Two: Operating a Business
Employees: The Basics
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
For information on hiring:
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
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
||Are you 18 years of age or older? (To determine if the applicant
is legally old enough to perform the job)
||How old are you?
||Is your spouse employed by this employer? (If your company has
a policy against nepotism)
||Are you married?
||Are you legally authorized to work in the United States on a
||Are you a native-born citizen of the United States? Where are
||These [provide applicant with list] are the essential functions
of the job. How would you perform them?
||Do you have any physical disabilities that would prevent you
from doing this job?
|Drug and alcohol use
||Do you currently use illegal drugs?
||Have you ever been addicted to drugs?
For further information on interviewing:
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
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
For additional information on conducting background
Keeping the Smart, Capable People you Hire from Quitting
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:
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.
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
Sometimes you may have to let a great employee go
due to budgetary concerns. In this case, it will be in your and your
employee’s best interest to keep relations between you as excellent
as possible. 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:
Questions and Answers about Firing Someone
Employees: Government Regulations and Taxes (return
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. A form is included at the end of this section to help you
keep track of your decisions related to employees. Consult with an
attorney, as needed.
(Note: The forms
included in this section are current as of 2006. You may check for
changes to any of the forms on the Internal Revenue Service web site
To exit forms and web sites in this section and return to the CD,
please click the X in the upper right-hand corner of your screen.)
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;
- Real estate mortgage investment conduits;
- Non-profit organizations;
- Farmers' cooperatives; or
- Plan administrators.
To apply for an EIN, fill out IRS
Form SS-4. You may access instructions for this form
here. Application may be made by phone, fax, mail or on-line.
For more information on applying for the EIN, visit the IRS web site: http://www.irs.gov/businesses/small/article/0,,id=97860,00.html.
Or you may reach them by phone at (800) 829-1040.
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.
To access a copy of the Form I-9 in pdf format, click
here. Information on Employee Eligibility Requirements and the
form I-9 is available on the Bureau of Citizenship and Immigration
Services web site: http://uscis.gov/graphics/formsfee/forms/i-9.htm.
If you do not have access to the Internet, you may call 1 (800) 870-3676
to have the form mailed to you.
regulations require that companies with employees must post certain
posters in a conspicuous place so that their employees may read them.
Four required posters are listed below. For additional information about
these posters or to obtain information about other posters that certain
employers may be required to display, you may view the Department of
Labor web site at: http://www.dol.gov/osbp/sbrefa/poster/matrix.htm.
Fair Labor Standards Act (FLSA) Minimum Wage Poster
Employers subject to the Fair Labor Standards Act's
minimum wage provisions must display, and keep displayed, in a conspicuous
place a notice related to minimum wage. An approved copy of this poster
is included on this CD, and may be accessed by clicking
Family and Medical Leave Act (FMLA) Poster
Employers must post, and keep posted, a poster summarizing
the major provisions of The Family and Medical Leave Act (FMLA) and
telling employees how to file a complaint. An approved copy of this
poster is included on this CD, and may be accessed by clicking
Equal Employment Opportunity (EEO) Poster
Employers covered by the non-discrimation and EEO
laws are required to display the poster "Equal Employment Opportunity
is the Law" in a prominent place. This poster gives information
about laws and procedures for filing complaints of violations of the
laws with the Office of Federal Contract Compliance Programs (OFCCP).
An approved copy of this poster is included on this CD, and may be
accessed by clicking
Occupational Safety and Health Administration
Employers must display the OSHA poster in a prominent
place where all employees may read it. This poster gives information
about the rights of employees to a safe and healthy workplace. An
approved copy of this poster is included on this CD, and may be accessed
Federal Tax Requirements (Note:
The forms included in this section are current as of 2006. You may check for changes to any of the forms on the Internal Revenue
Service web site at http://www.irs.gov.)
There are three different federal tax requirements
Social Security and Medicare (FICA)
Federal Unemployment Tax (FUTA)
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 35 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
“Form 941 Deposit Due Date. 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.)
Publication 15, Circular E, Employer’s Tax Guide (Rev.
