Can a Sole Proprietor Have Employees?

Sole proprietors don’t have to run the ship alone. Here are some things you should know about hiring staff for your small business.

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Can a sole proprietor hire employees?

Yes! Although a sole proprietorship does not constitute a separate entity, it is possible for business owners to hire employees provided they comply with all labor and tax laws. You, as an employer, are responsible for all bookkeeping.

Sole proprietors must report all income and expenses to their tax returns, including any wages they pay.

What does it mean to be a sole proprietor? A sole proprietorship is the most basic structure for running a business. This is not a legal entity. The term refers to the owner of the business who personally backs the debts. This means that your business finances and liabilities are entirely yours.

Sole proprietors report all of their business income and expenses on the Schedule C of their personal IRS Form 1040 income tax return. Most sole proprietors are small-business owners, but they may also look to expand. This is when you can hire employees.

Can you hire your spouse?

Yes! You can employ your spouse as an employee if you are sole proprietor. A sole proprietor can hire their spouse but they must actually hire their spouse. Your spouse must perform essential functions to help your business run.

Here’s what to keep in mind if you hire your spouse:

  • Federal taxes. Your spouse’s wages will be exempted from the federal unemployment tax (a.k.a. FUTA). FUTA. The FICA taxes may include the first two tax liabilities.
  • State and local taxes. You may have to deduct or remit state or local taxes from the wages of your spouse in addition to federal taxes. Seek legal advice from a small business tax expert in your area to find out for sure.
  • Benefits. You can have your spouse enroll in the sole proprietorship’s healthcare plan. It is important to note the amount of your spouse’s healthcare benefits in order to deduct them from your tax return. You may also be eligible to deduct other benefits, such as transportation discounts, commute plans, or group life insurance. This applies to your spouse’s expenses related to travel.

Can you hire your children?

Yes! You can also hire your spouse if your business is sole proprietor. Remember that your business is still subject to child labor laws if you hire your children and not someone else’s.

If you’ve hired one of your children who’s under 18 years old, you don’t need to withhold and remit FICA taxes on their behalf. The same is true for FUTA taxes if your child is under 21 years old. No matter what age your child is, you must still withhold and pay income taxes. These tax experts are available to answer any questions you may have about withholding or remitting taxes for your children.

What you need to start hiring

Before you start hiring, make sure you’re prepared to carry out all our obligations as an employer. This is a quick checklist that will help you get started.

  1. Employer Identification Numbers. Register with the IRS to obtain your Employer Identification Number (or EIN) if you plan to become an employer. This unique number will be used in your tax filings. Your state tax authorities might issue another identification number to your business.
  2. Licensing and Permits. You are likely to know that as a sole proprietor you must comply with all state and local licensing and permit laws. You should be familiar with any local regulations regarding hiring employees. To expand your business, you might have to move to a commercial zone.
  3. Tax Obligations. You, as an employer, will be responsible for ensuring that your employees complete all necessary paperwork such as the W-4 and I-9. Also, workers’ compensation benefits, such as workers’ compensation, are covered. As soon as the new hire joins your company, ensure that you withhold the correct amount from their paychecks. Also make sure to file all tax forms promptly.
  4. Employment Forms. You may need additional forms to keep track of the employment of your new staff member. Consider creating an employee handbook for your employees. They should sign it to confirm that they have read it. Any additional paperwork that you feel necessary can be provided.
  5. State Labor Department Registration. To open a business solely as a proprietor, you need to register your do-business-as name (DBA). Your state will automatically make your business a sole proprietorship when you file a DBA and no other paperwork. You need to apply for government permission before you can do business under any name other than your legal name.
  6. Business Insurance. Business insurance is required for all business owners, even small-sized ones like sole proprietorships. Certain types of business insurance are required by law, including workers’ compensation. Other types of business insurance are strongly recommended to protect your business from a lawsuit or natural disaster. Since sole proprietorships do not offer limited liability protection, this can also affect your personal assets.
  7. Legal Advice. Regardless of how much information you have about hiring employees for a sole proprietorship, it is still important to seek professional legal advice. Their advice is invaluable. Tax and small-business attorneys are experts in the details of local and state employment laws. You should be safe. You don’t want to get into trouble as soon as your sole proprietorship is established.

Is a sole proprietorship right for you?

Although sole proprietorships are common, some small business experts believe that other types of business entities are more conducive to hiring employees. Let’s take, for example, an employee gets hurt or becomes ill at work and you don’t have worker’s comp insurance. Your employee could easily sue you in this situation, and they may win. This situation puts your personal assets at risk as a sole proprietor.

You lose personal liability when you register your company as a limited liability corporation (LLC). This business structure allows you to separate your personal and business assets. It also reduces your risk for employee affairs. To register your LLC, you will have to give up your sole proprietorship. However, other unincorporated businesses like partnerships can also be LLCs. S and C corporations cannot be LLCs.

The below SmartBiz Loans (r) blogs can help you figure out which of the above business structures is best for you:

  • LLC vs. C Corporation: The Similarities and Differences. Both LLCs and corporations have similar registration processes and liability protections. These two business structures are very different.
  • S Corp vs. C Corp: Advantages and Disadvantages. There are four main differences between S and C corporations. Find out which difference is most important to your company.
  • Partnership Vs. S Corp: Differences You Should Know About. S corporations and partnerships have similar ownership structures and are both pass-through entities. They can also differ significantly, which could have serious implications for your business.
  • The Biggest Advantages of a Sole Proprietorship. Perhaps sole proprietorships may be the best structure for you business. This guide will help you make a decision about whether sole proprietorships are right for your business.

What’s next? If your small business is expanding and you are looking for an additional boost, start SmartBiz Advisor today to find out if you are Loan Ready. This online educational tool provides you with tailored insights and recommendations that will help you improve your credit score.

WHAT YOU NEED TO KNOW: The SmartBiz(r) Small Business Blog and other related communications from SmartBiz Loans(r) are intended to provide general information on relevant topics for managing small businesses. This is not an exhaustive analysis of the topic and does not make any recommendations for your business. For more information, please consult financial and legal professionals.

SmartBiz Team
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