Gordian Advisors was excited to recently add its first employee. Since I have been through plenty of government and regulatory exercises (SEC and state investment adviser examinations, FINRA brokerage audits, to say nothing of personal and business taxes), I was actually very curious to wade through the steps required to hire and pay an employee.
Although Gordian Advisors has been in existence since 2002, to this point the owners were the only employees. As such, the net income from Gordian simply “passed through” to the owners, who paid self-employment and estimated income taxes throughout the year. There were no ongoing tax withholding, unemployment insurance or other reporting requirements.
Each new employee must be legally eligible to work in the United States. This begins with a form from the US Citizenship and Immigration Services which includes documented proof of work eligibility (US passport, work visa, ”green card”, etc.) but which is kept in the employer’s files rather than being submitted. Arizona also requires employers to use the Department of Homeland Security’s much-maligned “E-Verify” system to further confirm eligibility.
Once registered, the employer must complete a tutorial prior to verifying employees. The tutorial is heavily focused on avoiding abuses of the system, such as prescreening applicants and sharing any information gathered from E-Verify. (There is also a Self Check function in E-Verify where anyone can confirm that they are eligible to work. A cynic might say that could allow fraudulent workers to see if they have fooled the system.) For US citizens, there is instant confirmation including picture verification. If information does not match (either from the Social Security Administration or Homeland Security), the employee has eight working days to correct the problem. If the employee is either unable to provide satisfactory documentation to Homeland Security or makes no attempt to do so, the employee may be terminated and Homeland Security does . . . nothing.
It is mandatory in Arizona for employers to secure workers’ compensation insurance for employees. Workers’ compensation is a “no fault” system in which an injured employee is entitled to receive benefits for a workplace injury, no matter who caused the job-related accident. While an employer can use any authorized insurer or qualify as self-insured and bear all liability for injuries, there is a non-profit organization that was founded in 1925 and covers 70% of all businesses working in Arizona.
Workers can voluntarily decline workers’ compensation coverage, which the owners of Gordian did. And for a financial firm, the incidence of workplace injuries would seem uncommon. But in 2011, over 4% of all nonfatal injuries at private Arizona employers were from “financial activities” and another 16% were from “professional and business services” (excluding healthcare). At least Arizona’s average premium rate is only 86% of the national median, and our premium turned out to be less than 40% of the Arizona average. And like all insurance, the premiums from insured parties who never have a claim go toward insurance benefits for those who do have claims.
Arizona employers must register with the Department of Revenue (DOR) for the privilege of remitting withheld state taxes. Fortunately, there is a Joint Tax Application which registers for both the Departments of Revenue (income Taxes) and Economic Security (unemployment insurance). This application must be submitted before any quarterly taxes are due, but the DOR takes at least 30 days to approve the application. There is also a separate required registration with Business Services Online to report payroll information to Social Security. Finally, another registration with the Division of Child Support Enforcement of the Arizona Department of Economic Security allows the reporting of each new or rehired employee within 20 days of the hire date so that any unpaid child support can then be garnished from wages.
The employee does not get off scot free, of course, and must submit forms for withholding of both federal and state income taxes in addition to providing work eligibility documentation. Despite the instructions, estimating tax withholding to avoid either a big refund or a large tax bill is, in practice, a shot in the dark.
And then the fun really starts. The IRS Employer’s Tax Guide is 44 pages long and covers Social Security, Medicare and income tax withholding and annual federal unemployment reporting. Penalties for noncompliance and failure to remit withheld taxes are severe. At this point, it would be crazy for a small business to handle all the necessary government payments and reporting, so payroll service providers efficiently fill that need.
In fairness, once the first employee is added subsequent employees are easier. All these registrations and requirements are part of government programs that have merit (of varying degrees). And the same payroll providers will also complete much of this upfront work if the employer so chooses.
But the arguably worthy objectives of these requirements do not necessarily justify the burden created for employers. It is more likely that well-intentioned small employers will make mistakes or overlook some requirement than correctly navigate all the hurdles, even with expert help. As with most rules and procedures, it would benefit everyone if the rule makers looked at both the costs and benefits of the rules.
If any small employer can do this, we should be able to, given our education and work experience. We issued our first paycheck yesterday. I hope we got it right.