January 2006) 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 line 11 of your Forms 941 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.”
| 2006 Lookback Period
|July 1 to September 30
||October 1 to December 31
||January 1 to March 31
||April 1 to June 30
||Calendar Year January to December
More information about this process is available
on the IRS web site at: http://www.irs.gov/businesses/small/article/0,,id=98818,00.html.
Federal Forms Relevant to Income Taxes
- For further instructions on W-2 and W-3 forms and
- For a copy of the W-2 form, click
here (provided for informational purposes only).
- For a copy of the W-3 form, click
here (provided for informational purposes only).
- For a copy of the W-4 form, click
- For a copy of the Form 941, click
- For a copy of the Employer’s Tax Guide (Publication 15) (January 2006 version), click
here. This informative guide contains much information to guide
you regarding taxes and your employees.
- For a copy of the The Employer's Supplemental
Tax Guide, click
here (web link).
- For a copy of The Employer's Tax Guide to Fringe
For more tax information related to businesses, consult
the IRS web site at: http://www.irs.gov/.
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, Virginia, at (804)521-4320.
Social Security and Medicare
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. For information on Social
Security and Medicare Taxes, please refer to page 15 of the IRS
Publication 15, Circular E, Employer’s Tax Guide.
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
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.
here for a copy of the IRS Form 940.
Commonwealth of Virginia Requirements
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 at http://www.tax.virginia.gov/site.cfm?alias=BusinessTaxInformation.
With regard to taxes and tax forms, it is important
to note that the forms included with this CD are current as of 06/23/06.
Because tax forms do change, you may wish to consult the Virginia
Department of Taxation's web site for changes to any of these
The Commonwealth of Virginia requires businesses
to be responsible for five different types of monetary requirements:
Retail Sales Tax
Workers’ Compensation Insurance
must withhold a portion of their employee(s)’ income for Virginia’s
income tax. Employers register for this tax with the State of Virginia
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,
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: http://www.tax.virginia.gov/site.cfm?alias=WithholdingTax.
If you do not have access to the Internet, you may also consult the
Virginia Department of Taxation’s Customer Service by phone
at: (757) 455-3810.
Copies of forms are available here:
For more information on Virginia's Requirements related to small businesses, click here.
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
- Are you subject to the FUTA?
- Are you a governmental operation or political
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, Virginia 23218.
For more information, consult the VEC web site: http://www.vec.virginia.gov/index.cfm.
For answers to specific questions regarding unemployment insurance, click here.
If you do not have Internet access, you may reach your local VEC office
by phone. There are VEC field offices located throughout the state
of Virginia. For the location closest to you, consult your local phone
to Local Tax Information)
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% (4% is
state tax, and 1% is local tax). 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 tax table for sales in Virginia, click
here. To view the tax table for the sale of food in Virginia, click here.
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.
For a copy of the form
ST-9, click here. You may also contact Customer Service at (757)
455-3810 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: http://www.tax.virginia.gov/site.cfm?alias=SalesUseTax.
You may also contact Customer Service at (757)455-3810.
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:
- Purchase and maintain a workers' compensation
policy from a company licensed in Virginia;
- Apply to the Virginia Workers' Compensation Commission
for approval as an independent self-insurer;
- Become a member of a group self-insurance association
licensed by the Virginia State Corporation Commission; or
- Enter into an agreement with a professional employer
organization as provided in Section 65.2-801.A.4 of the Code of
(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 at: http://www.vwc.state.va.us/.
Or contact the Commission by phone at (703) 518-8055.
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: http://www.tax.virginia.gov/site.cfm?alias=BusinessTaxInformation.
Or contact them by phone at (757)455-3810.
requirements related to employment will vary. Please check with your local
economic development department for the latest information on local requirements
related to employment in your area.
*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;
8. The worker can’t be fired except for breach of contract.
For more information, consult your local IRS field
Managing Your Employees (return
To help keep track of your decisions about employees
and requirements related to employees, you may click
here to access an "Employee
Go to Step Two: Operating a Business, Assistance
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