Thinking about starting a new business in Hawaii? Here are answers to the four most commonly asked questions we receive as people prepare to begin their new endeavors.
1. How do I get started with a new business?
Step 1 – Choose a Business Structure.
The five most common business structures are Sole Proprietorship, General Partnership, Corporation, S Corporation, and Limited Liability Company. The structure you select can influence everything: day-to-day operations, how you pay yourself, how much you owe in taxes, the risk you take on, and even your ability to raise funding. Research the ins and outs of each business type before making a final decision. Check out Indeed’s Guide to Business Structures: 5 Types and Their Advantages
Step 2 – Choose a Name.
Your business name should be unique and reflect the nature of your product, service, or brand; and be easy to spell and pronounce. Find out if the name you want is available by searching Hawaii Business Express's online database. Also check popular social media platforms like Facebook, Instagram, and TikTok, if you plan to leverage social media to help customers discover your brand. While not always required, registering for a DBA can be advantageous. DBA, short for “Doing Business As,” refers to a registration that allows a business to conduct operations under a name that is different from its legal name or the name of its owners. DBAs are useful for increasing credibility, providing privacy to owners, and marketing the business in a different direction.
Step 3 – Apply for a FEIN.
A Federal Employer Identification Number (FEIN or EIN), is essential for filing federal taxes, hiring employees, or in some cases, opening a business bank account. However, not all businesses need a FEIN. If you operate a Sole Proprietorship or LLC with no employees (and no plan to hire in the future), your Social Security Number may be used as your Tax Id. Apply for a FEIN online or through the mail.
Step 4 – Register Your Business.
Register your business with the State of Hawaii, and file for necessary licenses, permits, and other employer requirements. Do this online through the Hawaii Business Express website. Be ready to provide your business name, address, and structure, as well as names and contact information for the business owners.
Step 5 – Open a Business Bank Account.
While not every business requires a business bank account, it is a best practice for staying organized. It separates business and personal finances, making it easier to track expenses and income. Choose any bank or credit union that operates in Hawaii, but do research fees and services before making a final decision. Consider these factors when shopping for a business bank account: type of account (checking, savings, merchant); monthly fees; minimum balance requirements; branch and ATM locations; online or mobile banking capabilities; and access to loan options.
2. How do I pay myself?
How you pay yourself as a business owner is predicated on how your business is structured. In a Sole Proprietorship, the owner is paid by withdrawing cash from the company's profits. Typically this is done by writing a check, and the withdrawals are taxed at the end of the year. In a Partnership or an LLC, owners are generally paid through an “owner's draw.” The owner draws a portion of the business's cash reserves for personal use. Corporation owners often pay themselves a salary, which works the same way as a normal job. And, an owner of an S Corporation can choose between distributions or salary, or a combination. Carefully consider your business structure not only for control, flexibility, and complexity but for how taxes are handled and how owners are paid.
3. I'm ready to hire an employee. What do I do?
Congrats! This is an exciting time, but it comes with responsibilities and legal requirements. Before you make your first hire there are six things you must do to have all your licenses and insurance.
Step 1 – Get a FEIN.
Apply for a Federal Employer Identification Number (FEIN), which is a unique identifier assigned to businesses for tax purposes. The federal government uses your FEIN to identify your business when you report tax information. Apply directly through the IRS website.
Step 2 – Get a Withholding License.
A key employer responsibility is to withhold and remit state income tax on behalf of employees each quarter. To do so, you must obtain a withholding license from the State of Hawaii. With the license, you can collect and transmit the correct amount of state income tax from your employee's paychecks. Failure to obtain a withholding license, or to pay the correct amount of state income tax, leads to penalties and fines. Ensuring compliance is a big reason why many small businesses turn to a payroll service provider like ProService.
Step 3 – Get an Unemployment Insurance Tax License.
Employers must pay state unemployment taxes, referred to as SUTA or SUI, to fund Hawaii's Unemployment Insurance Program. Obtain an unemployment insurance (UI) tax license, and account number (DOL Account number) from Hawaii's Department of Labor and Industrial Relations (DLIR). If one of your employees loses their job through no fault of their own, the UI fund provides temporary financial assistance. In Hawaii, employers contribute to the state's UI fund through payroll taxes based on a percentage of each employee's wages. Failure to obtain an unemployment license or pay required UI taxes results in penalties and fines from the DLIR. Learn more about new employer registration for unemployment insurance.
Step 4 – Set up for Employer-Sponsored Health Insurance.
According to the Prepaid Health Care Act, Hawaii businesses of all sizes – even those with only one employee – must provide health insurance to eligible employees. Eligible employees are any full or part-time worker who has worked at least 20 hours per week for four consecutive weeks. By law, employers must pay at least 50% of eligible employees' single coverage health care premiums. There are multiple ways to shop for health insurance for your small business. For example, go directly to providers like HMSA or Kaiser; or through HR partners like ProService Hawaii. If you're looking for health insurance or other benefits, check out our helpful Benefits Package guide.
Step 5 – Get Worker's Compensation Insurance.
By state law, every business with Hawaii employees must have workers' compensation insurance. It provides employees with the medical and wage replacement benefits they need if they have a work-related illness or injury. It also protects your business by limiting your liability in lawsuits from such incidents. You can purchase workers' compensation insurance from various national or local providers, including ProService Hawaii. Read this comprehensive Workers' Compensation Guide to learn more.
Step 6 – Get Temporary Disability Insurance.
One more insurance product is needed, by state law, to protect employees. Temporary Disability Insurance (TDI) provides employees with partial wage replacement benefits for eligible expenses when they cannot work because of an off-the-job injury or illness. TDI does not cover medical care. Typically, TDI coverage can be purchased from your Workers' Compensation insurance provider.
4. What employer taxes do I need to pay?
One of your biggest responsibilities as an employer is paying federal and state taxes. Failure to file taxes correctly or on time may result in fines or penalties. Here are some of the taxes you must be aware of if you run a business in Hawaii:
- Federal and State Unemployment Tax (FUTA and SUTA)
- Social Security and Medicare Taxes (FICA)
- Federal and State Income Tax
What the employer or employees pay for each tax depends on the tax type. For example, employers are wholly responsible for paying FUTA and SUTA taxes. FICA taxes are split between employers and employees. And, employees are responsible for paying income taxes. However, as an employer, it's your responsibility to collect (withhold) the employee's portion of FICA tax and income tax from their paychecks and remit them to the appropriate government agencies.
We know it's a lot to digest, which is why many businesses opt to outsource their payroll processing. A payroll services provider, like ProService Hawaii, can help you by calculating and withholding taxes, and filing your taxes and payroll reports.