The Powerful Guide for Hiring Employees as a Sole Proprietor

Big tech companies and corporations steal the spotlight, creating a picture of their significant impact on the business landscape. But, in reality, small businesses are the lifeblood of an economy.

A recent study done in the US shows that out of 33.2 million small businesses, 27.1 million are run by sole proprietors.

A sole proprietorship is a simple business structure where a single individual owns and operates a business. Here, the owner is entirely responsible for managing every aspect of the business, including the business's legal and financial liabilities. 

Besides enjoying the business's profits, they are also responsible for its debts, losses, and liabilities.

As a sole proprietor, when your business grows, you may need an employee to handle the increased workload. But can a sole proprietor have employees? 

This article will answer your questions about hiring employees as a sole proprietor and how an EOR can simplify the onboarding process.

Can you hire employees as a sole proprietor?

Yes, you can hire employees to work for your business. 

Before eBay became an established company, the online trading platform was a sole proprietorship started by Pierre Omidyar. It was initially named and operated as Auction Web. Before its name change, the company had already sold millions of items and hired several employees.

So, even though you start as a sole proprietor, you can bring in more people as your business grows with time. However, it’s essential to follow standard employment practices, including setting expectations, negotiating compensation, and adhering to relevant labor laws.

In most cases, sole proprietors hire family members, especially spouses or children. However, different tax requirements come into play when employing a spouse or a child.

Key Considerations for Sole Proprietors Hiring Employees

Can You Hire Your Spouse? What Are the Tax Implications?

Yes, you can hire an immediate family member, like your spouse, to join your team as an employee. The tax implications change for every country.

In the US, you don't have to pay federal unemployment tax (FUTA) on your spouse's income, but your spouse is still subjected to federal income tax and Federal Insurance Contribution Act (FICA) taxes.

In Canada, when you hire your spouse as an employee, they are subjected to federal and provincial income taxes, the Canada Pension Plan (CPP), Provincial Payroll Taxes and Employment Insurance.

Note: Some sole proprietorships are jointly owned by a couple rather than an individual. Here, the spouse works as a business partner, then they receive compensation through the owner's draws and aren't salaried traditionally.

Can You Hire Your Children?

The answer is a big yes. If you want to get your children involved in business, you can hire them as employees. But you must ensure you meet the labor and tax regulations.

In the US, if your child is under 18, they aren't subjected to FICA taxes. Meanwhile, if your child is under 21, they need not pay FUTA tax. However, children of all ages must pay federal income tax

Unlike the US, children of all ages in Germany are liable to pay income tax if their income exceeds a certain threshold.

Can a Sole Proprietor Hire 1099 Employees?

Yes, a sole proprietor can hire 1099 employees or independent contractors, like freelancers and consultants, to work on their team. But they won't be on the company's payroll. Instead, they send invoices to the business and get paid.

However, if you have paid them more than $600 in a year as a sole proprietor in the US, you must issue them a Form 1099-NEC (Non-Employee Compensation) at the end of the tax year.

Is There a Cap on the Number of Employees You Can Hire?

There is no such limit. While 84% of small businesses have no employees, 16% have between one and 19 employees. As long as the sole proprietors adhere to their tax obligations, they can hire employees to undertake their business tasks. 

What Does a Sole Proprietor Need to Hire Employees?

Here's a list of the necessary tax documentation and accounts you need for hiring employees in the US as a sole proprietor:

Apply for an EIN (Employer Identification Number): Obtain your unique IRS-issued EIN for tax administration purposes for your business. The federal government uses this ID number to track employers' tax remittances from employee withholdings, payment of the employer’s share of FICA taxes, and payment of FUTA tax.

Payroll tax registration: Register with state and federal tax authorities for tax reporting and tracking. Since the requirements and process differ for each business, you must research the rules that apply to them and seek help from an accountant for insights.

