Hiring Employees for your Construction Business
Before hiring your first employee for your construction business, you must consider preparing to manage another person. With construction, you have a very high level of responsibility for a client’s home. When you hire an employee, you take on additional responsibility. That means you have obligations to numerous government agencies.
Capacity to Grow
Do you have the capacity to grow? Hiring an employee also means that you must line up consistent work to keep that person busy as promised. That means if you hire a full-time person at 40 hours a week, you will grow your business by 2,080 hours for the year.
If you have taken care of all business details by yourself up until this point, now would be a good time to consider sourcing out payroll and HR responsibilities or creating an in-house position.
Ability to Process Payroll
Before you can hire employees, you must register with federal and state agencies and obtain workers compensation insurance in order to process payroll.
Step 1 Obtain an Employer Identification Number (EIN).
Score provides 5 very good reasons for sole proprietor to obtain an EIN.
- It shows separation between the business and the individual.
- It protects personal privacy.
- Most banks require an EIN to open a business bank account.
- It helps to establish business credit.
- It indicates the business is credible.
Hiring an employee is one more reason to obtain an EIN. If you haven’t obtained an EIN for your business yet, you can obtain a free EIN by submitting an online application through IRS.gov.
Step 2 Register with your state’s unemployment insurance office and state’s taxation department.
Each state has an unemployment insurance program with its own rules. Each state sets its wage base and determines its tax rates for employers. Once the business registers, the state provides the unemployment insurance rate.
Step 3 Obtain Worker’s Compensation Insurance.
Each state sets its own rules and rates for Worker’s Compensation Insurance. Ohio, North Dakota, Washington, and Wyoming have monopolistic state funds from which businesses must purchase Worker’s Compensation. Competitive State Funds are state-owned and operated plans, keeping pricing affordable for high-risk industries, such as construction. State funds are an alternative to private Worker’s Compensation insurance in twenty states.
Step 4 Decide how payroll will be processed.
Because of the amount of time involved with payroll processing and the amount of knowledge needed, it is rarely economical to process payroll yourself. Processing payroll in-house requires a subscription to a payroll program and knowledge of payroll laws. In-house payroll works well for companies that are large enough to hire a full-time office manager or accountant, but not as well for companies with only a few employees.
Accountant, Payroll Specialist, or CPA
Other options for construction companies with a small crew are to use an online payroll company or outsource payroll to an accountant, payroll specialist, or CPA.
Accountants and Certified Public Accountants (CPA) provide a range of accounting, payroll, and tax services. CPAs specialize in difficult and complex accounting issues and provide year-end accounting reviews and audits. Annual company audits are recommended for maintaining proper checks and balances.
Online payroll is economical and offers employees a portal to paystubs and W-2’s. Once on-line payroll is set-up, the process to enter payroll is relatively easy. It’s a simple solution to keeping payroll cost down.
Time to Hire your Employee
Write a Job Description
It is a big step going from working alone to hiring an employee. Many remodeling companies start out with small jobs and sporadic scheduling. If your business is at this point, it may be best to hire a part-time position rather than a full-time position.
Ideally, the person you hire should be compatible with your goals and mission. In a perfect situation, you already know that person, but rarely does it work that way.
Before you can hire an employee, you must figure out what job they will perform.
Decide on the role of the new hire
- Do you need someone with skills or are you willing to train?
- Do they need their own tools and vehicle?
- Will they be leading jobs?
- Job description templates are readily available. A job description should include objectives, daily responsibilities, skills, and qualifications.
Search for the New Employee
After determining the job role, the next step to hiring an employee is to look for someone to work for you. Take time to find your employee. Since you could be spending more time around your employee than your family, you want to be around someone enthusiastic and excited to come to work each day.
Search during the slow season. Winter tends to be a good time for remodeling businesses to do some housekeeping. After a busy season, comes tax season. This is a good time of the year to plan for the upcoming busy season. The earlier you start recruiting, the more likely you will avoid desperately seeking someone during your busy time and it will give you more time for training.
Where to Recruit
- Network everywhere you can. Get the word out through family, friends, and organizations you belong to.
- Let people know you are hiring. Talk to people working with the public; your server when you pick up lunch, the cashier at the grocery store, your hair stylist.
- Post on local boards at the lumberyard, community college, Craigslist
- Hire through a temporary agency.
- Post through the Unemployment Office.
Independent Contractor or Employee Rules
Independent contractors are used widely throughout the construction industry. However, to treat a worker as an independent contractor, they must pass the rules set up by the individual states, the Internal Revenue Service, and the Department of Labor.
