We are continuing our conversation on the ABCs of starting a business. We will follow the progress of a fictitious newly formed Yoga Studio. In episode 128 we looked at business structure and today we will focus on hiring employees.
With us is Cory Johnson from Cory W. Johnson, CPA, LLC which is located in Silver Spring, Maryland. He has about 200 individual clients and about 30 business clients located all throughout the country. He provides accounting, payroll, CPA, incorporation, and tax services.
Hiring Employees – Key Points
- When hiring employees, you can choose to hire either employees or contractors to work for your business.
- The front desk worker is probably an employee while the yoga instructor is most likely a contractor.
- Look for guidance to help you determine whether someone is your employee or a contractor.
- In addition to salaries, payroll-related expenses include social security, medicare, and unemployment tax payments.
- Use a payroll service provider to make mandated state and federal payments as well as monthly or quarterly filing of relevant taxes.
- Monthly, quarterly, and annual employer tax returns may need to be filed.
- A business owner can have a solo 401(k), but if you are employed and run a business, there are limits to what you can contribute to it.
- Putting money away in a retirement savings account reduces your tax obligation.
Listen in and find out Cory’s best tip on doing due diligence.
Links and Contact Information
- Cory W. Johnson, CPA, LLC
- Email: info@cpacory.com
Here are some of our featured free resources.
- How Can I Organize My Financials?
- Should I Have A Business Plan?
- What Steps Should I Take Towards Branding?
- How Can Marketing Bring In More Clients?
- The Start-Up Checklist
- What Type Of Corporation Should I Be?
- Things To Consider When Scaling A Business
Understanding Your Employer Tax Obligations From Day One
As an employer, you are responsible for withholding federal and state income taxes from employee paychecks, along with the employee’s share of Social Security (6.2%) and Medicare (1.45%) taxes. You also pay a matching employer share of those FICA taxes out of your own business funds — costs that must be factored into your hiring budget before you post a single job listing.
New employers must obtain a Federal Employer Identification Number (EIN) from the IRS if they haven’t already, and register with their state’s department of revenue or labor to handle state withholding and unemployment insurance accounts. Missing these registrations can trigger penalties even if your payroll amounts are small.
For a yoga studio specifically, misclassifying instructors as employees when they qualify as independent contractors — or vice versa — can result in back taxes, interest, and fines. The IRS uses a behavioral, financial, and type-of-relationship test to make this determination, so document your reasoning carefully and revisit classifications whenever a working arrangement changes.