Employee documentation: Having official policies or an employee handbook is crucial, even if you are a sole proprietor. They cover at-will employment status, benefits eligibility, pay schedules, equal employment opportunities, and other notifications required by law.

Workers' compensation insurance: Protect your employees from work-related injuries by carrying workers' compensation insurance. This covers rehabilitation, recovery, or medical bills for employees' work-related injuries.

Form I-9: The employee is asked for a completed Form I-9 (Employment Eligibility Authorization) to certify the individual is legally eligible to work in the US.

Form W-4: Employers must have a completed Form W-4 (individual withholding certificate) from each employee. This helps them calculate the income tax to withhold from the individual's wages during each pay period.

State Tax Withholding Form: While some states go by the withholdings on the W-4, some states may expect employers to have their employees complete an official state form to determine how much state income tax to withstand.

Set up a recordkeeping system: Any employer who is hiring and paying their employees must establish a secure file system with employee details. The details include name, date of birth, regular pay rate, hours worked, deductions from wages, deductions, pay dates, etc.

How Do Sole Proprietors Pay Employees?

As a sole proprietor, it's your job to figure out the best way to pay your employees.

Most small businesses pay employees weekly or biweekly, either via physical paycheck or direct deposit.

Some states in the US allow businesses to pay their employees through prepaid payroll cards. Here, the sole proprietor allocates a certain amount to the employee's card account, which the employee can use, like a debit card, to make purchases without cash, etc. If you plan to issue such a card, ensure to deduct the required tax withholdings.

In addition, when providing benefits like medical insurance, health savings accounts, or a 401(k) plan, deduct the corresponding contributions from your employee's paychecks.

These deducted amounts must then be forwarded to the healthcare provider or financial institution handling the 401(k) plan.

Also, employers must withhold other obligatory deductions, such as court-ordered wage garnishments for child support or back taxes, from an employee's pay.

Paying employees as a sole proprietor in Australia involves registering with the ATO (Australian Taxation Office), managing payroll, contributing to superannuation, reporting through STP (Single Touch Payroll), and maintaining proper records. Also, special tax rules apply to spouses or child employees. It's best to consult the ATO or a tax agent for guidance.

Note: Do sole proprietors pay themselves a salary? The answer is no. Because sole proprietors are not employees, they can't earn a salary. Instead, they receive payment via an owner's draw from the business's profits.

Can Sole Proprietors Handle Payroll on Their Own?

Yes, sole proprietors can handle payroll on their own.

However, paying your employees as a sole proprietor is tedious and confusing. You must calculate gross pay, withhold pretax deductions, statutory deductions, and post-tax deductions and then finally make the payment. 

Also, even a small error can result in penalties. This is why you need robust payroll software that simplifies and streamlines the payment process. 

What if there's a solution that can handle all the complex tax regulations, take care of employee documentation and onboarding, process payroll, and provide global expansion support?

That’s where an Employer of Record comes in. An EOR is a third-party service provided by companies to handle various employer responsibilities like those mentioned above. 

How Can EORs Help Hire Freelancers and Contractors from Abroad?

If you want to hire freelancers or contractors for your sole proprietorship, get help from an employer of record (EOR). EOR doesn't participate in hiring, but it acts as a bridge between sole proprietors and freelancers or contractors from abroad and aids in onboarding them.

It can navigate the complexities of international employment laws and regulations, avoid legal issues, and ensure a hassle-free collaboration.

Next, an EOR handles all the paperwork and administrative tasks, including contracts, payroll, and taxes, saving you time and minimizing the chances of human errors.

Start Your Hiring Journey with an Effective EOR Solution Like Gloroots

Building a successful team is a dream for every sole proprietor when their business starts blooming. 

However, hiring employees as a sole proprietor might be daunting, especially if you are tapping into the pool of global employees. Let Gloroots handle all the onboarding and payment processes while you can focus on growing as a sole proprietor. Get in touch with Gloroots.