Knowing It's Time to Hire an Employee

As an entrepreneur, you

You’re a sole proprietor and business is booming. In fact, you’re doing so well, you’re thinking you might need another pair of hands to help you out. Making that first hire for your small business is a big decision. When is the right time, and the best first steps to take? Consider these points:

Look for tell-tale signs

If there just aren’t enough hours in the day for you to get all your work done and you simply have more orders than you can fulfill, that’s one signal it might be time to hire. Another: when you start to lose customers or receive a lot of complaints about anything from missed orders to poor quality.  “If things start to fall through the cracks, it’s a pretty good indication it’s time to bring someone in,” says Ron Finklestein, who heads AKRIS, a small business consulting firm in Akron, Ohio.

Pinpoint which tasks you can assign to someone else

Once you know you need to bring in an employee, you next have to decide just what that person’s job should be. The best tack is to assign tasks you don’t like to do or aren’t good at. For sole proprietors, that tends to be administrative tasks or bookkeeping.

At the same time, be prepared to admit mistakes

Jack Veale, who runs PTCFO, a small business consulting firm in West Hartford, Ct., hired a part-time secretary to take care of administrative and bookkeeping chores, which would free him up to spend more time working with clients and looking for new business.  But after just six months, he realized he’d made the wrong choice. “I can take care of the paperwork myself once a month on a Saturday,” he says. When she decided to leave, he didn’t replace her.

Analyze your financial wherewithal

Of course, you also have to figure out whether you have the money to bring in an employee.  “A lot of sole proprietors need people, but lack the money to hire them,” says Finklestein. If you don’t have a good handle on the books, particularly on cash flow and profitability, then you’ll have to buckle down and grapple with them as soon as possible.   

Ultimately, even if it means making a financial stretch, you may still decide that hiring is necessary in order to increase revenues. Three years ago, Kristen Putnam, founder of Putnam Community Investment Consulting, a firm that acts as an advisor to philanthropic foundations, decided to hire an administrative assistant when she realized she simply couldn’t handle all the work herself.  But right before the person was about to start, business took a nose dive. Putnam decided to go ahead with the hire so that she could concentrate on bringing in more contracts, and ended up paying the salary out of her own savings. Just two months later, she was able not only to land several more contracts, but also to stop eating into her nest egg to pay her new hire.

Make sure you understand the legal requirements

Having employees involves meeting a number of federal and state filing requirements. Even for part-timers, you’ll have to pay payroll taxes and workman’s compensation insurance, costs that, according to Veale, “can add 20% for every dollar you pay an employee.” To make sure you’re following all the rules, consult with a CPA and lawyer specializing in employment law.

You’ll also need to put in place official policies regarding employees. “You have to have a set of rules by which each person is expected to perform,” says Veale.  Whatever you come up with, it’s important to have a lawyer look it over.

Consider the matter of physical space

If you work out of your home, keep in mind that many potential employees might find that an uncomfortable situation – it may not work for you either. Take Putnam, who realized after about six months that she disliked sharing her home office with her new hire. She ended up using a virtual assistant, on a retainer for 55 hours a month. Based in St. Louis, the woman has access to Putnam’s calendar, email and database. “She can do everything but file things in my office,” says Putnam.

Use independent contractors

You won’t have to pay employment-related taxes, and you’re not tied to meeting payroll obligations if business demand drops. Veale, for example, now employs several independent contractors to work in sales.

At the same time, independent contractors are not a panacea. There are strict IRS rules for what characterizes an independent contractor vs. an employee – whether you control their hours of work, for example, or they’re allowed to work for other businesses. (You can find the rules on the IRS website).  And if you pay someone as an independent when they don’t qualify as one, you can wind up owing the government a small fortune in taxes and penalties.   So do your homework before making a decision about hiring, and consult with the pros every step of the way to make sure you’re playing by the rules.

Anne Field is a freelance writer for StartupNation.

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