A sole proprietor can hire employees without an LLC. The word “sole” refers to the number of business owners, not the number of people who can work for the business.
You do not have to form an LLC before hiring a W-2 employee. However, the first hire turns the sole proprietor into an employer with new payroll, tax, insurance, reporting and recordkeeping responsibilities.
The business will generally need an Employer Identification Number, applicable state employer accounts, a payroll process, employment forms and any insurance required where the employee works. The owner also remains personally responsible for the obligations of a sole proprietorship.
This article explains general U.S. requirements. State and local rules can differ, so employers should confirm their obligations with the relevant government agencies or qualified professionals.
Can a Sole Proprietor Legally Hire Employees?
A sole proprietor can employ one person or build a larger team without changing the ownership structure. The business still has one owner, while the people hired by that owner work as employees of the sole proprietorship.
Hiring someone does not automatically create an LLC, corporation or partnership. It creates an employer-employee relationship and activates the rules associated with that relationship.
The owner does not become their own employee after hiring someone else. IRS Publication 334 states that a sole proprietor is not an employee of the business and cannot deduct their own salary or personal withdrawals. The owner generally continues taking money through owner’s draws, while employees receive wages through payroll.
An LLC is therefore not a prerequisite for hiring. A sole proprietorship and a single-member LLC can both employ workers, but each business must follow the employment rules that apply to its workforce.
What Changes After the First Employee Is Hired?
A sole proprietor working alone may use a Social Security number for certain tax purposes and focus mainly on business income, expenses and self-employment taxes. Hiring an employee introduces a separate employer system.
This timeline shows when the main responsibilities generally begin:
| Deadline | Action |
|---|---|
| Before hiring or promising a start date | Confirm the worker’s classification and calculate the full employment cost |
| Before the first payroll | Obtain an EIN, complete required state registrations and establish payroll |
| Before covered work begins | Confirm workers’ compensation, insurance and workplace requirements |
| By the employee’s first workday | Have the employee complete Form I-9 Section 1 and provide required hiring information |
| Within three business days | Complete Form I-9 Section 2, unless the employee will work for fewer than three business days |
| Before the first wage payment | Obtain Form W-4 and any applicable state withholding form |
| Within 20 days or the applicable state deadline | Submit the new-hire report |
| Every payroll period | Calculate wages, deductions, tax withholding and employer contributions |
| Quarterly or as instructed | File Form 941 or another assigned federal employment-tax return |
| Annually | Handle Form 940, Form W-2 and Form W-3 when applicable |
| Ongoing | Maintain payroll, employment-tax and Form I-9 records for the required periods |
The exact state registrations, insurance thresholds, pay rules and filing deadlines depend on where the employee works.
What Must a Sole Proprietor Prepare Before Hiring?
The safest approach is to build the employer system before the employee performs work. Paying someone first and trying to correct missing registrations later can lead to delayed filings, tax problems and avoidable penalties.
Classify the Worker Correctly
A business cannot make someone an independent contractor merely by signing a contractor agreement or issuing Form 1099-NEC. The actual working relationship determines whether the person is an employee or independent contractor.
The IRS worker-classification guidance examines factors involving control, finances and the relationship between the parties. A person is more likely to be an employee when the business controls what work is performed, how it is performed, when the person works and how the role fits into normal business operations.
For example, a designer completing one project with control over their own schedule, methods and equipment may operate as an independent contractor. A receptionist who follows the owner’s daily instructions, works established hours and represents the business is more likely to be an employee.
Misclassification can create liability for unpaid employment taxes, wages, benefits and penalties. The owner should determine the correct classification before the worker begins providing services.
Obtain an Employer Identification Number
A sole proprietor with an employee needs an Employer Identification Number. The EIN identifies the employer on payroll filings, tax deposits, state registrations and employee wage reports.
The IRS confirms that businesses with employees need an EIN. A business can obtain the number without paying a private company by using the official IRS online EIN application.
An EIN does not create an LLC. That same distinction explains why a sole proprietor may also open a business bank account without an LLC.
The owner should retain the EIN confirmation notice with permanent business records. Websites that charge unnecessary fees for a standard EIN application should be avoided.
Complete State Employer Registrations
Federal registration is only one part of becoming an employer. The sole proprietor may need state accounts for income-tax withholding, unemployment insurance and other employment programs.
A state without individual income tax may still require unemployment registration, workers’ compensation coverage and new-hire reporting. Some cities and counties also impose payroll, occupational or local employment requirements.