Two types of tests are used for determining employee classification. Each state has chosen how to adopt the tests.
- The Common Law Test used by the IRS, New York, District of Columbia, and 17 other states presumes the worker is a contractor unless the employer has any behavioral or financial control over the worker and based on the relationship of the parties.
- The ABC Test used by the Department of Labor and 33 states presumes the worker is an employee unless they are free of control or direction of the employer, their work is unusual for the hiring business, and whether they have a business identity.
The Department of Labor defines the employment relationship under the Fair Standards Labor Act (FSLA). The “economic reality” determines the employer-employee relationship test. It looks at the situation to determine if an individual is an employee or an independent contractor.
Workers are entitled to certain protections under the Fair Standards Labor Act. Employees that are misclassified as subcontractors miss out on wages and benefits that should be provided to them.
Worker classification is important and taken very seriously by the IRS and Department of Labor.
A job application is used to screen employees for skills and experience. An application can go further than just asking for previous education and work experience. The application can include questions that will establish the candidate’s industry knowledge and to determine how well the candidate will fit the role.
Include questions such as these:
- Tell me about your carpentry experience.
- Why are you interested in this position?
- What skills would you like to develop?
- What’s one of the most valuable lessons you’ve learned?
Avoid questions such as these:
- What is your birthdate?
- When did you graduate?
- Why were you discharged from the military?
- What is your race?
- What country were you born in?
- Are you married?
Social Security numbers aren’t needed for the job application. Although it is not unlawful to ask for a social security number, it adds risk to identity theft and privacy concerns. Therefore, avoid asking for social security numbers.
Asking for salary history is prohibited in some states to prevent pay inequality. Many states have adopted “ban the box” laws that prohibit asking for criminal history on the application to avoid applicants from being automatically disqualified from the selection process.
The U.S. Equal Employment Opportunity Commission enforces laws that protect against discrimination.
Application questions are unlawful when the requirements could screen out a disproportionately high percentage of candidates on the basis of protected status and are not justified for a business purpose. For more information, see EEOC Prohibited Employment Policies/Practices.
For further information, EEOC provides answers through their Small Business Center.
A job trial provides an opportunity to determine the compatibility of a job candidate. If the job trial is unpaid, it cannot include unsupervised productive work. An unpaid job trial should only be long enough to demonstrate skills. A paid job trial has the benefit of seeing how the candidate performs in a real job environment.
In order to issue a paycheck, the employee needs to complete required forms W-4 and I-9.
A W-4 is an employee withholding certificate that indicates the amount of tax to withhold. For states with withholding taxes, some will allow using the Federal W-4 and other states will have their own withholding form.
Report New Hires
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) requires reporting new hires in order to assist in the collection of child support and to detect and to prevent fraud of government benefit payments. Each state maintains its own website for reporting new hires.
Employee Required Posters
United States Department of Labor requires visibly posting workplace posters. The U.S. Department of Labor has a compliance assistance resource, FirstStep Poster Advisor. It determines the poster requirements through several questions. Obtain state posters through your state’s Department of Labor
A good amount of time can go into an employee handbook. Get a good start on it with The Ultimate Guide from Score. The Guide breaks down the components that belong in an employee handbook.
New Hire Orientation
The new hire introduction to the company should be organized and well planned. A checklist will help to make the orientation go smoothly. Provide a new hire packet on the employee’s first day that includes an employee handbook, benefits information, and pertinent information. The first day of work should welcome the new employee and introduce them to procedures and policies. After introductions, address required paperwork and time card procedure.
The second part of a new hire orientation in a construction company takes place in the field. A safety orientation is required and, at the minimum, needs to provide an overview of rights and responsibilities, health program and policies, and an overview of hazards, PPE, and reporting protocols. The safety program will need to meet state and federal requirements and be ongoing.
Employee turnover is expensive. It requires administrative time, training time, and can lead to higher unemployment insurance costs. Reduce turnover by implementing programs that address turnover issues.
- Recognition and rewards let employees know that you appreciate them.
- Pay competitive wages and give raises at regular intervals. Employees that are unhappy about payrate are quick to leave when a better paying job becomes available.
- Address concerns and allow open communication. Creating a pleasant work culture keeps people interested in staying.
- Advancement opportunities give people something to work towards achieving.
- Benefits! Retirement plans are a win for the company and a win for the employee.
- Keep employees interested and learning by offering training opportunities.
- Little things make a difference. Something as simple as a birthday card can have a big impact.
Benefits enhance what your company can offer employees and help to retain employees and have tax advantages for the businesses as well.
