A sole proprietorship is the first step for many businesses and is the simplest of all business entities to set up. It is not a business entity per se, since no legal setup is involved. Usually, such businesses have one owner, although in some cases, spouses may jointly own a business. In a sole proprietorship, the owner is responsible for all liabilities.
However, being a sole proprietor doesn’t mean you have to handle everything by yourself. If you find that your business is expanding, you will likely need to hire help. Before you do, here’s what you should know.
1. Get an EIN
Prior to hiring employees, you must get an EIN or Employer Identification Number. You use this number on tax returns and other tax documents. To get an EIN, you must file the SS-4 form with the IRS.
2. Register with the State Labor Department
Once this step is complete, you can pay state unemployment compensation taxes. These payments go to your state’s unemployment compensation fund, which provides short-term relief to workers who lose their jobs. You can visit the Department of Labor’s website for a list of state unemployment insurance tax agencies.
3. Explore Insurance Options
An employee may injure himself while on the job, and you could be on the hook for their medical expenses and lost wages. Therefore, before hiring employees, it’s important to secure workers’ compensation insurance. Purchasing insurance right away can protect your business from lawsuits and encourage continued growth.
4. Set up a Payroll System for Taxes
As an employer, it’s necessary to withhold taxes from your employees’ paychecks to give to the IRS. You will also have to make Social Security and Medicare tax payments to the IRS. An automated payroll system can help you avoid costly errors and fines at tax time.
5. Get the Paperwork Ready
Hiring employees involves a lot of paperwork, which is better done sooner rather than later. For each new hire, you must fill out Form I-9 for the U.S. Citizenship and Immigration Services (USCIS) and Form W-4 for the IRS.
Have each employee fill out IRS Form W-4, which tells you how many allowances they are claiming for tax purposes so that you can withhold the correct amount of tax from their paychecks. You can find this form at https://www.irs.gov/.
You should ask employees to fill out a new W-4 form each year if they want to change their allowances.
6. Consult an Attorney to Comply with Employment Laws
Consulting a business attorney may be the most important step that you should consider. It can help you avoid many pitfalls, like failing to meet state or federal standards that can lead to massive fines, failing to comply with all relevant statutes and employment laws, etc. Such mistakes can possibly bankrupt your business. Consulting a business attorney can protect your business and create a safe work environment for your employees.
Being a sole proprietor can be challenging, but you don’t need to do it alone. You can get support and technical assistance from the experienced team at Lendistry. To know more about how we can help your small business grow, contact us today!