Many people think that a sole proprietorship is a small one-person enterprise. The owner hides in a small home office and works for a long time and at odd hours to maintain his business. This image may apply to some self-employed individuals, but it is definitely not applicable to all self-employed individuals.
We hope that the business will continue to grow. As your independent business grows, you may find that you need help to overcome any challenges. Therefore, you decide to hire employees. But is it possible for employees to become sole proprietorships? Do you need to reorganize your company?
What is a Sole Proprietorship?
In terms of operating a business, a sole proprietorship is the simplest structure. It is not a legal entity; the term refers only to the person who owns the company and personally holds its debts. This means that most of your company’s finances and liabilities belong to you.
The sole proprietorship reports all its business income and expenses in Appendix C of its IRS 1040 personal income tax return. Sole proprietorships are usually small businesses, but sometimes they want to expand. Hiring employees can help here.
Can Sole Proprietor Hire Employees?
Although a sole proprietorship is not technically a for-profit organization, the owner can hire employees. There is no limit to the number of employees that a self-employed person can employ. As an employer, a sole proprietorship is responsible for correct tax declaration and management for these employees. Some sole proprietorships choose to use independent contractors.
There are many reasons for this situation, including less responsibility to the owner and greater planning flexibility. For self-employed contractors, the owner only pays the agreed fee, which requires less bookkeeping. The use of independent contractors is shown in tax returns and some insurance documents.
What is Needed to Have Employees?
1# Licenses & Permits
Sole proprietorship must comply with state and local licensing and approval guidelines. These laws may require individual owners to obtain licenses or permits to conduct business in accordance with local land use, zoning or noise laws.
For businesses, like half of the businesses in the United States, local land use regulations can severely limit the number of employees you can have on the premises or the parking options for employees and customers before you can engage employees.
2# Employer Identification Number
A sole proprietorship that wants to hire employees must register as an employer with the tax bureau and obtain an employer identification number or EIN. EIN is equivalent to a personal social security number and is used to identify your sole proprietorship in all tax returns.
You also need to register the company with the state tax office, which can issue a separate state tax number, because most state labor laws require you to report all new employees to the state tax office or labor office.
3# Tax Incentives and Responsibilities
Like any other business, a sole proprietorship must pay state and federal income taxes for all employees, including payroll taxes, state and federal income taxes, and employee income taxes. In addition to the owner’s self-employment tax, medical assistance withholding tax is also required.
You must also correctly classify all independent contractors and provide the necessary tax records. The hidden tax advantage of a sole proprietorship is that you can hire minor children without paying wage tax on their salaries. This feature can save a family thousands of dollars in taxes each year, and is not suitable for other forms of agriculture.
What Happens if You Hire Your Children?
Even if you hire your own children, you must comply with child labor laws. Your tax liability may vary depending on the age of your child. You do not have to withhold or pay any FICA dues until your child turns 18 years old. You do not have to pay FUTA tax until your child turns 21.
Regardless of the age of the child, you must always withhold federal income tax. Please consult your state to see if you and your children are exempt from state tax.
What Happens if a Sole Proprietor Hires His/Her Spouse?
As a sole proprietor, you can hire your spouse as employee of the business, but they must be legal employees. Do not try to sneak into the IRS by adding your spouse as an employee, unless you are working as a legal employee.
If your spouse is your employee, your salary is not subject to Federal Unemployment Tax (FUTA), but your salary is still subject to federal income tax and FICA. Please consult your state to find out what state taxes you must pay.
If you provide medical benefits to employees, your spouse can apply for benefits. You are covered by your spouse’s plan. In addition, benefits will be deducted from your spouse’s salary and deducted from your C form.
Other benefits that can be deducted from your spouse’s salary and are tax-exempt include group life insurance, meals, accommodation, and transportation.
How to Upgrade Your Business Structure?
If your business expands to the point where you need additional help, you may want to consider moving to a limited liability company (LLC) or corporation. The main reason for this situation is responsibility. If an employee gets injured at work, they can sue the business and it is very likely that you will lose a lot of personal property.
Establishing a legal enterprise, such as an LLC, can protect your personal assets in the event of a legal dispute. A law firm is more difficult to dissolve than a sole proprietorship, requiring more paperwork and bookkeeping, but it is worth it. Protect your hard-working business.
The Bottom Line
So, the answer to a sole proprietor having employees at the firm is YES! Although a sole proprietorship is not an independent company, as long as it complies with all relevant tax and labor laws, entrepreneurs can still hire employees. As an employer, you are responsible for keeping accounting records. A sole proprietorship declares income and expenses on the tax return, including the amount paid to employees.
So, keep all the above-mentioned information in mind before hiring employees for your sole business!