Yes. A sole proprietor can legally hire employees. You do not have to form an LLC or another business entity before hiring your first employee.
However, hiring employees changes your responsibilities as a business owner. You may need an Employer Identification Number (EIN), payroll system, employment tax filings, employee forms, workers’ compensation coverage, and compliance with federal, state, and local employment laws.
The key is understanding what changes when your sole proprietorship goes from being a business you operate yourself to a business with employees.
Key Takeaways
A sole proprietor can hire one or more employees.
A sole proprietor with employees generally needs an EIN.
Employees are generally paid through payroll and receive Form W-2.
Employers must withhold and pay applicable employment taxes.
You must determine whether a worker is an employee or an independent contractor before deciding how to pay and report them.
State requirements, including workers’ compensation and employer registration, vary.
Hiring employees does not automatically require you to form an LLC.
However, growing businesses should consider whether a different business structure could provide advantages, including liability protection.
Can a Sole Proprietor Legally Hire Employees?
Yes. A sole proprietorship does not mean you have to work alone. A sole proprietor can hire employees just like other types of businesses.
You can generally hire full-time, part-time, temporary, or seasonal employees. There is also no general federal rule that says a business must stop being a sole proprietorship after reaching a particular number of employees.
The important distinction is that becoming an employer creates additional responsibilities.
The IRS states that when a business has employees, the owner must correctly classify workers, obtain an EIN, withhold and pay applicable employment taxes, and complete required employee and government forms.
So the answer to “Can a sole proprietor have employees?” is straightforward:
Yes. But once you hire employees, you become responsible for complying with employer and payroll requirements.
What Changes When a Sole Proprietor Hires an Employee?
When you operate alone, your primary tax obligations generally relate to your own business income and self-employment taxes.
When you hire an employee, you take on a second set of responsibilities as an employer.
Before hiring | After hiring |
You primarily manage your own business income and expenses | You must also manage employee payroll |
No employee withholding | You generally withhold applicable federal income, Social Security, and Medicare taxes |
No employee onboarding | You must collect required employee information and forms |
No employee payroll records | You must maintain employment and payroll records |
No employee classification issues | You must correctly classify workers |
Limited employment-law responsibilities | Federal, state, and local employment requirements may apply |
No employee workers' compensation considerations | State workers' compensation requirements may apply |
The U.S. Department of Labor notes that employers can have responsibilities involving wages, recordkeeping, workplace rights, minors, leave, and other employment requirements. State and local laws can impose additional requirements.
This is why hiring an employee is more than simply adding someone to your payroll.
What Does a Sole Proprietor Need to Do Before Hiring an Employee?
If you're preparing to hire your first employee, think of the process as a series of steps.
1. Get an Employer Identification Number (EIN)
An EIN is a federal tax identification number issued by the IRS.
If you have employees, the IRS generally requires your business to have an EIN.
If you already have an EIN for another business purpose, you may be able to use it for your employment tax obligations. If you don't have one, you can apply through the IRS.
An EIN is different from your Social Security number. It identifies your business for federal tax and reporting purposes.
2. Register as an employer where required
Depending on where your business operates, you may need to register with your state or local government before or after hiring employees.
Requirements can include:
State employer registration
State income-tax withholding accounts
State unemployment insurance accounts
New-hire reporting
Local registrations
Workers' compensation requirements
These rules vary by state, so don't assume that meeting federal requirements means you've completed every requirement.
3. Determine whether the worker is an employee or independent contractor
Before deciding how to pay someone, determine what type of worker they are.
This distinction matters because employees and independent contractors are treated differently for tax and employment purposes.
The IRS says businesses must consider the entire working relationship, including the degree of behavioral and financial control and the nature of the relationship. There isn't a single factor that automatically determines classification.
Don't classify someone as an independent contractor simply because:
They prefer to receive a 1099
You don't want to run payroll
They work part-time
They work remotely
You have a written contractor agreement
The actual working relationship matters.
4. Check workers' compensation requirements
Workers' compensation requirements are primarily determined at the state level and can depend on factors such as the number of employees, type of business, and nature of the work.
The U.S. Department of Labor provides links to the workers' compensation officials for each state and territory.
Before your employee begins work, check the rules that apply to your business and location.
5. Set up payroll
You'll need a system for calculating employee wages and handling applicable payroll taxes.
