Many people think of sole proprietorships as small, one-person firms. The proprietor is hidden away in a little home office, working long and irregular hours to keep their firm running.
While this image may be accurate for certain sole proprietorships, it is far from accurate for all of them.
Businesses will presumably expand. As your sole proprietorship expands, you may realize you require assistance to keep up with all of the tasks. So you decide to hire someone. But can a sole proprietor have employees? Or do you need to change the structure of your company?
What is a Sole Proprietorship?
A sole proprietorship is defined by the Small Business Administration as an unincorporated business owned and operated by one person, with no distinction between the business and the owner. The sole proprietor is entitled to all earnings and is individually liable for any debts, losses, and obligations incurred by the business.
Because the owner and his or her business are deemed one and the same for tax purposes, the income of the sole proprietorship is the income of the owner.
A sole proprietorship is not regarded as a separate legal entity, even if it operates under a fake name or trade name. Instead, it refers to the person who owns the entire company.
If you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you prefer to treat the LLC as a corporation, according to the IRS.
What is a Common-law Employee?
According to the IRS, anyone who performs services for your firm is deemed an employee (rather than a contract worker) if you control both what must be done and how it must be done.
The IRS suggests three main elements to determine whether a person delivering a service is an employee or an independent contractor based on the business’s degree of control and monitoring.
- Behavioral: Does the company have the authority to control what the employee accomplishes and how he or she does his or her job?
- Financial: Does the business control the business parts of the person’s job (including compensation, reimbursements, and tools and supplies provided)?
Is there a written contract or employee-type perks, such as a pension plan, insurance, or vacation pay? Will the working connection be maintained, and is the work done an important component of the business?
Can a Sole Proprietor Have employees?
A sole proprietor can and does hire employees. Many businesses begin with family members, but recruiting workers, whether related or not, adds another layer of complication to business administration. Sole entrepreneurs must pay their employees, submit and remit payroll taxes, and follow employment requirements. However, if the employee is a spouse or kid, different tax rules may apply.
Hiring a Spouse
If a spouse is a genuine employee rather than a company partner, the sole proprietor is exempt from paying federal unemployment tax (FUTA) on their spouse’s earnings. However, spouses are still subject to federal income tax and the federal insurance contribution act (FICA).
Here are some things to consider if you hire your spouse:
#1. Federal income taxes
When you hire your spouse, their wages are not subject to federal unemployment tax (a.k.a. FUTA). Nonetheless, you must subtract the three most important types of work taxes: Social Security, Medicare, and income taxes. The first two of these three tax responsibilities may sometimes be combined together under the name FICA taxes.
#2. Local and state taxes
In addition to the federal taxes mentioned above, you may be required to deduct and remit state and local taxes from your spouse’s salary. To be certain, seek legal counsel from a small company tax expert in your area.
#3. Benefits
Your spouse is eligible to participate in your sole proprietorship’s employee healthcare plan. You should also keep track of your spouse’s healthcare benefits so that you can deduct them from your tax return. Transportation discounts, commute plans, and group life insurance may also be tax-deductible. The same is true for your spouse’s business travel expenses.
Recruiting your children.
Depending on the age of the child, sole owners who hire their children withhold taxes differently. The following are some general guidelines:
- FICA taxes are not levied on children under the age of 18.
- Children under the age of 21 are exempt from FUTA taxes.
- The federal income tax applies to all children, regardless of age.
What is required for hiring?
Now that we know the answer to the question “can sole owners have employees?” the next step is to hire some. To do so, sole proprietors must normally satisfy the following compliance-related responsibilities:
What Paperwork does a Sole Proprietor Need for their Employees?
In addition to the previously mentioned Form W-4 and Form I-9, sole proprietors may require the following documentation from their employees:
- A job application and a completed offer letter signed
- If different from the federal Form W-4, state withholding certificates are required.
- Bank account information for direct deposit purposes
- An employee handbook or corporate policy signed recognition
- Forms for authorizing participation in health care or retirement savings programs
- The specific papers necessary will vary according to the individual business and state of employment.
How Does a Sole Proprietor Compensate their Employees?
Before you begin the process of attracting a qualified recruit, you should first learn how to compensate them. It may appear difficult to learn how to pay employees as a sole proprietor. It isn’t as straightforward as handing over a few dollars.
#1. Obtain tax forms from your employee.
According to the IRS hiring handbook, new and current employees must complete and submit the following forms:
- W-4 form from the IRS
- If applicable, a state tax withholding form
- Form I-9
#2. Determine your pre-tax pay.
Determine how you will compensate your employees. The following are the most typical types of compensation:
- Wage per hour
- Annual salary
- Commission
Then, decide how frequently you’ll pay your employees (typical pay periods are weekly, biweekly, semimonthly, or monthly), and compute the gross salary for each employee each pay period.
