What is a sole proprietorship?
A sole proprietorship is a one-person business that’s unincorporated. The individual owner of the business (referred to as the sole proprietor) is legally responsible for the business’s liabilities, losses, and debts. Also, the owner of the company enjoys all the profits.
But is a sole proprietor considered an employee? Put simply, sole proprietors are self-employed, and the Internal Revenue Service (IRS) considers the owner and the business as one legal and tax-paying entity.
As the sole proprietor, you conduct business under your legal name and pay personal income tax on the business profits you earn. This is the easiest way to set up a sole proprietorship, as you’re not legally required to file paperwork for registration at the local, state, or federal levels.
However, you may have to apply for a business license or an occupancy permit, subject to your local jurisdiction. If you operate under a trading name instead of your legal name, most local authorities will demand you register a DBA (“doing business as”) name.
The million-dollar question you’re most likely grappling with, especially if your business is quickly scaling, is, "Can you hire employees as a sole proprietor?"
Let’s dig in and find out.
Can I have employees as a sole proprietor?
If you've been wondering, "Can I hire employees as a sole proprietor?" the answer is "yes."
You can hire employees as a sole proprietor, but you must follow the local ttax and labor laws. Tax laws relating to hiring spouses and children may contain special provisions you must satisfy.
Working with a resourceful human resource (HR) partner like Skuad that is well-versed in global tax and labor laws helps hire employees the right way. Before we guide you on how to hire employees as a sole proprietor, we’ll help you determine whether it’s best to work as a sole proprietor or independent contractor.
If a sole proprietorship is the best fit for you, here’s how hiring a spouse and children works:
Hiring a spouse
If you own a sole proprietorship as a married couple, your spouse works in the business as a partner, and you can’t hire them as an employee. Just like a sole proprietor isn’t considered an employee of the business, the same goes for your spouse, with whom you own the company. In such a case, you and your spouse earn money from the owner’s draw.
However, if your spouse isn’t a partner and you decide to bring them on board, you must put them on the payroll. The spouse will pay income tax and Federal Insurance Contribution Act (FICA) tax. However, you will not pay Federal Unemployment Tax Act (FUTA) tax on the spouse’s wages.
While your spouse may be able to help you manage everyday tasks, Skuad advises sole proprietorships to outsource critical admin tasks like bookkeeping as their businesses expand.
Hiring your children
When you start wondering if you can hire employees as a sole proprietor, you most likely want to involve your children in your business.
When you hire your children, you’ll be subject to the following labor and tax regulations:
- You won’t pay FUTA tax if the children under 21 years old
- You’ll withhold your child’s income tax pay
- Your children won’t pay FICA tax if they’re under the age of 18
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What does a sole proprietor need to hire employees?
Now that the question, “Can I hire employees as a sole proprietor?” has been answered, let’s explore the tax requirements you’ll have to satisfy to hire staff.
Here’s a list of necessary tax documentation and accounts you’ll need:
- EIN (Employer Identification Number): Obtain an IRS-issued EIN for tax administration purposes
- Payroll tax registration: Establish state and local payroll tax accounts for tax reporting and tracking
- Employee documentation: Obtain duly filled Form W-4, Form I-9, and State Tax Withholding Form from your employees
- Workers’ compensation insurance: Carry this insurance to cover medical, lost wages, and rehabilitation costs
- Record-keeping system: Establish a robust and secure data and file system to archive employee details
How do sole proprietors pay employees?
Once you know how to hire an employee as a sole proprietor, you must figure out the best way to pay them. First, you'll choose a payroll schedule that fits your business and employees. Then, you'll establish each employee's deductions and tax withdrawals. These may be wage garnishments, requisite tax withholdings, and employee contributions.
Sorting out these payroll requirements streamlines your sole proprietorship taxation process. It also helps you calculate your employee’s take-home pay.
Here are five steps to follow when calculating employee pay:
- Calculate gross pay: Total hours worked × hourly rate
- Withhold pre-tax deductions: Deduct relevant employee contributions
- Withhold taxes: Federal income tax, FICA taxes, and other pertinent taxes
- Withhold post-tax deductions: Deduct voluntary benefits
- Pay workers: Remit net pay to employees
Besides helping you establish fair pay for your employees, these processes help you determine your cost per hire and improve it as your business grows and welcomes more employees.
How can Skuad help?
With Skuad as your partner, you can hire employees as a sole proprietor across the globe seamlessly. We leverage our global expertise in HR administration to help small, medium, large, and one-person businesses like yours hire and pay internationally without establishing a local entity. Talk to our experts to start your global hiring journey!
1. Can a sole proprietor have 1099 employees?
Yes. A sole proprietor may hire 1099 employees (independent contractors such as freelancers and consultants) to undertake business tasks.
2. How many employees can a sole proprietor have?
Sole proprietors can hire any number of employees as long as they satisfy pertinent tax obligations.
3. Can a sole proprietor be a w2 employee?
No — the IRS considers a sole proprietor as self-employed, not an employee of the sole proprietorship. Therefore sole proprietors cannot issue themselves a W-2 tax form, so they can't be W-2 employees.