are due monthly. If your withholding liability for the month is $1000 or more, your withholding tax payments are due semiweekly.

The specific forms you will use (Forms VA-5, VA-6, VA-15, and VA-16) will vary based on your withholding liability. To gain more information, please consult the Virginia Department of Taxation’s web site for information on withholding taxes. You may also consult the Virginia Department of Taxation’s Customer Service by phone at: 804-367-8037.

2. Unemployment Tax

As noted above, the main purpose of the unemployment tax is to provide temporary financial relief to individuals unemployed through no fault of their own. Employer’s contributions to Virginia’s unemployment fund are normally based on wages they have paid, the amount they have contributed to the unemployment fund, and the amount of compensation that their laid off employees have received from the unemployment fund. Employers pay both a state and federal unemployment tax, as noted above; the state tax paid by employers may be credited against the federal tax.

If you answer yes to any of the following questions, you must pay the unemployment tax:

• Do you employ one or more employees (or 10 agricultural employees) during twenty weeks or more of the calendar year?
• Do you have $1500 or more in your quarterly payroll?
• Have you acquired a business subject to the unemployment tax?
• Are you subject to the FUTA?
• Are you a governmental operation or political subdivision?

The unemployment tax is paid via the Virginia Employment Commission (VEC), rather than the Virginia Department of Taxation. Payment is due quarterly to: Virginia Employment Commission, P.O. Box 1358, Richmond, VA 23218.

For more information, consult the VEC web site. You may also reach your local VEC office by phone or at their location in Fredericksburg at:

3501 Lafayette Blvd.
Fredericksburg, VA 22404
Phone: 540-898-3806; Fax: 540-891-3128

3. Retail Sales Tax

Businesses in Virginia must pay a sales tax to the state on gross receipts from retail sales. The tax is noted to consumers and is added to the regular price of purchased goods. Currently the sales tax rate is 5%. The Virginia Department of Taxation defines retail sales as “sales to a customer or to any person for any purpose other than for resale.” The tax may also apply to the lease of personal property and the renting of accommodations. Some food may be taxed at a lower rate. As of July 1, 1998, nonprescription drugs and certain medicines were exempted from state sales tax.

To view the Virginia Department of Taxation tax table for sales in Virginia, click here (.PDF) .

As noted above, you must register your business with the Virginia Department of Taxation using form R-1. Businesses subject to the sales tax must also submit a monthly sales tax report on form ST-9, with payment, by the 20th of the following month, regardless of whether they had taxable sales that month. The form and payment should be mailed to: Virginia Department of Taxation, P.O. Box 26626, Richmond, VA 23261-6626. Some businesses may be able to switch from monthly to quarterly payment of this tax. If you would like to switch, please contact the Virginia Department of Taxation.

You may also contact Customer Service at 804-367-8037 for a copy of the form to be mailed to you.

For more information on the Virginia Sales Tax, consult the relevant section of the Virginia Department of Taxation’s web site. You may also contact Customer Service at 804-367-8037.

4. Workers’ Compensation Insurance

Workers’ Compensation is not a tax, but a type of insurance that most employers in Virginia must have. This insurance provides compensation and medical benefits to an employee or his or her dependents if the employee becomes disabled or dies from an accidental injury or disease acquired due to employment. Any employer with three or more regular employees is required to provide worker’s compensation insurance. The employee pays no portion of this insurance.

There are four methods of obtaining insurance:

1. Purchase and maintain a workers' compensation policy from a company licensed in Virginia;
2. Apply to the Virginia Workers' Compensation Commission for approval as an independent self-insurer;
3. Become a member of a group self-insurance association licensed by the Virginia State Corporation Commission; or
4. Enter into an agreement with a professional employer organization as provided in Section 65.2-801.A.4 of the Code of Virginia.*
   (Source: Virginia Workers’ Compensation Commission web site.)
   
   The contractor's certification of insuring compensation for worker's liability in Virginia form may be accessed here. For more information on Workers’ Compensation Insurance, consult the Workers’ Compensation Commission web site. Or contact the Commission by phone at 703-518-8055.

5. Miscellaneous Taxes

In addition to the requirements listed above, certain businesses are required to pay additional, miscellaneous taxes, such as the “Litter Tax” and the “Tobacco Tax.” To find out if your business is responsible for paying a miscellaneous tax, consult the Virginia Department of Taxation’s web site for business tax information. Or contact them by phone at 804-367-8037.

Local Requirements

Stafford County does not have additional requirements related to employees. For more information about the Stafford County workforce, please click here. For information on taxes required in Stafford County, click here.

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