Can a Sole Proprietor Have Employees?

Can a sole proprietor hire employees in 2026?

Yes! Even though a sole proprietorship is not a separate business entity, business owners may still hire employees as long as they follow all the relevant labor and tax laws. As an employer, you’re responsible for all the bookkeeping.

Sole proprietors report their business income and expenses on their personal tax return, including the amount they pay their employees.

What does it mean to be a sole proprietor?

A sole proprietorship is the simplest structure when it comes to running a business. It’s not a legal entity – the term just refers to the person who owns the business and personally backs its debts. That means your business finances and liabilities are essentially your own.

Sole proprietors report all of their business income and expenses on Schedule C of their personal IRS Form 1040 income tax return. Usually, sole proprietors run small business operations but sometimes look to expand. That’s when hiring employees may help.

Can you hire your spouse?

Yes! As a sole proprietor, you are allowed to hire your spouse as an employee. However, when a sole proprietor hires their spouse, they must actually hire their spouse. In other words, your spouse needs to be an employee who performs essential job functions that help your business run.

Here’s what to keep in mind if you hire your spouse:

• Federal taxes. When you hire your spouse, their wages will be exempt from federal unemployment tax (a.k.a. FUTA). That said, you must still deduct the three key types of employment taxes: Social Security, Medicare, and income taxes. You may also see the first two of these three tax liabilities grouped together under the label FICA taxes.
• State and local taxes. In addition to the above federal taxes, you may need to deduct and remit state and local taxes from your spouse’s wages. Seek legal advice from a small business tax expert in your area to find out for sure.
• Benefits. Your spouse may enroll in your sole proprietorship’s employee healthcare plan. You should also note the amount of your spouse’s healthcare benefits so you are allowed to deduct them on your tax return. Other benefits such as transportation discounts, commuting plans, and group life insurance may also be deductible. The same is true for your spouse’s travel-related business expenses.

Can you hire your children?

Yes! Just as you are allowed to hire your spouse if you’re a sole proprietor, you may also hire your children. Just keep in mind that hiring your own children doesn’t exempt your business from child labor laws.

If you’ve hired one of your children who is under 18 years old, you don’t need to withhold and remit FICA taxes on their behalf. The same is true for FUTA taxes if your child is under 21 years old. However, you must always withhold and remit income taxes no matter your child’s age. Local and state tax experts may be able to answer your questions about withholding and remitting these taxes for your children.

What you need to start hiring

Before you start hiring, make sure you’re prepared to carry out all our obligations as an employer. Here’s a simple checklist to help you on your way.

1. Employer Identification Numbers. If you’re planning to become an employer, you’ll need to register as one through the IRS and receive your Employer Identification Number (EIN). You’ll use this unique number on your tax filings. State tax authorities may issue your business another identification number.
2. Licensing and Permits. As a sole proprietor, you probably know that you need to comply with state and local business licensing and permit laws. When it comes to hiring employees, make sure you know about any regulations, like local land use. You might need to relocate to a commercial zoning district to expand your operations.
3. Tax Obligations. As an employer, you’ll be responsible for having your employees fill out all the relevant paperwork, like the W-4, the I-9, and any insurance benefits like workers’ compensation. Once the new hire joins your team, make sure you’re withholding the proper amounts from their paychecks and filing all the appropriate tax forms on a timely basis.
4. Employment Forms. In addition to the above new hire forms, you may also need forms filled out to keep a record of your new staff member’s employment. You should also consider preparing an employee handbook to give to your employees, who should sign it to acknowledge they’ve read and received it. You may provide any additional paperwork you feel is necessary, too.
5. State Labor Department Registration. To start a business as a sole proprietor, you must register your doing-business-as (DBA) name. That’s because when you file a DBA but no additional business entity paperwork, your state automatically designates your business as a sole proprietorship. It’s also because you need government permission to do business under a name other than your legal name.
6. Business Insurance. All business owners – even those who own entities as simple and small as sole proprietorships – should obtain business insurance. Some types of business insurance, such as workers’ compensation, are legally required. Many other types of business insurance are highly recommended so you might be better able to protect your business in the event of a natural disaster or lawsuit. In the latter case, your personal assets are on the line, too, since sole proprietorships offer no limited liability protection.
7. Legal Advice. No matter how much you learn about hiring employees as a sole proprietor, you should still seek out professional legal advice. Tax and small business attorneys will know the ins and outs of state and local employment extensively, so their advice is invaluable. The last thing you want as you’re getting your sole proprietorship off the ground is to immediately wind up in hot water.

