Employee Rights and Labor Laws

Q: "I've just hired my first real employee. Where can I learn more about his rights and my legal responsibilities to him?"

A: Even if you have only one or two employees, they have legal rights. Not only must you, as an employer, be aware of them, but you must make your employees aware of them as well. A brief summary of the most important ones appears in Chapter 12 of my book The eBay Seller's Tax and Legal Answer Book, but every state law is a little bit different, and different rules apply depending on the nature of your business, the type of employees you hire (warehouse versus clerical, for example), and the number of employees you have.

There are three things you need to do as soon as you hire your first employee:

1. Develop a relationship with a local attorney who specializes in labor and employment law, and put his or her telephone number on your telephone speed dial.

2. Have your attorney draft an employee manual describing your employee policies and procedures. Depending on where you live, an attorney should be able to do this for a fee in the $1,000 to $2,000 range as long as you don't request a lot of specific provisions.

3. Have a poster prepared for your office eating area or other community space that educates your employees about their rights and responsibilities under federal and state law. You can do this online at the HROne website (hrone.com). When the poster arrives, be sure to read it yourself before posting it.

Keep in mind that your employee manual is a contract—your employees are legally entitled to the rights and benefits you put in your manual. You can change the contents of your manual, but only by giving notice of the change to all your employees.

Payroll Taxes and Hiring Family Members

Q: "How do I deal with payroll taxes when I hire my first employee?"

A: You are required to withhold income taxes from each of your employees' paychecks. In addition, you are required to pay (and sometimes also deduct from your employees' wages) federal employment, or "payroll," taxes: Social Security (also known as FICA), federal unemployment tax (known as FUTA), and Medicare tax. The calculation of these three amounts is complicated, but it generally totals 15.3 percent of each employee's gross taxable wages (as defined by the IRS).

The simplest advice when it comes to calculating payroll taxes is: Don't do it yourself! The procedure is extremely complicated—make one mistake here and the IRS will be all over you like savage dogs on a piece of raw meat. If you have only one or two employees, have your accountant make these calculations and give her access to your business checking account so she can automatically debit it when payroll taxes are due to the IRS.

If you have more than two employees or anticipate having more within the next few months, hire a payroll service to do your payroll tax calculations for you. The service most frequently used by small business owners is Paychex (paychex.com), but there are plenty of others—search on the Web for "small business payroll service" and you will see the biggest and most reputable companies on the first page of the search results.

Q: "Are there any tax advantages to hiring family members to help me with my eBay business?"

A: There is no tax benefit to hiring your spouse or parents. They are treated the same as other employees. If you employ your spouse, you can save about $56 a year in federal unemployment tax (FUTA), but that's about it.

You can, however, provide health insurance and other employee benefits to a spouse who works for you and take the full deduction (see Chapter 14). By hiring your spouse, you can also go on business trips together and deduct your spouse's meals and lodging along with your own.

Now, hiring your kids is another matter. If your children work in your business and each of them makes less than $5,000 a year, they don't pay income taxes (unless they have income from investments). If each of your children makes more than $5,000 a year, they pay taxes, but at a much lower rate than you do. If your child is under age eighteen, you don't have to withhold or pay Social Security or Medicare taxes on his or her income. If your child is under twenty-one, you don't have to pay federal unemployment tax (FUTA), either.

Make sure, though, that your children are truly employees and are actually working in the business. And make sure their compensation is reasonable—no ten-year-old should be making $200 an hour, no matter how smart he or she is.