Can a Sole Proprietorship Have Employees — and How Do You Hire Legally?

A sole proprietorship is the simplest form of business ownership — one person runs and manages everything. But many new entrepreneurs wonder: can a sole proprietorship have employees? The answer is yes. While a sole proprietorship has a single owner, it can legally hire employees just like any other business entity.

This guide explains how hiring works in a sole proprietorship, including setup requirements, payroll taxes, recordkeeping, and tips for managing a growing team while staying compliant with employment laws.

Understanding the Basics of a Sole Proprietorship

A sole proprietorship is an unincorporated business owned and operated by one individual. There’s no legal separation between the owner and the business — meaning you are personally responsible for all profits, losses, and liabilities.

However, being the only owner doesn’t mean you have to handle every task alone. You can hire employees, independent contractors, or even part-time help to support your business operations.

Key characteristics include:

• Single Ownership: Only one person legally owns the business.

• Unlimited Liability: The owner is personally liable for debts and legal obligations.

• Tax Simplicity: Income is reported on the owner’s personal tax return.

• Flexible Hiring: You can employ others while maintaining sole ownership.

To clarify, if you’re wondering how many owners does a sole proprietorship have? — the answer is just one. But when it comes to hiring workers, there’s no limit as long as you comply with employment regulations.

Hiring Employees as a Sole Proprietor

Hiring employees as a sole proprietor involves several important steps to ensure legal compliance. Though you don’t need to form an LLC or corporation, you must follow the same employment laws and tax obligations as larger businesses.

Here’s how to do it right:

1. Obtain an Employer Identification Number (EIN)

Even if you don’t incorporate, you need an EIN from the IRS to hire employees. This number identifies your business for tax purposes.

• You can apply online at irs.gov.

• Use your EIN to report employment taxes and file payroll forms.

2. Register with State Agencies

You’ll need to register with your state’s labor and unemployment departments. This ensures you can:

• Report new hires.

• Pay unemployment insurance.

• Withhold and remit state income tax if applicable.

3. Understand Employment Laws

Sole proprietors must follow federal and state labor laws, including:

• Minimum wage and overtime under the Fair Labor Standards Act (FLSA).

• Anti-discrimination rules enforced by the Equal Employment Opportunity Commission (EEOC).

• Occupational safety standards under OSHA.

4. Set Up Payroll and Tax Withholding

As an employer, you’re responsible for withholding:

• Federal income tax from employee wages.

• Social Security and Medicare (FICA) taxes.

• Federal and state unemployment taxes (FUTA/SUTA).

You can manage payroll yourself using software or outsource it to a payroll service provider.

5. Provide Required Employment Forms

Before employees start, collect the necessary documents:

• Form W-4 (Employee’s Withholding Certificate)

• Form I-9 (Employment Eligibility Verification)

• Any state-specific forms for tax or wage reporting

Employee vs. Independent Contractor

Before hiring, it’s important to understand the difference between employees and independent contractors. Misclassification can lead to tax penalties and legal issues.

Employees:

• Work under your direction and control

• Have taxes withheld from their paychecks

• May receive benefits (health insurance, PTO, etc.)

Independent Contractors:

• Operate their own businesses

• Control how and when they work

• Handle their own taxes and insurance

If you control the details of how the work is performed, that person is likely an employee, not a contractor.

Benefits of Hiring Employees in a Sole Proprietorship

Hiring staff can help your business expand, improve productivity, and free up your time for higher-level decision-making. Here are the key benefits:

• Increased Capacity: More hands mean you can take on additional clients or larger projects.

• Improved Efficiency: Delegating tasks allows you to focus on business growth.

• Better Customer Service: Employees can ensure faster response times and personalized attention.

• Professional Image: A staffed business often appears more credible to customers and partners.

• Scalability: With a reliable team, your sole proprietorship can operate more smoothly and sustainably.

Even though hiring adds complexity, it can lead to greater profitability and long-term success.

Responsibilities and Legal Obligations

Hiring employees as a sole proprietor comes with responsibilities. To avoid fines or disputes, you must comply with employment, tax, and workplace safety laws.

Key responsibilities include:

• Paying wages on time according to federal and state laws.

• Keeping accurate payroll records for at least three years.

• Maintaining a safe workplace that meets OSHA standards.

• Displaying required labor law posters where employees can see them.

• Filing quarterly employment tax returns (IRS Form 941).

It’s also wise to carry workers’ compensation insurance, even if not legally required in your state. This protects both you and your employees in case of injury.

Setting Pay and Benefits

As a sole proprietor, you can determine pay rates and benefits based on your budget and industry standards. Offering competitive compensation helps attract and retain skilled employees.

Tips for setting fair pay:

• Research average wages for similar positions in your area.

• Consider experience, certifications, and job complexity.

• Offer performance-based raises or bonuses.

Optional benefits to consider:

• Health insurance

• Paid time off (PTO)

• Retirement plans (SEP IRA, SIMPLE IRA)

• Flexible scheduling or remote work options

You’re not required to offer all these benefits, but doing so can help you build a loyal and motivated team.

Managing Employees Effectively

Once you have staff, effective management ensures your business runs smoothly. Good leadership fosters loyalty, improves morale, and reduces turnover.

Best practices for managing employees:

• Communicate clearly: Set expectations, provide feedback, and encourage open dialogue.

• Provide training: Teach employees proper techniques, customer service, and safety procedures.

• Recognize achievements: Acknowledge hard work through praise or small incentives.

• Create a positive environment: Promote respect, fairness, and teamwork.

Remember, a supportive workplace culture is essential for long-term success, especially when your team is small.

Tax Implications of Having Employees

Adding employees changes your tax responsibilities. In addition to paying income tax on profits, you must manage payroll taxes.

Employer tax obligations include:

• FICA Taxes: You pay half of the Social Security and Medicare contributions.

• FUTA Taxes: Federal unemployment taxes fund unemployment benefits.

• State Taxes: Depending on your location, you may owe additional unemployment or disability taxes.

Keeping organized financial records and consulting a tax professional can help you stay compliant and avoid costly mistakes.

When to Hire Help

Knowing when to hire employees depends on your workload, growth goals, and available resources. Signs you may need help include:

• Turning down clients due to lack of time

• Missing deadlines or experiencing burnout

• Spending too much time on routine tasks

• Seeing consistent profit growth that allows for payroll expenses

If hiring isn’t feasible yet, consider part-time workers or independent contractors as a temporary solution.

Can a Sole Proprietorship Grow with Employees?

Absolutely. Many successful small businesses began as sole proprietorships with one person and expanded by hiring help. While the legal structure remains the same, adding employees can significantly boost efficiency and capacity.

However, as your workforce and revenue grow, you may eventually consider transitioning to an LLC or corporation for better liability protection and tax advantages.

Final Thoughts

A sole proprietorship can absolutely have employees — and hiring the right people can transform your business. By following proper registration, payroll, and compliance steps, you can grow responsibly while maintaining control of your operations.

Although it’s the simplest business structure, running a sole proprietorship with employees still requires careful management of legal and tax responsibilities. Take time to set up systems, document processes, and seek professional guidance when necessary.

With the right foundation, you can build a thriving team, expand your reach, and turn your small business into a sustainable success.