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.

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. Understanding how to hire the right employees for your startup is essential, from setting expectations and negotiating compensation to 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

1. 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.

2. 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.

3. Can a Sole Proprietor Hire 1099 Employees?

Yes, a sole proprietor can hire international contractors or domestic 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. Managing multiple contractors is easier with a dedicated contractor management platform. If you need an intermediate classification, a contractor on record solution can help you engage contractors while staying compliant.

4. 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, employee 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.

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 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. Businesses with global teams can also leverage a global benefits solution to manage multi-country benefits more efficiently.

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.

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.

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 and solid payroll management tips to simplify and streamline 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. Understand the pros and cons of hiring with an Employer of Record (EOR) to decide if it is the right fit for your business. An EOR is a third-party service that handles 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 Employer of Record (EOR) services. An EOR does not 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 challenges of hiring international employees, avoid legal issues, and ensure a hassle-free collaboration. Use Gloroots' global EOR country guides to understand the specific employment requirements for each country you are hiring in.

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. For businesses looking to expand internationally, Gloroots also offers global expansion consulting services to guide your growth strategy.

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. Follow our step-by-step guide on how to hire employees as a sole proprietor, or let Gloroots handle all the onboarding and payment processes, from global employee relocation services to global device management, while you focus on growing your business. Get in touch with Gloroots.

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.