Being a sole proprietor is the simplest form of business to run. Most of the time, it’s just you doing all of the work and calling all of the shots. However, once your 18 hour days start paying off and you have customers and the money coming in, you may consider getting some help and hiring employees to take on some of the work.
Can you hire an employee to help you take your business to the next level as a sole proprietor? As the title says, yes, you can. However, there are some things you need to know and start doing and some different options for you to look at.
Can a Sole Proprietor have Employees?
As a sole proprietor, you likely haven’t had to deal with much on the business side. You are the only employee, you haven’t registered as a business and you just pay your income tax on the money you make. However, there is nothing that says you can’t hire as many employees as you want.
You will have to follow labor and tax laws to hire an employee, and you should not just be handing them money and going on with business as usual.
You will need to look at ways to protect yourself and the business, filing taxes, and handling the administration of the employees. Consider the following:
The most important thing as far as the new employees will be concerned is how to pay them.
How do you Pay Employees as a Sole Proprietor?
Before you’re ready to hire and get your new employees to work, you need to understand how to pay them and what your responsibilities are. Do you just hand them a check, and they file their own taxes?
Online Payroll Companies
When setting up payroll for your new employees, outsourcing the process to an online payroll service is the simplest option. This type of service will handle all the tax requirements for your state and calculate everything required. You can also provide a report to the employee to know what is being done with their money.
Check Tax Forms
Once you hire an employee, they will need to fill out various forms and submit them to the IRS.
Calculate Withholding Tax
You can’t just hand all earned money over to the employee. You will be responsible for calculating and withholding some of it for tax purposes. You need to review:
Expected Costs When Adding Employees
As the employer, you will have some additional responsibilities to ensure your employee is looked after if they lose their job or have an accident.
FUTA
Federal Unemployment Tax is a tax you must pay. It contributes to the federal unemployment pool, which covers people who qualify for unemployment.
SUTA
State Unemployment Tax is another unemployment benefits tax you must pay to assist people who qualify for state unemployment benefits.
Workers' Compensation
Worker’s compensation is insurance for employees who become disabled or injured while working. It is mandatory, and each state provides slightly different options, so you must look up your state’s worker’s compensation requirements.
Risks to the Sole Proprietor of Having Employees
As a business, you always have risks you need to be aware of, however, when you start adding employees, your risks can go up, and the control is not always in your hands.
As a sole proprietor, you have no separation from your business. You and the business are considered the same entity. So any legal trouble your business gets into, it’s actually you as a person who will be responsible for it. This responsibility could put your personal assets at risk.
Anything your employee does, whether damaging something, getting into an accident, or performing a lousy job that ends up in a customer suing you, puts you legally and financially on the hook for the employee’s mistakes.
Risk Between You and Your Employee
One essential thing to consider is the risk of not carrying the proper insurance. Of course, when it comes to your employee, this would be the worker’s compensation insurance, which is mandatory, but nobody will be forcing you to buy it.
Suppose you do not get this insurance and your employee becomes injured or disabled. In that case, you are personally liable for the costs associated with the injury or disability.
Getting this insurance covers your costs, it assists your employee, and if the employee accepts this insurance, they waive their right to sue you later.
Tax Risks
Messing up your taxes is a risk whether you have employees or not. However, you must handle employee withholding tax correctly and pay all of your FUTA/SUTA tax.
You are responsible for collecting and paying all of these; failure to do so would cost you money and potentially other issues with the IRS and other government departments.
Final Thoughts
Adding employees to your business as a sole proprietor can free up your time and allow you to take on more business. However, there are complex requirements and risks involved when adding employees. Considering these two suggestions:
- 1Don’t do payroll yourself. Instead, get one of the recommended services listed above. They will handle all of the tax and calculations so that you don’t end up with costly mistakes.
- 2Consider if being a sole proprietor is still the best option as you grow your business. You are not protected, and employees can get you into trouble through their actions on the job. At the very least, see if there are business insurance options to cover you for lawsuits.