Depending on your circumstances, payroll responsibilities can include:
Calculating gross wages
Withholding federal income tax
Withholding the employee's share of Social Security and Medicare taxes
Paying the employer's share of Social Security and Medicare taxes
Paying applicable federal unemployment tax
Handling state and local payroll taxes
Depositing withheld taxes
Filing required payroll tax returns
Providing year-end wage statements
The IRS explains that employers generally withhold federal income tax, Social Security, and Medicare taxes from employee wages and are responsible for the applicable employer taxes as well.
6. Collect required employee forms
Your new employee will need to provide certain information and complete required forms.
For example, employees generally complete Form W-4, Employee's Withholding Certificate, which provides information used to calculate federal income-tax withholding.
You'll also need to complete the employment eligibility verification process using Form I-9 as required by federal law. The IRS notes that employers must verify that new employees are legally eligible to work in the United States.
State and local requirements may add additional forms.
7. Establish basic employment policies
Even a very small business benefits from having clear expectations for employees.
Depending on your business, consider documenting:
Work schedules
Pay periods
Timekeeping
Paid time off
Attendance
Workplace conduct
Safety procedures
Confidentiality
Use of company equipment
Remote-work expectations
You don't necessarily need a massive employee handbook for your first hire. But clear policies can prevent misunderstandings as your business grows.
How Does a Sole Proprietor Pay Employees?
A sole proprietor generally pays employees through payroll rather than treating their wages as ordinary business expenses paid without withholding.
For employees, the employer generally needs to calculate applicable withholding and employment taxes, maintain payroll records, and report wages appropriately.
At the end of the year, employees generally receive Form W-2, which reports their wages and applicable tax information. The IRS's 2026 instructions state that employers generally must file Form W-2 for employees who meet the applicable reporting requirements.
Federal employment tax filings can include forms such as:
Form 941
for quarterly federal employment tax reporting
Form 940
for federal unemployment tax
Form W-2
for employee wages and tax reporting
The specific filing and payment requirements depend on your circumstances.
Can a sole proprietor pay themselves a salary?
Generally, a sole proprietor isn't treated as their own employee simply because the business has other employees.
Instead, the owner's business income is generally reported through the sole proprietorship's tax reporting structure. This is different from how the business pays its employees.
If you're considering changing how you receive compensation or changing your business's tax classification, it's worth discussing your situation with a qualified tax professional.
Sole Proprietor Employee vs. Independent Contractor
One of the most important decisions you'll make when bringing someone into your business is determining whether they're an employee or an independent contractor.
Employee | Independent contractor |
Generally works under the business's direction and control | Generally operates independently |
Generally paid through payroll | Generally paid according to the contractor arrangement |
Applicable taxes are generally withheld from wages | Generally responsible for their own taxes |
Generally receives Form W-2 | May receive Form 1099-NEC when reporting requirements apply |
Employment laws generally apply | Different legal and tax rules generally apply |
The IRS considers factors involving behavioral control, financial control, and the type of relationship when determining worker classification.
If someone is genuinely an independent contractor, you generally don't handle their payments the same way you handle employee wages. For reportable payments, you may need to collect a Form W-9 and issue Form 1099-NEC.
Misclassifying an employee as an independent contractor can result in employment tax liabilities and other consequences.
Bottom line: Don't choose worker classification based solely on which option seems easier or less expensive. Determine the classification based on the actual working relationship.
Can a Sole Proprietor Hire a Spouse or Child?
Yes, a sole proprietor may be able to employ certain family members.
However, special tax rules can apply when a sole proprietor employs a spouse, child, or other family member. The treatment can depend on the family relationship, the employee's age, the type of work performed, and other circumstances.
For that reason, don't assume that putting a family member on payroll works exactly the same way as hiring an unrelated employee.
If you're considering employing your spouse or child, review the applicable IRS rules and state requirements before setting up payroll.
Does Hiring Employees Increase a Sole Proprietor's Liability?
It can.
One of the biggest considerations when a sole proprietor starts hiring is that a sole proprietorship does not create the same legal separation between the owner and business that a corporation or LLC can create.
That means your business structure deserves more attention as the business grows.
For example, a growing business may have:
More customers
More contracts
More property
More employees
More workplace responsibilities
Greater potential exposure to lawsuits or claims
Business insurance can help address certain risks, but insurance and business structure are not the same thing.