Is a sole proprietorship right for you?

Although sole proprietorships are common, some small business experts believe that other types of business entities are more conducive to hiring employees. For example, let’s say an employee winds up with a work-related illness or injury and you lack workers’ compensation insurance. In that case, your employee may easily sue you, and just as importantly, they may easily win. As a sole proprietor, this situation means your personal assets are on the line.

You will generally not be subjected to personal liability if you register your business as a limited liability company (LLC). This business structure separates your business and personal assets, reducing your risk in employee matters like these. You’ll give up your sole proprietor status to register your business as an LLC, but other unincorporated businesses such as partnerships may be LLCs. However, S and C corporations may not be LLCs.

These blogs may help you figure out which of the above business structures is best for you:

• LLC vs. C Corporation: The Similarities and Differences. The registration process and liability protections of LLCs and C corporations are similar. However, where these two business structures differ, they do so substantially.
• S Corp vs. C Corp: Advantages and Disadvantages. S and C corporations differ in four major ways. Learn how to decide which of these differences matters the most to your business.
• Partnership Vs. S Corp: Differences You Should Know About. Partnerships and S corporations have similar ownership structures, and they’re both pass-through entities. Otherwise, they differ substantially, and these differences may have significant ramifications for your business.
• The Biggest Advantages of a Sole Proprietorship. At the end of the day, maybe sole proprietorships are indeed the right structure for your business. This primer on how sole proprietorship structures may benefit your operations may help you decide.

What’s next?

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FAQs

Can a sole proprietor have W-2 employees?

Yes. A sole proprietor may hire W-2 employees just like other business owners. You don't need to form an LLC or corporation before hiring workers. However, you typically need to obtain an Employer Identification Number (EIN), complete the required employment forms, withhold and pay applicable payroll taxes, and comply with federal, state, and local employment laws. You'll also generally need to report employee wages using Form W-2.

Do I need an LLC before I can hire employees as a sole proprietor?

No. Hiring employees doesn't require you to change your business structure. A sole proprietor may employ workers without forming an LLC. However, an LLC may provide liability protection and could offer other advantages depending on your circumstances. If you're considering changing your business structure, it may be worth discussing the potential tax and legal implications with a qualified professional.

Should I hire an independent contractor or an employee as a sole proprietor?

It depends on the type of work and the relationship you have with the worker. Employees generally perform work under the direction and control of the business while independent contractors typically operate more independently and may provide services to multiple clients. The distinction isn't simply a matter of what you call the worker or what a contract says. Misclassifying an employee as an independent contractor may result in back taxes, penalties, and other legal consequences, so review IRS and applicable state classification rules before making a decision.

What taxes do I owe when I hire my first employee as a sole proprietor?

When you hire an employee, you'll generally be responsible for withholding certain federal income and payroll taxes from the employee's wages and paying the employer's share of applicable payroll taxes. These can include Social Security and Medicare taxes, federal unemployment tax, and potentially state and local payroll taxes. You'll also have employment tax filing and deposit obligations. Because requirements vary by location and circumstances, check current IRS and state requirements before your first payroll.

Can a sole proprietor legally hire their spouse or children?

Yes. A sole proprietor may employ a spouse or child, but special tax rules may apply depending on the family relationship, the employee's age, and the type of work performed. For example, the payroll tax treatment of wages paid to a spouse or child may differ from the treatment of wages paid to other employees. The work should be legitimate, and compensation should be reasonable for the services performed. Review the applicable IRS rules before putting a family member on payroll.

Is there a limit on how many employees a sole proprietor can have?

Generally, no. A sole proprietor typically isn't limited to a specific number of employees simply because the business operates as a sole proprietorship. However, as the business grows, additional federal, state, and local requirements may apply based on factors such as employee count, industry, location, and payroll size. At a certain point, you may also want to evaluate whether another business structure would better suit your liability, tax, and growth needs.