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Can a sole proprietorship have employees?

You’ve put in countless hours to get your company up and running and grow your business income. As a sole proprietor, one of the perks is having complete control over your business. Sole proprietorships are also one of the simplest businesses to set up.

But there’s no doubt you’ve likely worked more than one 15-hour day to meet deadlines and keep clients happy. With business booming, you may need an extra hand—hiring an employee seems like the logical next step.

Can your sole proprietorship hire an employee to pitch in? The good news is yes, it can. But there’s a catch: You have to follow appropriate labor and tax laws to hire employees as a sole proprietor.

Can you be self-employed and have employees?

A sole proprietorship is often the first step for many businesses. It’s one type of business entity that lets you set up shop and start your journey into self-employment without jumping through legal hoops. It’s an unincorporated business and usually has a single owner. However, spouses can jointly own a business.

But being self-employed doesn’t mean you have to run your business on your own. You can hire employees as a sole proprietor. In fact, whether you’re hiring your first employee in Georgia or Oregon, you can employ as many as you want—there’s no limit on the number of employees you can have.

Just keep in mind that you’ll be responsible for protecting yourself and your business, tax filings, and proper administration of those you hire, including:

  • Complying with state and local business license and permit rules
  • Registering for an Employer Identification Number (EIN) from the Internal Revenue Service (you may also need an EIN to open a bank account or credit card)
  • Verifying employment eligibility to work in the U.S.
  • Getting the name and Social Security Number of each employee
  • Collecting income tax withholding information
  • Meeting small business insurance requirements such as buying workers’ compensation insurance

For example, if you’re hiring your first employee in Texas, you’ll need to meet all local, state, and federal requirements. You’ll also want to invest in a system to track bookkeeping records like payroll taxes, federal and state employee income tax, and self-employment tax.

What about independent contractors?

Sole proprietors and independent contractors share many similarities. The main distinction is that a sole proprietor usually makes things, teaches classes, sells products, or provides a service, while an independent contractor typically works for someone else (but not as an employee).

Being an independent contractor doesn’t require you to set up any legal business structure. Simply going into business for yourself and providing services (consulting, web design, or construction) for someone else without being an employee is enough to classify yourself as an independent contractor.

So, can independent contractors hire employees? Yes! As a self-employed person, you are your own business—and businesses are allowed to hire employees.

However, you’ll need to take steps to protect and prepare yourself and your business just like if you were a sole proprietor.

How do sole proprietors pay employees?

Before you go through the steps to attract a quality candidate, you should first learn how to pay them. Learning how to pay employees as a sole proprietor can seem tricky. It isn’t as simple as forking over a handful of cash.

Collect tax forms from your employee

According to the IRS hiring guide, new and current employees must fill out and submit:

  • IRS Form W-4
  • State tax withholding form, if required
  • Form I-9

Calculate pre-tax pay

Decide how you’ll pay your employees. The most common types of compensation are:

  • Hourly wage
  • Fixed annual salary
  • Commission

Then determine how often you’ll pay your employees (standard pay periods are weekly, bi-weekly, semi-monthly, or monthly), and calculate the gross pay for each employee per pay period.

Determine withholding amounts

Your employees’ tax forms determine how much of their earnings you need to withhold for tax purposes. You must consider:

  • Federal income tax
  • State income tax
  • Local tax
  • FICA (Social Security and Medicare taxes)
  • Federal unemployment tax
  • Deductions for healthcare and other benefits

The amount of pay your employee receives depends on the withholding amount. For example, if the employee earned $1,500, and you need to withhold $380 for taxes, the employee’s net pay would be $1,120.

Distribute paychecks to your staff

If you use direct deposit, distributing paychecks is simple—refer to the bank information the employee submitted on their direct deposit form. You could also have your bank or payroll provider write checks.

File taxes and pay benefits

The last step is to meet your tax liability and pay into benefits. You may need to file taxes with the IRS, your state’s tax collection agency, and your city’s tax collection agency.

Another portion of the withheld pay may go toward employee benefits such as health insurance, retirement, or health savings accounts.

At what point should I upgrade my business from a sole proprietorship?

If you’re a small business owner with a sole proprietorship, you’re not alone—it’s the most common business entity, according to the Small Business Administration (SBA). Many owners do business under their own name. But you may have filed a DBA (doing business as) to conduct business under an assumed name.

Still, you might wonder when is a good time to switch to a Limited Liability Company (LLC). You should get legal advice before making a decision, but it might be time to upgrade your legal entity if:

Sticking with a sole proprietorship might be the easiest option, but it may not be the best. For example, there’s no distinction between the business and you—if a client or employee files a lawsuit against you, you could lose both your business and your personal assets.

Upgrading to an LLC can limit your personal legal liability. They can be used to own and run nearly any type of business and have many benefits, such as:

  • Personal asset protection
  • Pass-through taxation to your personal income tax return
  • Simplicity because it doesn’t require officers or board meetings
  • The credibility of having an official business name

More options to limit your liability include doing a small business health checkup and buying small business insurance. In fact, you can get fast, affordable coverage in minutes. With Huckleberry, everything is online, so there’s no wait.


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Disclaimer

All content on this page is for general informational purposes only and does not apply to any specific case, is not legal, tax or insurance advice and should not be relied upon. If you have any questions about the situation for your small business or the latest information in your state, you should contact an attorney for legal advice, an insurance agent or broker, and/or your state's labor or industry agency, board, commission or department. Please note that the information provided on this page may change at any time as a result of legislative action, court decisions or rules adopted or amended by any state or the federal government.

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