Can a Sole Proprietor Have Employees? (Detailed Guide)

Even when a small business begins as a sole proprietorship with a single business owner handling everything, growth and expansion are frequently the ultimate goals. To attain those objectives, sole proprietors will most certainly want some assistance along the road, which may include recruiting employees. You may be asking if a sole proprietor can have employees because it is not an officially registered business entity or recognized as its own tax entity. Well, the answer is yes. Read on to learn more about how sole proprietors handle employees.

What Is A Sole Proprietor?

A sole proprietorship is a business that is not formally registered with the state as an entity. It is run by a sole proprietor (either an individual or a married couple). The business owner and the business are regarded the same legal and tax-paying entity in a sole proprietorship. The lone proprietor is solely liable for all of the company’s legal and financial obligations.

The business income, costs, profits, and losses of a sole proprietorship are taxed on the individual business owner’s tax returns (using Schedule C of IRS Form 1040).

Can Sole Proprietors Have Employees?

Sole proprietors can and do hire employees. Many businesses begin with family members, but recruiting workers, whether related or not, adds another layer of complication to business administration. Employees must be paid, payroll taxes must be filed and remitted, and employment standards must be followed. However, if the employee is a spouse or kid, different tax rules may apply.

Can A Sole Proprietor Employ Himself?

A lone proprietor is NOT an employee of the company and may not be paid by it. Instead of receiving a salary or pay from the company, the lone proprietor uses “owner’s draws” (usually by writing business checks to themselves) to withdraw money from the company’s profits for personal use.

Because no taxes are withheld from the owner’s draws, the single proprietor is required to make quarterly estimated tax payments to the government based on the business’s expected taxable earnings each quarter. Income tax and self-employment taxes (Social Security and Medicare) are included in these quarterly tax payments.

Can A Sole Proprietor Employ His Spouse?

A married couple, rather than a person, may hold a sole proprietorship. If a spouse works as a partner in the business, the individual receives owner’s draws and is not rewarded through the conventional payroll procedure.

If the sole proprietor recruits their spouse as an employee, the spouse must be placed on payroll and pay income tax as well as FICA (Social Security and Medicare) taxes on their earnings. Their wages, however, are not subject to FUTA (federal unemployment tax).

Can a Sole Proprietor Employ their Children?

If a sole entrepreneur hires children (including their own), they must follow child labor regulations.

The age of the kid worker determines how taxes are handled. In general, the federal government follows the following guidelines:

FICA taxes (Social Security and Medicare) are not levied on children under the age of 18.
Employers are not required to pay FUTA on earnings earned by minors under the age of 21.
Children of any age are required to pay income tax on their earnings. Employers are required to deduct that tax from the child’s wages.

Because state and municipal tax regulations differ, company owners should verify with their state and local governments to see if children are exempt from paying income taxes.

What Do Sole Proprietors Need To Have Employees?

Now that we know the answer to the question “can sole proprietors have employees?” the next step is to hire some. To do so, sole proprietors must normally satisfy the following compliance-related responsibilities:

#1. Request an employer identification number (EIN).

EINs are issued by the federal government to firms for tax management purposes.

#2. Compile employee documentation

Employees must complete Form W-4, Individual Withholding Certificate, so that their employer knows how much income tax to withhold from their wages. They must also fill out Form I-9, Employment Eligibility Authorization, to prove that they are legally entitled to work in the United States.

#3. Employee policies and procedures should be documented.

Even the smallest firms should have formal policies in place, such as an employee handbook. This documentation often includes at-will employment status, pay schedules, benefits eligibility, equal employment opportunities, and certain other legal notices.

#4. Take out workers’ compensation insurance.

Workers’ compensation insurance is required in most states for businesses with one or more employees. It covers employees’ work-related injuries, rehabilitation, recovery, and medical expenditures, as well as lost time.

#5. Posters should be displayed at the workplace.

Certain workplace posters are required by the Department of Labor (DOL) and state and local labor authorities. A citation and/or a penalty may be issued if the correct information is not displayed.

#6. Create a record-keeping system.

Anyone who hires and pays employees is required to retain certain information about each employee on file for defined periods of time. Name, date of birth, normal pay rate, hours worked, overtime compensation, deductions from earnings, pay dates, and so on are examples of obligatory payroll records.

#7. Select a payroll method.

Sole proprietors may be tempted to run payroll and file taxes manually, but the process is hard and entails a significant level of risk if errors occur. Alternatively, outsourcing payroll and tax administration to a seasoned source like as ADP can help you save both time and money.

How do Sole Proprietors Pay Their Employees?

Sole entrepreneurs pay their employees in the same way that larger corporations do, but on a smaller scale. Here are the fundamental steps:

#1. Determine your gross pay.

Employers multiply the total hours worked by the hourly wage for non-exempt, hourly workers. If there is any overtime, the employer must multiply the number of overtime hours worked by the applicable overtime rate and add it to the base salary. Employers divide the annual compensation of exempt employees who earn a wage by the number of pay periods.

#2. Pre-tax deductions should be withheld.

If an employer runs a pretax health care or retirement savings plan, employee contributions to those benefits are deducted.

#3. Retain statutory deductions

Employers are required to withhold federal income tax, FICA taxes, and any other state or local taxes that apply.

#4. Retain post-tax deductions

Post-tax deductions apply to some forms of voluntary benefits and, if necessary, wage garnishments.

#5. Pay employees

Employers can pay employees through direct deposit into their bank accounts or, depending on state regulations, another electronic means such as paycards. Traditional paychecks are likewise legal in every jurisdiction.

When Should I Upgrade From A Sole Proprietorship To A Corporation?

If you own a sole proprietorship, you’re not alone—it’s the most frequent type of company entity, according to the Small company Administration (SBA). Many business owners operate under their own names. However, you may have filed a DBA (doing business as) to operate under a fictitious name.

Still, you may be wondering when is the best moment to convert to a Limited Liability Company (LLC). Before making a decision, seek legal counsel, although it may be time to improve your legal entity if:

You bring on a full-time, permanent employee.
Your customer base is growing.
Your company’s assets and income are increasing.

Choosing a sole proprietorship may be the simplest option, but it may not be the best. For example, there is no separation between the business and you—if a client or employee sues you, you may lose both your business and your personal assets.

By converting to an LLC, you can restrict your personal legal liability. They can be used to own and administer almost any form of business and have numerous advantages, including:

Pass-through taxation to your personal income tax return
Personal asset protection
Because it does not require officers or board meetings, it is simple.
The legitimacy of having a registered business name

Can A Sole Proprietor Have Investors?

A solo owner may accept outside finances, but he or she is not permitted to form partnerships or attract investors by providing stock.

Are All Self-Employed People Sole Proprietors?

A sole owner is considered self-employed because they run their own business. A self-employed person is simply someone who works for himself or herself. It’s simply a commercial word.

What Is The Lifespan Of A Sole Proprietorship?

A sole proprietorship can persist as long as its owner is alive and wants to keep the firm going. The sole proprietorship ceases to exist when the owner dies. The business’s assets and liabilities become part of the owner’s estate.

How Do I Know If I’m a Sole Proprietor?

A sole proprietor is an individual who owns an unincorporated business on his or her own. If you are the sole member of a domestic limited liability company (LLC), you are not considered a sole proprietor if you choose to handle the LLC as a corporation.

In Conclusion,

Most small businesses want to expand, which usually means hiring extra employees to help handle the increasing volume. Even sole proprietorships can hire employees. However, there are significant dangers involved. Expanding sole owners may eventually desire to restructure their organization for liability protection.