The owner should use official state tax, labor and unemployment websites to identify the required accounts. Registrations should be completed early enough to receive the necessary account numbers before payroll filings become due.
Check Workers’ Compensation Requirements
Workers’ compensation rules primarily operate at the state level. Coverage thresholds, owner exemptions and industry requirements can differ significantly.
Some states require coverage when the first employee is hired. Other states use different thresholds or special rules for family members, agricultural workers, construction businesses and other industries.
The Department of Labour provides a directory of official state workers’ compensation agencies. The owner should check the rules for the state where the employee will perform the work and arrange required coverage before covered work begins.
Forming an LLC does not replace workers’ compensation insurance. The business structure and insurance policy address different forms of risk.
Calculate the Full Employment Cost
An employee costs more than the hourly wage or annual salary. The business may also pay employer payroll taxes, state unemployment contributions, workers’ compensation premiums, payroll administration expenses and other applicable costs.
Before making an offer, the owner should calculate:
- Gross wages or salary
- Employer portions of applicable payroll taxes
- Federal and state unemployment taxes
- Workers’ compensation premiums
- Payroll or bookkeeping costs
- Paid leave required by state or local law
- Equipment, software, uniforms and workspace
- Training and supervision time
- Promised benefits or reimbursements
Suppose a business can afford $3,000 per month in wages but has not budgeted for employer taxes, insurance and payroll expenses. The employee’s actual monthly cost will exceed $3,000 and could create cash-flow pressure during slower periods.
The position should remain affordable when revenue is weaker, not only during the month when the hiring decision is made.
Establish a Payroll Process
Payroll involves more than transferring money to an employee. The employer must calculate gross wages, apply deductions, withhold applicable taxes, determine the net payment, create pay records and deposit taxes according to the required schedule.
The owner may manage payroll directly, hire a professional or use payroll software. Whichever method is selected, the employer should understand what the provider handles and what remains the owner’s responsibility.
The payroll system should account for:
- Pay frequency
- Hour and overtime tracking
- Gross and net wages
- Federal, state and local withholding
- Employer tax contributions
- Pay statements
- Tax deposits and filings
- Reimbursements and benefits
- Payroll record retention
Using a payroll service may reduce calculation and filing errors, but the owner should still verify that payments, tax deposits and returns have been processed correctly.
Complete Form W-4 and Form I-9
The employee generally completes Form W-4 so the employer can calculate federal income-tax withholding. State withholding forms may also be required.
Every U.S. employer must complete and retain Form I-9 to verify an employee’s identity and authorization to work. According to USCIS I-9 guidance, the employee must complete Section 1 no later than the first day of employment.
The employer or authorized representative generally completes Section 2 within three business days after employment begins. However, if the employee will work for fewer than three business days, the employer must complete Section 2 no later than the employee’s first day.
The employer must allow the employee to choose which acceptable documents to present. Demanding one particular document when the employee presents an acceptable combination can create a compliance problem.
Form I-9 and other employment records contain sensitive personal information. The business should store them securely and limit access.
Report the New Employee
Federal law generally requires employers to report newly hired and rehired employees to the designated state agency within 20 days. A state may establish a different reporting timeframe.
The federal new-hire reporting guidance explains the basic requirement. The owner should confirm the state’s deadline, submission system and required employee information.
A payroll provider may submit the report, but the employer should verify that this service is included. New-hire reporting is separate from payroll tax returns unless the provider explicitly handles both.
What Payroll and Tax Duties Begin After the First Hire?
A sole proprietor must withhold federal income tax based on the employee’s Form W-4 and withhold the employee’s applicable Social Security and Medicare taxes. The business must also pay its employer obligations and follow state withholding and unemployment rules.
The owner cannot wait until the annual income-tax return to handle these duties. Employment taxes are normally deposited during the year, while payroll returns follow required filing schedules.
Common federal responsibilities can include:
- Withholding federal income tax
- Withholding and paying applicable Social Security and Medicare taxes
- Depositing employment taxes according to the assigned schedule
- Filing Form 941 quarterly unless the IRS requires or approves another return, such as Form 944
- Paying and reporting federal unemployment tax when applicable
- Filing Form 940 annually when required
- Preparing Form W-2 for each employee
- Submitting Form W-2 and Form W-3 information to the Social Security Administration
The current IRS Publication 15 (2026), Employer’s Tax Guide, provides the federal deposit, withholding and reporting instructions. Current-year guidance should be used because limits, procedures and forms can change.
