Can a Sole Proprietor Hire Employees? [2026]

Small businesses are the backbone of any economy. In the US, over 33.2 million small businesses operate today, and 27.1 million of them are sole proprietorships.

A sole proprietor owns and runs their business, taking on full legal and financial responsibility.

But as your business grows, you may need to hire employees to manage the increased workload. The good news is that sole proprietors can legally hire full-time staff, part-time employees, and independent contractors, provided they follow applicable employment and tax regulations.

Here is what this guide covers:

• What sole proprietors need to legally hire employees in 2026
• Tax rules for hiring spouses, children, and independent contractors
• Required documentation, payroll setup, and compliance obligations
• How an EOR simplifies international hiring for sole proprietors

Whether you are hiring your first local employee or building a diverse global team, this guide covers everything a sole proprietor needs to hire compliantly and confidently.

What Is a Sole Proprietorship?

A sole proprietorship is the simplest form of business ownership. In this setup, you and your business are legally the same. You keep all the profits, but you’re also personally responsible for any debts or losses.

For example, imagine you’re a freelance photographer. You earn all the money from your shoots, but if you accidentally break a client’s expensive equipment, you’re personally liable for the damages.

Advantages of a Sole Proprietorship:

• Easy to set up with minimal paperwork.
• Report business income and expenses on your personal tax return.
• Full control over decisions and profits.

If You Use a Business Name:

If your business name is different from your own name, you may need to register a DBA (Doing Business As) with your local government.

Can a Sole Proprietor Hire Employees?

Yes, sole proprietors can hire employees! While you might run the business on your own initially, hiring staff can help you handle more work, serve customers better, and grow your company.

Benefits of Hiring Employees:

• You can delegate tasks to focus on big-picture goals.
• Employees bring skills that can expand your services or products.
• More hands allow you to scale your business faster.

However, hiring comes with added responsibilities. You’ll need to comply with labor laws, handle payroll, and pay employment taxes. Don’t worry; it’s manageable with the right steps and tools.

Learn More: Challenges of Hiring International Employees With Solutions

Hiring Family Members: Rules for Spouses and Kids

Thinking of hiring your spouse or children? It’s possible, but there are some unique rules to follow.

1. Hiring Your Spouse:

• If your spouse helps you manage the business, they’re considered a partner, not an employee. You’ll share profits as an owner’s draw instead of receiving wages.
• If your spouse works on specific tasks, they must be on the payroll and pay income taxes like any other employee.
• Tax Benefits: You don’t need to pay Federal Unemployment Taxes (FUTA) on your spouse’s wages.

2. Hiring Your Kids:

• Under 18: No Social Security (FICA) or Medicare taxes required.
• Under 21: No FUTA taxes required.
• You must still withhold income taxes.

Hiring family members can be a cost-effective and flexible way to grow your team while benefiting from certain tax breaks.

Understand More: How to Hire The Right Employees for Your Startups

How to Hire Employees as a Sole Proprietor

Ready to hire? Follow this simple checklist to get started:

Step 1: Get an Employer Identification Number (EIN)

Apply for an EIN through the IRS. This number is essential for filing taxes and managing payroll.

Step 2: Register for Payroll Taxes

Sign up for state and local payroll tax accounts. This ensures you’re withholding the right amounts for Social Security, Medicare, and unemployment insurance.

Step 3: Collect Employee Forms

Before your new hire starts, gather:

• W-4 Form: To calculate federal income tax withholding. 
• I-9 Form: To verify employment eligibility.
• State Tax Forms: If required in your state.

Step 4: Obtain Workers’ Compensation Insurance

Most states require this insurance to cover medical expenses or lost wages if an employee gets injured on the job.

Step 5: Set Up Record Keeping

‍Keep detailed records of wages, hours worked, taxes withheld, and other employment details. This ensures compliance with labor laws and keeps your business organized.

Read More: How to Hire Employees as a Sole Proprietor

What Are the Legal Documents Required to Hire Employees as a Sole Proprietor?

Before your first employee starts, you need more than just a job offer. Here are the legal documents every sole proprietor must have in place:

• Employment Contract or Offer Letter: Outlines the role, compensation, benefits, and terms of employment. Not legally required in every state, but strongly recommended to prevent disputes.
• Employee Handbook: Covers company policies, at-will employment status, pay schedules, code of conduct, and benefits eligibility.
• Non-Disclosure Agreement (NDA): Protects proprietary business information if the employee will have access to sensitive or confidential data.
• Form I-9: Verifies the employee's legal eligibility to work in the country. Must be completed within three days of the start date.
• Form W-4: Determines the employee's federal income tax withholding amount.
• Workers' Compensation Documentation: Proof of active workers' compensation insurance, which is mandatory in most states upon hiring the first employee.
• Background Check Authorization: Before running background checks for new hires, obtain written consent from the candidate. This protects your business and ensures compliance with the Fair Credit Reporting Act (FCRA).

For international hires, additional documentation such as work permits, visa sponsorship letters, or country-specific employment agreements may also be required. Explore global hiring guides to understand what documentation is needed in each country.

How Hiring Employees Affects a Sole Proprietor's Taxes

Hiring employees changes your tax obligations significantly as a sole proprietor. Here is what to expect:

• Employer share of FICA taxes: As an employer, you are required to match your employees' Social Security (6.2%) and Medicare (1.45%) contributions. This comes out of business profits, not the employee's wages.
• Federal Unemployment Tax (FUTA): You must pay FUTA on the first $7,000 of each employee's annual wages. The standard rate is 6%, though credits can reduce it to 0.6% for most employers.
• State Unemployment Taxes (SUTA): Most states require employers to pay state unemployment insurance taxes in addition to FUTA. Rates vary by state and industry.
• Self-employment tax: Hiring employees does not eliminate your self-employment tax obligation. As a sole proprietor, you still pay self-employment tax on your own net earnings.
• Payroll tax deposits: Depending on your total payroll size, you may be required to deposit withheld taxes on a monthly or semi-weekly schedule with the IRS.

