On the February 3, 2007 edition of The American Entrepreneur, Dave Wilke, partner with Wilke and Associates CPA, discussed some of the key accounting issues involved with taking on a new hire for your company during his “Ask the Accountant” segment.

Employment Agreements – It is in the company’s best interest to set up an employment agreement between the employer and the prospective employee, if not immediately upon employment, then as early in the term of employment as possible. This agreement should explicitly spell out the terms and conditions of employment. The establishment of this agreement by the employer and subsequent acceptance of this agreement by the new employee protects many of the company’s key assets and properties, including the customer base and the staff.

Two major clauses of many employment agreements are non-compete clauses and non-solicitation agreements. Inclusion of these clauses further protects the company in the event that the employee leaves the company (and maybe under not-so-positive terms). By stating that an employee is not contractually permitted to work for a competitor immediately after termination of employment (non-compete) or not allowed to take his or her clients with him or her after termination of employment (non-solicitation), the employer is effectively protecting the system that is in place in the company. The employee can take the knowledge and experience gained during that term of employment, but can’t effectively do anything with that knowledge that would hurt the company.

Payroll Processing – When adding a new full-time employee, the onus also falls on the company to effectively add that employee onto the payroll. This is a task that is far more complex then adding a line item onto a spreadsheet, and given the barrage of recent legislation on a state and federal level, this task is more complex than ever.

While there was a time that a company could regularly consult with a CPA to get a hire added to the payroll, that process has become far less frequent in recent years. Dave recommends that a small business that is hiring new employees instead consult a reputable, nationally-regarded payroll service, such as ADP or Paychex.

The third alternative to using a CPA or payroll service would be to administer payroll in house. On the surface, this would appear to be the most cost-effective method for a small business to handle this task. But thanks to the recent legislative developments that affect payroll administration (including, but not limited to, the Pennsylvania New Hire Reporting Act, the further development of I-9’s, overtime and minimum wage laws, the Family Medical Leave Act, COBRA issues), doing this task yourself becomes more trouble than the money you save is worth. As a result, you may be putting less emphasis on your core competencies.

Sales employees – Sales employees are generally a different animal than other types of employees. Instead of working on a straight salary basis, most sales employees instead work on a combination of salary and commission. As with other terms of employment, business owners are encouraged to explicitly lay out the percentage-based breakdown of how these two categories will work in the employment agreement.

For one thing, business owners are advised to be mindful when setting up a “draw”, or a current payment in advance of future anticipated commission, for their sales employees. While it may be beneficial to the sales representative in the short term, there’s the odd chance that the performance may not live up to the expectation that the draw assumes.

Watch the Law - Business owners, whether dealing with sales or other employees should also be mindful of overtime and minimum wage laws. For instance, if you have a full-time employee who is making less than $24,000, but is spending more than 40 hours a week in the workplace, that is a red flag to the employer that “time and a half” compensation is due for any time worked over the 40 allotted hours. It is for this reason that employers should be mindful when dealing with new hires, both young and old, that work for less than this amount.

Business owners should also be mindful when it comes to expenses to salaried employees and how these expenses relate to payroll. For example, if an employee, for whatever reason, requests an advance in compensation (akin to a draw for a sales rep), that money should run through payroll, so that the proper taxes can be taken out of it.

In addition, as discussed on prior editions of “Ask the Accountant”, employers should be mindful of non-salaried forms of compensation for employees as they relate to payroll tax. If an employee wants to run a cell phone bill through the company or lease a car through the company, there are two ways to go about doing this. The first way is for the employee to be directly reimbursed for expenses such as these, where the employee submits a bill, the bill is paid through the company, and, if the employment agreement calls for it, the expense will be taken out of the employee’s paycheck.

The other way is for the employer to allot an “allowance” to the employee, so that the employee can process these expenses outside of the company. While this way may lead to less internal hassle, it is imperative that this allowance is to be run through payroll, much like standard salary, as this allowance is subject to the same payroll taxes as other monetary forms of compensation.

As always, Dave recommends that you consult with your CPA or financial planner should you be confused on any of the aforementioned issues. And as always, Dave and his staff at Wilke and Associates invite you to contact them as well, either by calling them at (412) 278-2200, or on the web at www.wilkecpa.com.