State rules may add income-tax withholding, unemployment contributions, disability insurance, paid-family-leave contributions or other payroll programs. The owner should check the rules for the employee’s actual work location rather than copying another business’s payroll setup.
Part-time and seasonal employees do not automatically escape payroll requirements. Applicable federal withholding, Social Security and Medicare rules also cover these employees.
How Long Must the Records Be Kept?
The IRS instructs employers to keep employment-tax records for at least four years. These records can include wage payments, employee information, tax deposits, filed returns, Forms W-4 and supporting payroll documents.
The complete requirements appear in the IRS employment-tax recordkeeping guidance.
Form I-9 follows a different retention period. The employer must keep it for three years after the date of hire or one year after employment ends, whichever date comes later, according to USCIS retention guidance.
Paper records should remain in a secure location. Electronic records should have appropriate access controls and reliable backups.
Should a Sole Proprietor Form an LLC Before Hiring?
An LLC is not legally required before hiring, but the first employee may be a sensible time to reconsider the business’s risk.
A sole proprietorship does not create a legal boundary between the owner and the business. The IRS explains that the owner is personally responsible for the sole proprietorship’s debts and obligations.
An employee may increase the business’s exposure by driving vehicles, operating equipment, entering customer property, handling money, accessing confidential information or dealing directly with the public.
The Small Business Administration’s business-structure guidance explains that LLCs protect owners from personal liability in most instances. However, an LLC does not provide unlimited protection and should not be treated as a replacement for insurance or legal compliance.
Forming an LLC generally does not eliminate:
- Payroll and employment-tax obligations
- Workers’ compensation requirements
- Wage-and-hour compliance
- Liability for the owner’s own wrongful actions
- Responsibilities created by personal guarantees
- Federal and state recordkeeping duties
- The need for appropriate business insurance
A home-based writer hiring administrative help presents a different risk profile from a contractor hiring someone to operate machinery at customer locations. The decision should reflect the work performed and the possible consequences of an employee accident, dispute or mistake.
Professional legal and tax guidance becomes particularly useful when employees will drive business vehicles, work in customers’ homes, handle expensive property, perform licensed services or create a meaningful risk of injury.
If the owner forms an LLC, the business should confirm whether it needs new tax-identification details, employer registrations, bank records or insurance policies. The new entity should not automatically continue using the sole proprietorship’s records without checking the correct treatment.
Which Employment Rules Can Apply With One Employee?
Some employment laws use employee-count thresholds, but others can apply when the first employee starts. Requirements also depend on the business’s activities, revenue and location.
The sole proprietor should examine:
- Federal, state and local minimum-wage requirements
- Overtime and employee-classification rules
- Timekeeping and payroll-record requirements
- Required pay frequency and pay statements
- Meal and rest-break rules where applicable
- Workplace safety obligations
- State and local paid-leave requirements
- Required federal and state workplace notices
- Final-pay rules when employment ends
- Rules protecting employee records and personal information
Not every federal workplace poster applies to every business. The Department of Labour offers a free FirstStep Poster Advisor to help employers identify federal notices. State and local poster requirements must be checked separately.
The business should create a reliable method for recording hours, wages, deductions, leave and reimbursements. Verbal arrangements can become difficult to prove if the owner and employee later remember the terms differently.
A written offer or employment document should clearly identify the position, pay rate, pay schedule, expected duties and any promised benefits. It should not promise permanent employment, guaranteed hours or other conditions unless the owner intends and is legally prepared to provide them.
First-Employee Checklist for a Sole Proprietor
Before the employee begins working, confirm each relevant item:
- Define the position and calculate its full cost.
- Determine whether the worker is an employee or independent contractor.
- Obtain an EIN directly from the IRS.
- Register for applicable state withholding and unemployment accounts.
- Check workers’ compensation and other insurance requirements.
- Select a pay frequency and establish a payroll process.
- Review wage, overtime, timekeeping and pay-statement rules.
- Prepare Form W-4, Form I-9 and required state forms.
- Provide applicable employment notices and workplace posters.
- Report the employee through the state new-hire system.
- Confirm tax-deposit and payroll-return schedules.
- Store employee information securely.
- Retain employment-tax and Form I-9 records for the correct periods.
- Review the owner’s personal-liability exposure.
- Verify every payroll payment, filing and tax deposit.
The checklist should be adjusted for the employee’s location, industry and duties. A qualified professional can help when classification, payroll, insurance or liability requirements remain unclear.
