In my Small Business Management class, we were reviewing organization & staffing in a small business and we found a great deal of information on the theory of organizational management. More difficult was finding a practical, how-to guide for hiring an employee, be it in Vermont or anywhere else in the U.S. Many of my clients also find this to be a difficult system to comprehend as it requires coordinating with three different branches of government: the IRS, the Vermont Department of Taxes, and the Vermont Department of Labor (and ensuring that you have workers compensation). While many business owners hire a payroll service, for those that want to do it themselves or in QuickBooks, there are some steps to ensure proper setup. The Small Business Administration has a website that comes close to explaining the legal side of the hiring process, albeit with outdated links.
The organizations that you need to coordinate with include:
- Federal Withholding (with the IRS). This is the income taxes & medicare/social security that employers have to withhold from paychecks. Most business owners prefer to file electronically, so they set up an account through EFTPS (QuickBooks allows you to connect through this system so it is very easy to pay Federal withholdings).
- State Withholding (with the Vermont Department of Taxes). This is the state income taxes the business withholds for their employee. Businesses can manually pay this through myVTax (an online systems similar to EFTPS). If you are using QuickBooks Online for payroll, you can set it up so you do not need to log into myVTax.
- State Unemployment Insurance Taxes (with the Vermont Department of Labor). Unemployment taxes are due on the first $16,800 paid to each employee during the calendar year. If you are a new employer, sign up here.
- An insurance agency to ensure you are properly set up with workers compensation insurance.
Beyond this initial communication with government agencies, business owners and nonprofits who are budgeting for a new employee have a difficult time understanding what additional costs they will incur. This is where it can get messy.
Money spent in addition to employee’s salary or wage
- Social Security and Medicaid – right now, employers pay 7.65% in addition to an employee’s salary
- Federal Unemployment (FUTA) – the FUTA rate is 6.0% on the first $7,000 of wages, but they offer a credit of up to 5.4% for employers that pay state unemployment taxes. This means that in Vermont, employers should pay $42 for each employee that earns more than $7,000 in a year
- Vermont Unemployment – In Vermont, new employers get a starter rate of 1% until they earn a rate based on their “experience” with employment. The state tax is payable on the first $16,800 in wages paid to each employee in a year.
- Workers Compensation – this will vary based on the risk in each industry (office workers have lower rates than meat cutters or carpenters). You have to get a quote from an insurance agency to determine your actual cost.
- Miscellaneous – if you hire a professional to process your payroll you will pay a fee. If your employees want direct deposit you will pay a fee. Furthermore, if you offer any benefits you will want to calculate these costs.
If you want to calculate all of the costs together, this employee total compensation calculator works well, but it forces you to come up with your unemployment taxes first. Assuming the scenarios above are true, it will be $210 for an employee earning more than $16,800 in Vermont.