#3. Determine the amount of withholding
The tax forms that your employees complete determine how much of their pay you must withhold for tax purposes. Consider the following:
- Federal income taxation
- Income taxation in the state
- Local taxation
- FICA (Social Security and Medicare taxes)
- The federal unemployment insurance tax
- Deductions for medical expenses and other perks
The quantity of salary your employee receives is determined by the amount of withholding. For example, if an employee earns $1,500 and you must withhold $380 for taxes, the employee’s net compensation is $1,120.
#4. Paycheck Distribution
Paycheck distribution is straightforward if you use direct deposit—just refer to the bank information the employee provided on their direct deposit form. You might also have your bank or payroll company write checks for you.
#5. Pay taxes and benefits
The final step is to pay your tax liability and benefits. You may be required to file taxes with the Internal Revenue Service, your state’s tax collection agency, and your city’s tax collection agency.
Another percentage of withheld pay may be used for employee benefits such as health insurance, retirement plans, or health savings accounts.
How Many Employees Can a Sole Proprietor Have?
There is no right or wrong number of employees for a sole proprietorship. However, because sole proprietors are solely liable for their employees’ activities, many restructure their businesses as they develop. Because of the liability protections they provide, LLCs are a popular choice.
Can a sole proprietor employ employees who receive Form W-2s?
Sole proprietors, like other firms, can hire full-time employees or outsource work to independent contractors. They must be cautious in any instance to avoid misclassifications, which can result in severe penalties.
What About Self-Employed Workers?
Employees have a potential option in the form of independent contractors. Independent contractors, often known as freelancers, are typically engaged to execute a specific assignment (web development, bookkeeping, etc.). They might be hired on a temporary or permanent basis.
Depending on your industry, hiring an independent contractor may or may not be beneficial to your company. They are usually experts in their field, therefore they charge more per hour than you would pay an employee. However, because they are not employees, you do not need to carry workers’ compensation insurance or keep track of any employment forms (W-4, I-9, etc.).
It all boils down to your requirements. So, consider hiring an independent contractor if the project can be done remotely. If the project cannot be completed remotely, you will need to hire someone.
When should I transition my firm from a sole proprietorship to a corporation?
If you own a sole proprietorship, you’re not alone—the Small Business Administration reports that it’s the most prevalent business entity (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 it is a suitable time 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:
- Personal asset safeguarding is
- Taxation applied to your personal income tax return via pass-through
- Because it does not require officers or board meetings, it is simple.
- The legitimacy of having a registered business name
Another way to limit your liability is to perform a small business health checkup and purchase small business insurance. In reality, you can receive quick, low-cost coverage in minutes. There is no waiting with Huckleberry because everything is online.
Hiring Employees as a Limited Liability Company vs. a Sole proprietor
Some small business owners establish a Limited Responsibility Company (LLC) to reduce personal liability or to operate under a business name by establishing a separate legal organization for their company.
W-2 employees and independent contractors can also be hired by LLC owners. The same rules regarding tax filing apply.
Organizing your company as an LLC entails more paperwork than a sole proprietorship, but it also provides the following benefits:
- Your assets will be safeguarded.
- Tax filing flexibility (choose to file as a sole proprietor or corporation)
- The Small Business Administration website provides materials to assist you in determining which business structure is right for you.
Yes, self-employed business owners can hire employees.
Running a sole proprietorship does not require you to be a one-person operation. It basically indicates you are the sole proprietor of the company. As your business expands, you can hire independent contractors and even full-time employees.
What Limits A Sole Proprietor?
One of the limits to sole proprietorship is that you have unlimited debt obligation because there is no legal distinction between personal and commercial assets. Your ability to raise cash is restricted. You are solely responsible for making day-to-day company choices.
Sole Proprietorship FAQs
Can you pay yourself as an employee in a sole proprietorship?
You do not pay yourself a salary as a sole proprietor, and you cannot deduct your salary as a business expense. Your “salary” is technically the profit (sales minus expenses) that the company makes at the end of the year. You can hire additional employees and pay them a salary. You just cannot pay yourself in this manner.
How many employees can a sole proprietorship have?
There is no limit to the number of employees you can hire.
How do sole proprietors get employees?
To hire employees, you must obtain an employer identification number from the IRS. Your employees must complete a W-4 form so that you can issue a W-2 to them at tax time.
Can a owner of a business be an employee?
In general, the owners of an LLC are not regarded as employees of their company and are not entitled to earnings or salaries. Instead, the owner of a single-member LLC is considered a sole proprietor for tax purposes, while the owner of a multi-member LLC is treated as a partner in a general partnership.
Can a sole proprietor have employees in Singapore?
Yes, a sole proprietor can have employees in Singapore.
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