Misclassifying an employee as an independent contractor can lead to significant back taxes and penalties. Use Gloroots' misclassification risk calculator to assess your exposure before making your next hire.

How to Pay Employees as a Sole Proprietor

Paying employees involves more than just writing checks. Here’s how to handle payroll effectively:

1. Set a Payroll Schedule: Decide whether to pay weekly, biweekly, or monthly.
2. Calculate Gross Pay: Multiply hours worked by the hourly rate or determine the monthly salary.
3. Withhold Taxes: Subtract federal and state taxes, along with Social Security and Medicare contributions.
4. Deduct Benefits: Subtract pre-tax and post-tax deductions like health insurance or retirement contributions.
5. Issue Net Pay: Pay the remaining amount to your employees.

Using payroll management software or partnering with a service like Gloroots can simplify this process and ensure accuracy.

What Forms Does a Small Business Need to Have for Its Employees?

Beyond setting up payroll, you'll need to collect, file, and maintain several key forms for every employee you hire. Here is what small business owners must have on hand:

• Form W-4 (Employee's Withholding Certificate): Collected before the first paycheck. Determines how much federal income tax to withhold from the employee's wages.
• Form I-9 (Employment Eligibility Verification): Confirms the employee is legally authorized to work in the US. Must be completed within three business days of hiring.
• Form W-2 (Wage and Tax Statement): Issued to each W-2 employee at year end, summarizing total wages paid and taxes withheld.
• Form 1099-NEC: Required if you pay an independent contractor $600 or more in a calendar year.
• New Hire Reporting Form: Most states require employers to report new hires to the state agency within 20 days of the hire date.
• State Tax Withholding Form: Some states require a separate withholding form in addition to the federal W-4.

Before finalizing compensation for a new hire, use Gloroots' compensation checker to benchmark salaries against market rates in your region.

Pros and Cons of Hiring Employees as a Sole Proprietor

Hiring employees can boost your business, but it’s important to weigh the benefits and challenges:

Pros:

• Increased Efficiency: More hands mean you can take on more work.
• Specialized Skills: Employees can bring expertise you may not have.
• Business Growth: With help, you can serve more customers and expand operations.

Cons:

• Added Responsibilities: You’ll need to handle payroll, taxes, and benefits.
• Higher Costs: Employees require wages, taxes, and possibly benefits.
• Legal Compliance: You must follow labor laws, including minimum wage and workplace safety rules.

 Further reading: The Pros and Cons of Hiring with an Employer of Record (EOR)

How Gloroots Can Help

Hiring employees as a sole proprietor may feel overwhelming, especially if you’re navigating compliance in multiple states or countries. That’s where Gloroots comes in.

Gloroots Simplifies Hiring by Offering:

• Payroll Management: Accurate and compliant payroll processing for your team.
• Tax Compliance: Ensures your business meets all tax obligations, locally and globally.
• Global Hiring Solutions: Hire employees anywhere in the world without setting up a legal entity.

With Gloroots, you can focus on growing your business while we handle the complexities of employment.

Conclusion

Yes, you can hire employees as a sole proprietor! It’s an exciting step that can help your business grow and reach new heights. However, hiring comes with added responsibilities, from payroll to labor laws.

By following the steps outlined in this guide and partnering with experts like Gloroots, you can confidently expand your team without the stress of compliance issues.

Ready to grow your team? Contact Gloroots today and let us help you navigate the complexities of hiring employees, no matter where in the world they are.

FAQ

1. Can a sole proprietor have employees?

Yes, a sole proprietor can legally hire employees. You will need to obtain an EIN, register with state tax agencies, set up payroll, and comply with applicable federal and state labor laws. There is no restriction on the number of employees you can hire as a sole proprietor.

2. Can a sole proprietor hire employees or independent contractors?

Yes, a sole proprietor can hire both W-2 employees and 1099 independent contractors. Employees are on payroll, while contractors invoice for their services. If you pay a contractor $600 or more in a calendar year, you must issue a Form 1099-NEC at year end.

3. How many employees can a sole proprietorship have?

There is no legal cap on the number of employees a sole proprietorship can have. You can hire as many employees as your business requires, as long as you comply with all applicable federal, state, and local tax and labor regulations.

4. Can a sole proprietor have full-time or W-2 employees?

Yes, a sole proprietor can hire full-time, part-time, or W-2 employees. You are responsible for withholding income taxes, contributing the employer share of FICA taxes, and complying with all state and federal employment laws for each person you hire.

5. Can you hire family members or a spouse as a sole proprietor?

Yes, sole proprietors can hire spouses, children, and other family members. Different tax rules apply to each. In the US, hiring your spouse exempts you from FUTA, while children under 18 are exempt from FICA taxes, and those under 21 are exempt from FUTA.

6. Does a sole proprietor count as an employee of their own business?

No, a sole proprietor is not considered an employee of their own business. Instead of a salary, they take an owner's draw from business profits. This means they pay self-employment tax on net earnings rather than standard employee payroll taxes.

7. Do sole proprietors need to provide benefits or workers' compensation?

Workers' compensation insurance is required by most states once you hire your first employee. Offering benefits like health insurance or retirement plans is generally optional, but providing a global benefits solution can help attract and retain top talent across locations.