Businesses with fewer than 50 employees my be eligible to purchase health insurance through Small Business Health Options Program (SHOP).
In addition to Health Insurance, employers may offer dental, vision, short-term and long-term disability, and life insurance.
Employers with one or more employee may offer retirement plans. There are two options for small business owners: Simple and SEP.
A SIMPLE Saving Incentive Match Plan for Employees is an easy to administer plan making it popular for small businesses. The employer either matches up to 3 percent of the employee’s pay or makes a 2 percent contribution to every employee, whether the employee participates or not.
A Simplified Employee Pension Plan (SEP) is a traditional IRA plan that the employer funds. Employers make contributions to the employee’s plans at a set percentage, up to 25% of the employee’s salary or up to $58,000 for 2021, whichever is less.
Fringe benefits are taxable, unless the law has excluded it. Qualified benefits such as cafeteria plans allow employees to receive benefits on a pre-tax free basis. Although cafeteria plans don’t include deferred pay, they can include qualified 401K plans. A cafeteria plan allows for payment of certain medical expenses through Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). A cafeteria plan may also include a Dependent Care Assistance Plan (DCAP), adoption assistance, and group life insurance coverage.
Cash types of employee benefits such as paid time off for personal days, sick days, vacation days, paid holidays, and bereavement leave or year-end bonus are taxable benefits.
The value of meals gets included in the employee’s gross income; however, there is an exception for meals provided where the employee performs their job under certain circumstances. The meals must be for the employer’s convenience, not the employee’s. The value of meals may be excluded; if the employee is available for emergency calls, cannot leave due to a peak workload, or a short meal break doesn’t allow the employee to eat elsewhere.
De Minimis Fringe Benefits
De minimis means trivial or minor and come from a Latin phrase “de minimis non curat lex”. The IRS has adopted the principle that the law is not concerned with insignificant or minor items that are so small it makes accounting unreasonable or impractical. Internal Revenue Code section 132(a)(4) excludes de minimis benefits and allows employers to provide small benefits to employees without taxing employees.
The IRS is clear that cash or the equivalent of currency such as gift cards is not excludable from income, with an exception for an occasional meal or transportation money to enable an employee to work overtime. The employee must work an unusual, extended schedule.
What is a de minimis fringe benefit? To be a de minimis fringe benefit, it must be occasional or unusual in frequency.
Examples of de minimis fringe benefits:
- Occasional use of photocopier
- Small gift such as flowers, cards at holidays or under a special circumstance
- Occasional snacks and beverages
- Group-term life insurance for employee spouse or dependent with a face value under $2,000
- Personal use of a business phone
Employers withhold taxes when they pay wages. The schedule for reports and tax due dates to agencies is based on the agency’s requirements. The employer submits taxes to the agencies for the company and on behalf of the employee.
Form 941 is filed by most businesses with wages subject to withholding, Social Security, and Medicare taxes. It is used to report federal income tax withheld from the employee and report Social Security and Medicare taxes. Most businesses must file Form 941 quarterly and make the tax deposits, either monthly or semi-weekly, determined by the tax liability amount.
Some businesses may pay and file Form 944 on an annual basis, if their tax liability is under $1,000 a year and they have been notified by the IRS to file the Form 944 instead of a Form 941.
The employer pays Federal Unemployment Tax quarterly and reported annually on Form 940. Form 940 is filed when wages of $1,500 are paid in a quarter or if a W-2 employee works 20 or more weeks of the year.
State and Local Income Tax
Seven states do not have withholding taxes, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. All other states require employers to withhold state income tax from paychecks.
Some states may have additional taxes, such as short and long-term disability. Seventeen states allow cities, counties, school districts, or special districts to impose additional taxes.
State Unemployment Tax Act (SUTA)
Employers pay SUTA also referred to as State Unemployment Insurance (SUI) to provide benefits to displaced workers. However, in a few states, Florida, New Jersey, and Pennsylvania employees also pay SUI.
Reporting requirements vary by state. Self-insured employers and state funded Worker’s Compensation may have reporting requirements.
W-2 and W-3
Employee wages are reported on Form W-2. W-2’s must be provided to employees by January 31st of the following year. Form W-3 is a summary of the W-2 forms. The W-3 and copies of the W-2’s are sent to Social Security annually by January 31.
Payroll reports must be submitted timely and accurately, and taxes must be paid on time. When you prepare to hire your first employee, plan to hire a professional to take care of your payroll and benefits as well.
Disclaimer: This article is not intended to provide tax or legal advice. Always use professional services when making business decisions.