Hiring your first employee: the paperwork, in order

This guide is for small charities about to put their first person on payroll: a part-time program coordinator, an office manager, someone to run the after-school club. Hiring your first employee brings a run of forms and deadlines that nobody warns you about, from the federal government, your state, and sometimes your city. After reading, you'll know what to settle before you make an offer, which forms to complete and when, and what to keep doing every quarter and every January.

If you aren't sure yet whether the person should be an employee or a contractor, read Employee, contractor or volunteer? first. This guide assumes you've decided they are an employee.

Before you hire

Can you afford it, this year and next?

A salary is only part of the cost. You'll also pay the employer's share of Social Security and Medicare taxes, state unemployment costs, workers' compensation insurance, and probably a payroll service. Build a budget that covers at least the first full year, and ask where next year's money comes from. A grant that pays for one year of a role is a start, not a plan.

Get the board's approval in writing

Hiring staff is a decision for the board, not just the founder. Put the role, the pay and the budget in front of the board and record the vote in the minutes. Agree who will supervise the new employee. In a small charity that is often the board chair or the executive director, and it should be one named person.

Write a job description

Half a page to a page is enough: the job title, who the person reports to, the main duties, the hours, the pay, and where the work happens. A clear job description helps you hire the right person. It also helps you decide whether the job is eligible for overtime (more on that below).

The paperwork, in order

1. Make sure you have an EIN

Your charity almost certainly already has an employer identification number (EIN), the nine-digit number the IRS uses to identify an organization. You need it on every payroll form. If you don't have one, the IRS says you can apply online for free and get the number right away.

2. Form W-4 from the employee

Form W-4 tells you how much federal income tax to hold back from each paycheck. IRS Publication 15, the employer's tax guide, tells employers to ask each new employee to complete one. Keep it on file. You don't send it to the IRS.

Your state may have its own withholding form too. Check your state's tax agency.

3. Form I-9, within three business days

Form I-9 confirms that the person may legally work in the United States. Every employer must complete one for every new hire, including tiny charities. USCIS, the federal agency that runs the form, sets two deadlines:

• The employee completes Section 1 no later than their first day of work for pay.
• You complete Section 2, after looking at the employee's original identity and work authorization documents, within three business days of their first day of work for pay. USCIS gives the example of an employee who starts on a Monday: Section 2 is due by Thursday. If the job lasts less than three days, Section 2 is due on the first day.

Don't send the I-9 to anyone. Keep it on file. USCIS has a calculator on its retention page that tells you how long to keep it after someone leaves, and you must be able to show your I-9s to government officials within three business days of a request. USCIS recommends keeping I-9s separate from other personnel files.

4. E-Verify: check your state

E-Verify is a federal online system that checks the information on an I-9 against government records. The E-Verify program says it is voluntary for most employers. It is required for many federal contractors, and some states require it for certain employers, for example as a condition of a business license. The rules differ from state to state, so check your own state before you hire. If you do sign up, E-Verify says you must use it for every new hire at that worksite, not just some.

5. Report the new hire to your state

Federal law requires employers to report basic details about each new or rehired employee within 20 days of hire to the state where the employee works. The federal Office of Child Support Services, part of the Administration for Children and Families, explains that states use these reports to find parents who owe child support. Some states require the report sooner, and you must follow your state's deadline. Each state has its own new-hire reporting website; most let you report online in a few minutes.

6. Register with your state for withholding and unemployment insurance

Most states have a payroll registration. Typically you register with the state tax agency (if your state has an income tax) and with the state workforce or labor agency for unemployment insurance, which pays benefits to workers who lose their jobs. Do this before your first payday.

Here is a piece of good news. The IRS instructions for Form 940 say that organizations described in section 501(c)(3) generally aren't subject to the federal unemployment tax (FUTA). So most 501(c)(3) charities don't file Form 940.

State unemployment is a different matter, and the rules vary. Some states let 501(c)(3) charities choose between paying the regular state unemployment tax and being a reimbursing employer, which means repaying the state only for benefits actually paid to your former employees. Washington State is one example: its Employment Security Department lets 501(c)(3) nonprofits choose either method, requires reimbursing employers to stay with that choice for at least two calendar years, and may require a surety bond. Reimbursing can save money, but one layoff can bring a large bill. Ask your state agency what applies to you before you choose.

7. Run payroll and deposit federal taxes on time

Each payday you hold back federal income tax and the employee's share of Social Security and Medicare, and you owe a matching employer share of Social Security and Medicare. Then:

• Deposit the taxes electronically. The IRS requires federal tax deposits by electronic funds transfer, and the Electronic Federal Tax Payment System (EFTPS) is free.
• Know your deposit schedule. Publication 15 says a new employer filing Form 941 is a monthly schedule depositor for its first calendar year: taxes on wages paid during a month are due by the 15th of the following month. There are exceptions, so check Publication 15.
• File Form 941 every quarter. Form 941 is the quarterly federal payroll tax return. Publication 15 lists the due dates as April 30, July 31, October 31 and January 31.

8. Form W-2 by January 31

After the year ends, give each employee a Form W-2, which shows their pay and the taxes withheld. The IRS says Forms W-2 must be given to employees and filed with the Social Security Administration by January 31. Send your state copy if your state requires one.

Add these dates to your compliance calendar so they don't sneak up on you.

9. Workers' compensation

Workers' compensation pays medical bills and lost wages when an employee is hurt on the job. For charities and other private employers, it is run by the states, not the federal government; the Department of Labor sends people to their state workers' compensation board. Whether you must carry it, and how you buy it, depends on your state. Ask your state board, and see our guide to insurance basics.

Pay rules: minimum wage and overtime

The federal law on minimum wage and overtime is the Fair Labor Standards Act (FLSA). The federal minimum wage is $7.25 an hour. Many states and some cities set a higher one, and the Department of Labor says employers must comply with both, so pay whichever is higher.

Under the FLSA, covered employees who aren't exempt must be paid at least time and a half for hours over 40 in a workweek. Some salaried roles are exempt; the Department of Labor sets the tests for that.

Don't assume a charity is outside the FLSA. The Department of Labor's Fact Sheet 14A explains that a charity's commercial activities, like a gift shop, can be covered, and that an individual employee can be covered on their own if their work involves interstate commerce, such as regularly making or receiving interstate phone calls or shipping materials to another state. State wage laws can reach further than federal law. When in doubt, treat the job as eligible for minimum wage and overtime, and keep accurate time records.

Posters

Employers must display certain notices where employees can see them. The Department of Labor offers the federal posters free and has an online Poster Advisor to show which ones apply to you. Your state labor department lists the state posters. You don't need to buy a poster package.

Your first 90 days

Checklist

• The board approved the role, pay and budget, and it's in the minutes
• We wrote a job description and named a supervisor
• We confirmed the person is an employee, not a contractor
• We registered with our state for withholding and unemployment insurance
• We arranged workers' compensation as our state requires
• We have a Form W-4 and a completed Form I-9 on file
• We checked whether our state requires E-Verify
• We filed the state new-hire report on time
• Payroll deposits and Form 941 dates are in our calendar
• Federal and state posters are up

If you'd like to talk it through with someone who has hired staff at a small charity, ask a member charity for help through the Exchange.

General information, not legal, tax or financial advice. Rules change and every situation is different, so check the official sources and talk to a qualified professional before you act.