YES! Sole Proprietors Can Have Employees: Here’s What You Need To Know

YES! Sole Proprietors Can Have Employees: Here’s What You Need To Know

By: Corey Philip
Updated: October 28, 2021

Being a sole proprietor is the simplest form of business to run. Most of the time, it’s just you doing all of the work and calling all of the shots. However, once your 18 hour days start paying off and you have customers and the money coming in, you may consider getting some help and hiring employees to take on some of the work.

Can you hire an employee to help you take your business to the next level as a sole proprietor? As the title says, yes, you can. However, there are some things you need to know and start doing and some different options for you to look at.

Can a Sole Proprietor have Employees?


As a sole proprietor, you likely haven’t had to deal with much on the business side. You are the only employee, you haven’t registered as a business and you just pay your income tax on the money you make. However, there is nothing that says you can’t hire as many employees as you want.

You will have to follow labor and tax laws to hire an employee, and you should not just be handing them money and going on with business as usual.

You will need to look at ways to protect yourself and the business, filing taxes, and handling the administration of the employees. Consider the following:

  • Review and adhere to local and state business license and permit rules.
  • Register for an Employer Identification Number (EIN) from the IRS.
  • Verify that your employees have a legal right to work in the US.
  • Create employee files, ensure you include their Social Security Numbers.
  • Collecting income tax withholding information.
  • Review small business insurance requirements, like workers’ compensation.

The most important thing as far as the new employees will be concerned is how to pay them.

How do you Pay Employees as a Sole Proprietor?


Before you’re ready to hire and get your new employees to work, you need to understand how to pay them and what your responsibilities are. Do you just hand them a check, and they file their own taxes?

Online Payroll Companies


When setting up payroll for your new employees, outsourcing the process to an online payroll service is the simplest option. This type of service will handle all the tax requirements for your state and calculate everything required. You can also provide a report to the employee to know what is being done with their money.

Check Tax Forms


Once you hire an employee, they will need to fill out various forms and submit them to the IRS.

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

Calculate Withholding Tax


You can’t just hand all earned money over to the employee. You will be responsible for calculating and withholding some of it for tax purposes. You need to review:

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

Expected Costs When Adding Employees


As the employer, you will have some additional responsibilities to ensure your employee is looked after if they lose their job or have an accident.

FUTA


Federal Unemployment Tax is a tax you must pay. It contributes to the federal unemployment pool, which covers people who qualify for unemployment.

  • If you have at least one employee who works at least 20 weeks a year, or you pay your employees at least $1500 in any quarter of the year, you must pay FUTA.
  • FUTA is not withholding tax, and the employee does not pay it. FUTA is the employer’s responsibility.
  • You pay 6% on the first $7000 of each employee’s wages.

SUTA


State Unemployment Tax is another unemployment benefits tax you must pay to assist people who qualify for state unemployment benefits.

  • In most states, the employer is responsible for paying this tax. However, in Alaska, New Jersey, and Pennsylvania, the tax falls on the employee.
  • The percentage you must pay varies by state, so you will need to check with your state’s tax authority website.

Workers' Compensation


Worker’s compensation is insurance for employees who become disabled or injured while working. It is mandatory, and each state provides slightly different options, so you must look up your state’s worker’s compensation requirements.

  • The employer must pay this, and it is mandatory.
  • Failure to have worker’s compensation could leave you liable for all costs related to an employee’s injury.

Risks to the Sole Proprietor of Having Employees


As a business, you always have risks you need to be aware of, however, when you start adding employees, your risks can go up, and the control is not always in your hands.

As a sole proprietor, you have no separation from your business. You and the business are considered the same entity. So any legal trouble your business gets into, it’s actually you as a person who will be responsible for it. This responsibility could put your personal assets at risk.

Anything your employee does, whether damaging something, getting into an accident, or performing a lousy job that ends up in a customer suing you, puts you legally and financially on the hook for the employee’s mistakes.

Risk Between You and Your Employee


One essential thing to consider is the risk of not carrying the proper insurance. Of course, when it comes to your employee, this would be the worker’s compensation insurance, which is mandatory, but nobody will be forcing you to buy it.

Suppose you do not get this insurance and your employee becomes injured or disabled. In that case, you are personally liable for the costs associated with the injury or disability.

Getting this insurance covers your costs, it assists your employee, and if the employee accepts this insurance, they waive their right to sue you later.

Tax Risks


Messing up your taxes is a risk whether you have employees or not. However, you must handle employee withholding tax correctly and pay all of your FUTA/SUTA tax.

You are responsible for collecting and paying all of these; failure to do so would cost you money and potentially other issues with the IRS and other government departments.

Final Thoughts


Adding employees to your business as a sole proprietor can free up your time and allow you to take on more business. However, there are complex requirements and risks involved when adding employees. Considering these two suggestions:

  1. 1
    Don’t do payroll yourself. Instead, get one of the recommended services listed above. They will handle all of the tax and calculations so that you don’t end up with costly mistakes.
  2. 2
    Consider if being a sole proprietor is still the best option as you grow your business. You are not protected, and employees can get you into trouble through their actions on the job. At the very least, see if there are business insurance options to cover you for lawsuits.
Corey Philip

Founder of a home service / specialty trade contracting company (think patio's and deck) with a focus on customer experience. Quantitative investor. Data driven marketer. Runner.

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