If im a sole proprietor am i an employee

Being a sole proprietor can be challenging, as the success of your business depends solely on you. As your business grows, you may find it difficult to keep up with the demand on your own.

Are you able to hire employees as a sole proprietor? We'll answer that question in this article as well as provide some tips to get started if you are considering hiring employees.

What is a Sole Proprietorship?

A sole proprietorship is the default business entity. You are not required to register with your state–unless you operate under a trade name (DBA)–and do not need to abide by regulations like corporations do.

According to the SBA, a sole proprietor is an "unincorporated business owned and run by one individual." There is no separation between you and your business. You assume all profits and losses of the business.

You are considered self-employed as a sole proprietor because you are your own boss. Being self-employed comes with a higher degree of freedom to conduct business when, where, and with whom you want, but it also comes with a higher degree of responsibility–namely, the success of the business rests entirely on you.

Additionally, being a sole proprietor opens the door to personal liability. When you conduct business–no matter the industry–there is always the possibility that an accident occurs or a client becomes disgruntled with your work. Therefore, it's critical to carry business insurance to cover any unexpected costs.

Can a Sole Proprietor Hire Employees?

Yes, sole proprietors can hire employees. There is no restriction on the number of employees you can have but remember that it does come with additional tax liability. When you become an employer, you must withhold income tax for each employee and pay additional taxes as an employer.

You will also be required to collect and store information from your employees. For example, every person you hire must fill out a W-4 and an I-9. The good news is, your employees' compensation and any health care costs you cover can be deducted as business expenses.

Before you hire employees, you must apply for an Employer Identification Number (EIN) with the IRS. It's fast, free, and easy to do. Additionally, you may be required to carry workers' compensation insurance. Check the regulations for your state to ensure you are abiding by state law.

What About Independent Contractors?

Independent Contractors are viable alternatives to employees. Generally, independent contractors, also called freelancers, are hired to complete a specific task (web development, bookkeeping, etc.). They can be hired on a short-term basis or a long-term basis.

Hiring an independent contractor may be useful for your business and may not, depending on your industry. They tend to be experts in their field so they charge more per hour than you would pay an employee, but since they are not an employee, you don't need to carry workers' compensation insurance or keep track of any employment forms (W-4, I-9, etc.).

It all comes down to your needs. If the job can be completed remotely, consider hiring an independent contractor. If the job cannot be done remotely, you will need to hire an employee.

Should You Change Your Business Structure Before Hiring Employees?

It is not necessary to change your business structure before hiring employees, however; doing so extends additional benefits to you. As a sole proprietor, you and your business are considered one entity. That means your personal assets and business assets are one and the same.

As a sole prop., your personal assets will not be shielded in the event of a lawsuit. For this reason alone, you should consider transitioning your small business to an LLC. Forming an LLC creates a separate entity and provides you with personal liability protection in the event your business is sued.

Let's say that you hire an employee who then gets hurt on the job and decides to sue your business. As a sole proprietor, your assets (house, car, etc.) could be in jeopardy. If you form an LLC, your personal assets would be shielded. An attorney will be able to offer additional legal advice for your specific situation.

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1. Get an EIN

Prior to hiring employees, you must get an employer identification number. You use this number on tax returns and other tax documents. To get an EIN, you must file SS-4 with the IRS.

2. Consider Changing Your Business Structure

Legally, you can continue operating as a sole proprietor while hiring employees. However, doing so may put you at considerable legal risk. If you face legal issues from employees down the road, your personal assets may be at risk if you operate as a sole proprietor. Choosing a different business entity can offer additional protection and help you take advantage of other resources available to corporation owners.

3. Register with the State Labor Department

You can register your company with the Florida Department of Economic Opportunity. Once this step is complete, you can pay state unemployment compensation taxes.

4. Explore Insurance Options

It’s important to secure workers’ compensation insurance before you hire an employee. If an employee injures themselves while on the job, you could be on the hook for their medical expenses and lost wages. You aren’t legally required to have workers’ compensation insurance in Florida until you have four employees. However, purchasing insurance right away can protect your business from lawsuits and encourage continued growth.

5. Set Up Your Tax Withdrawals and Payroll

As an employer, you must withhold taxes from your employees’ paychecks and give it to the IRS. Additionally, you have to pay Medicare and Social Security taxes. An automated payroll system can help you avoid costly errors and fines at tax time.

6. Get Employment Forms Ready

Hiring employees involves a substantial amount of paperwork. Each year, you have to file IRS Form 940 and pay federal unemployment tax. You may also be required to post notices and posters on employees’ rights and protections. For each new hire, you must fill out Form I-9 for the USCIS and Form W-4 for the IRS.

Consult an Attorney to Comply With Employment Laws

Now that you’re close to hiring your first employee, you should work with a business attorney to ensure that you are complying with all relevant statutes and employment laws. Failing to meet state or federal standards can lead to massive fines and other consequences, potentially bankrupting your business. Being proactive and consulting a business attorney can help you avoid these pitfalls, protect your business, and create a safe work environment for your employees.

Being a small business owner is challenging, but you don’t have to do it alone. Prepare for the future of your business by contacting Trembly Law at 305-431-5678.

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