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Building your team is an exciting step towards scaling your business. With over 30% of small business owners reporting that they work 50+ hours per week, bringing on more talent can also help take some less mission-critical tasks off your shoulders — so you can focus on the bigger picture. But a new hire accepting your offer is merely the beginning of adding someone to the team. There’s a lot to do in order to comply with state and federal laws for new hire reporting to successfully onboard your employee. The requirements aren’t necessarily complicated, but they are specific, and there are different deadlines depending on where you do business.
In addition, new hire reporting requirements vary by state, and it’s a good idea to do your research; make a wrong step, and you could receive fines for each employee that’s onboarded incorrectly.
Read on to learn how to report your new hires properly and remain compliant with the laws and regulations that apply to employers.
Do you have to report new hires?
To help them keep track of all taxpayers, federal and state laws require that businesses report newly-hired employees. In addition, state laws typically require companies to report employees being rehired to a position they previously held. The only businesses that may be exempt from some of these laws are farms.
The process is particularly time-sensitive on the state level, though the exact timing can vary. In most states, employers have 15 to 20 days to register new employees with the state’s new hire notification system. The timeline’s requirement is driven by the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), which was designed to help keep track of working parents for the purposes of enforcing child support obligations.
Employers who do not properly inform the government that they’ve hired someone new can be fined up to $25 per employee. That penalty increases to $500 per employee if it is determined that you intentionally avoided reporting new staff. With penalties, there’s no universal rule in place across all states. For example, in Alabama failure to report a new hire can result in a $25 fee per employee, while civil penalties start at $15 per employee in the state of Illinois.
If you’re unsure about the requirements where you’re located, the US Department of Health and Human Services has a landing page with new hire reporting websites for each state. And when in doubt, your bookkeeper or tax professional can offer advice.
What information gets reported and where?
All new hires must be reported in the state where the employee works, or where you report their quarterly wages for payroll purposes.
In addition, federal law requires that you submit seven things:
- Company name
- Company address
- Your Federal employer identification number (FEIN)
- Employee name
- Social Security Number
- Date of hire
The state requirements and methods of reporting do vary, so it’s important to do your homework — and get clarity — on what you must submit if it differs from federal requirements.
Why do I have to report new hires?
New hire reporting helps states determine who may be entitled to benefits and enforce the law. It also helps prevent fraudulent claims for unemployment insurance, welfare assistance, workers’ compensation, and other programs. Finally, it can also help states identify non-custodial parents, carry out child support income withholding orders, and track down taxpayers who owe back taxes. As an employer, you play an important role by keeping your state in the loop about your new employees.
OnPay is great because it saves me time from working on my business so I can work in the business. It automatically pays my quarterly taxes and setting up new employees and processing payroll is quick and easy!
— Chris Theis, Theis Management, LLC
When do I have to report a new hire?
Federal law requires employers to report new and rehired employees in the state where the new staffers work within 20 days of the hire date. As we mentioned, some states require reporting sooner than the federal government, so be sure to check with yours on timing and deadlines. Also, keep in mind that it’s important to use the same Federal Employer Identification Number (FEIN) to report new hires and quarterly wages.
Reporting of the new employee must be completed via a W-4 form or equivalent. New hire reports must include the employee’s name, address, and Social Security number.
Do I have to report contractors?
Some states, such as California, and Connecticut, require businesses to also report contractors, but federal law does not. That’s because contractors are technically in business for themselves and should be reporting their income in other ways — rather than through their clients.
What about terminated employees?
When an employee leaves the company you usually do not have to report it. However, there is an exception to this rule when an employee has child support withholding on their paychecks. If that’s the case, you’ll need to report the separation to one of these three places:
- Child support agency
- Court system
- The attorney that issued the order to withhold child support
More best practices for new hires
There can be a lot to do on your new employee’s first day: They’ll need to fill out new hire and HR forms, meet their new co-workers, and be provided company information like the employee handbook or policies and procedures manual. It’s a good idea to not only provide this type of manual to a new employee but also have them sign it — acknowledging that they understood its contents.
To help you really get onboarding right, here’s a checklist of everything you need to do.
What forms are required for new hires?
If possible, consider using HR software to save time and streamline the process by allowing your new worker to self-onboard before their first day on the job. As we mentioned above, new hire paperwork can vary by state, but here are a few things you’ll want to include:
- Form W-4: All employees who receive a W-2 at the end of the year will need to complete a W-4 — which underwent a refresh in 2020 — before you run your next payroll. Many states also require a separate state tax form.
- Form W-9: If you’re working with independent contractors, collect a W-9 form from them. You’ll need this at the end of the year to complete the 1099-NEC for any contractors who earned more than $600 in the year. A best practice is to get this W-9 completed before any work begins — even if you don’t know exactly how much the contractor will earn with your company that year.
- I-9 Employment Eligibility form: The I-9 form verifies an employee’s identity and confirms their eligibility to work in the United States. It must be completed within 72 hours of their first day of employment as the fines for non-compliance with the I-9 are substantial. The maximum penalty increased in 2020: a first violation can range from $586 up to $4,667, and the penalties get steeper for repeat offenses.
- If you offer it, this can be helpful for the new employee to bring information to enroll in direct deposit — to make delivery of their paycheck easier for you (and speedy for them).
Remember to inform your workers’ compensation insurance provider
When you hire a new employee (or if an employee leaves your company) be sure to inform your workers’ compensation insurance carrier or the state provider. Your costs are determined by your census of employees, so it pays to check the workers’ comp requirements in your state to find out if the new hire affects rates you’re responsible for.
Before your new employee receives their first paycheck, there are a variety of regulations and reporting requirements you must comply with as a small business owner. These new hire reporting requirements include notifying state and federal agencies of the employee and processing onboarding documentation and paperwork including a W-4 or W-9, I-9, and direct deposit enrollment where applicable.
Complying with all of these new hire reporting requirements, procedures, and rules will help you avoid fines, which — while not expensive on their own — can really add up when mistakes are repeated with multiple employees over time.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.