It's also important not to assume that forming an LLC eliminates every type of personal liability. The protection available depends on the circumstances and how the business and owner operate.
Should You Form an LLC Before Hiring Employees?
No, hiring employees does not automatically require you to form an LLC.
A sole proprietor can have employees.
However, hiring your first employee can be a good time to reconsider whether your current business structure still fits your needs.
Staying a sole proprietor may make sense if:
Your business is relatively small.
Your business has limited operational risk.
You want a simple business structure.
You understand the personal-liability implications.
You don't need the structural features of another entity.
You may want to consider an LLC if:
Your business is growing quickly.
You're adding multiple employees.
Employees interact directly with customers.
Your business has meaningful operational or contractual risk.
You have significant business assets.
You're entering larger contracts.
You want to explore a structure that can provide liability protection.
An LLC can also have different federal tax classifications, so forming an LLC and deciding how the LLC should be taxed are separate questions.
The right choice depends on the business, the owner's circumstances, applicable state law, tax considerations, and risk profile.
First-Employee Checklist for Sole Proprietors
Use this checklist as a starting point before your first employee begins work:
Determine whether the worker is an employee or independent contractor.
Obtain an EIN if required.
Register for applicable state employer accounts.
Check state and local employment requirements.
Check workers' compensation requirements.
Set up payroll.
Collect Form W-4.
Complete Form I-9 requirements.
Complete applicable state forms.
Complete required new-hire reporting.
Establish a pay schedule.
Set up payroll and employment records.
Review required workplace notices.
Establish basic employment policies.
Review appropriate business and employment insurance.
Reconsider whether your current business structure still makes sense.
This checklist isn't a substitute for reviewing the requirements that apply to your specific state and industry, but it can help you identify the major areas that need attention.
Frequently Asked Questions
Can a sole proprietor have W-2 employees?
Yes. A sole proprietor can hire employees who are treated as W-2 employees. The business must comply with applicable employer requirements, including payroll withholding, employment tax reporting, and required employee forms.
How many employees can a sole proprietor have?
There is no general federal rule that limits a sole proprietor to a particular number of employees simply because the business is a sole proprietorship. However, additional federal, state, and local requirements may apply as the business grows.
Does a sole proprietor need an EIN to hire employees?
Generally, yes. The IRS states that businesses with employees must have an EIN.
Can a sole proprietor pay themselves a salary?
Generally, a sole proprietor does not treat themselves as their own W-2 employee merely because the business has employees. The owner's compensation is generally handled through the sole proprietorship's tax structure rather than ordinary employee payroll.
Can a sole proprietor hire a spouse?
Yes. A sole proprietor can generally employ a spouse, but special federal tax rules may apply. Review the applicable rules before setting up payroll.
Can a sole proprietor hire their child?
Yes, in many circumstances. However, special tax and employment rules can apply to children who work for a parent's sole proprietorship. The child's age and the type of work can affect the rules.
Does a sole proprietor need workers' compensation insurance?
It depends on the applicable state requirements and the circumstances of the business. Workers' compensation rules are generally state-specific, and requirements can vary based on factors such as employee count and industry.
Can a sole proprietor hire independent contractors instead of employees?
Yes, a sole proprietor can generally engage independent contractors when the workers genuinely meet the applicable requirements. But you cannot simply label a worker a contractor to avoid payroll obligations. The IRS looks at the actual relationship between the business and worker.
Should I form an LLC before hiring employees?
Not necessarily. A sole proprietor can hire employees without forming an LLC. However, hiring employees can be a useful point at which to evaluate whether your current business structure still makes sense based on liability, taxes, growth, and other considerations.
The Bottom Line
A sole proprietor can have employees. You don't need to form an LLC simply because you're ready to hire your first worker.
But becoming an employer brings additional responsibilities. You'll generally need to obtain an EIN, establish payroll, withhold and pay applicable employment taxes, collect required employee forms, maintain records, and comply with federal, state, and local employment requirements.
The first hire is also a good opportunity to step back and evaluate your business structure. If your business is growing, your risks are increasing, or you're taking on more employees and customers, it may be worth considering whether an LLC or another structure better fits your long-term goals.
Because employment and tax requirements can vary based on your location and circumstances, use current IRS and state guidance—and consult a qualified tax or legal professional when appropriate—before hiring your first employee.
