Sole proprietorship and hiring: What you need to know before bringing someone on board
Sole proprietorships are the simplest way to start a business. For many entrepreneurs, it’s the first step toward financial independence. But as your workload grows, you may wonder: can a sole proprietor hire someone? And if so, how do you do it legally and compliantly?
In this article, Remote breaks down your options, obligations, and how to stay compliant when hiring as a sole proprietor.
Can a sole proprietor hire someone?
Yes. As a sole proprietor, you can hire others to support or grow your business. Your two main options are:
Hiring employees who follow your direction, work set hours, and are on your payroll
Hiring independent contractors who deliver specific services under contract and work independently
Each option comes with its own legal, tax, and administrative responsibilities. Choosing the wrong approach can lead to worker misclassification, penalties, or audit risk.
Hiring employees as a sole proprietor
If you want someone to work regular hours, follow your direction, and perform tasks as part of your day-to-day operations, you’re likely hiring an employee. It’s important to note that you’re not hiring a contractor in this situation.
To hire an employee as a sole proprietor, you’ll need to:
Apply for an Employer Identification Number (EIN) through the IRS
Register with state labor and tax agencies
Set up a payroll system to withhold and pay employment taxes (e.g. Social Security, Medicare, unemployment)
Provide any required benefits, such as workers’ compensation insurance
Issue W-2 forms to report annual wages to the IRS and employee
While hiring employees gives you more control over how and when work is done, it also involves higher administrative effort and regulatory responsibility. This is why many sole proprietors start by hiring contractors instead.
Hiring independent contractors as a sole proprietor
For many sole proprietors, hiring independent contractors is a simpler and more flexible way to scale. Contractors are self-employed professionals who work under a contract and maintain control over how they complete their tasks.
Advantages of hiring contractors:
You don’t have to withhold taxes or offer benefits
They can be hired for specific projects or short-term support
You avoid long-term employment obligations and overhead costs
However, the IRS has strict guidelines about what constitutes a true contractor. If the contractor is treated like an employee (e.g., set hours, direct supervision, required use of company tools), you could face worker misclassification penalties.
Employee vs independent contractor: How to decide which to hire
When hiring someone as a sole proprietorship, the right choice depends on how much control you need, how integrated they’ll be in your business, and how long you plan to work with them.
Use this side-by-side comparison to help determine the best fit:
Feature | Employee | Independent Contractor |
Level of control | You control work hours, tools, and how tasks are done | Contractor decides when, where, and how to complete work |
Integration | Works as part of your team and internal processes | Operates independently, usually outside your systems |
Tax obligations | You must withhold and pay payroll taxes (e.g., Social Security, Medicare) | Contractor handles their own taxes and reporting |
Benefits | May be legally entitled to benefits (e.g., workers’ comp, paid leave) | No benefits required or expected |
Engagement style | Often long-term, with fixed schedule and regular duties | Typically project-based, short-term, or task-specific |
Compliance risk | Low if treated correctly, but more admin overhead | Higher risk of misclassification if treated like an employee |
Bottom line: If you want long-term control and consistency, hire an employee. Just be ready to take on payroll, taxes, and HR obligations. If you need flexibility or short-term expertise, a contractor may be the better fit. Just be sure they’re genuinely operating independently, or you could risk noncompliance.
Compliance tips for hiring as a sole proprietor
Whether you hire an employee or an independent contractor, make sure you’re on top of compliance. Worker misclassification, missing documentation, or failure to meet tax obligations can lead to audits, fines, and back taxes.
Here are some key tips to help you get started:
Clearly define the role before hiring. Determine whether the position fits the legal definition of an employee or independent contractor. This classification affects taxes, benefits, and your responsibilities under labor law.
Use written agreements. Document the engagement with a contract that reflects the scope of work, payment terms, and level of independence. Written contracts are critical for both legal clarity and audit protection.
Avoid treating contractors like employees. Contractors should not have set work hours, be required to use your tools or systems, or be closely supervised. If they are, they may be legally considered employees regardless of their title or contract.
Keep accurate and organized records. Track contracts, payments, invoices, communications, and work scope changes. These records may be required for tax filings or to demonstrate compliance in the event of an audit.
Review IRS and DOL guidelines. The IRS uses a three-prong test (behavioral, financial, and relationship factors), while the Department of Labor applies an economic realities test. Both aim to assess the true nature of the working relationship.
Use classification tools for extra assurance. Remote’s Misclassification Risk Tool can help you evaluate how a worker should be classified before you onboard them.
If you’re still unsure how to classify a worker, consult a tax advisor or employment lawyer. A trusted global HR expert like Remote can guide you through compliant hiring.
Simplify contractor hiring with Remote COR
As a sole proprietor looking to hire, you want to focus on growing your business, not navigating compliance rules. If you’re considering working with contractors, especially those based in other countries, it’s critical to manage the engagement correctly.
Remote Contractor of Record (COR) helps you:
Classify contractors compliantly, using local labor law guidance and proactive risk monitoring
Generate localized, legally compliant contracts that protect your business and IP
Pay contractors in 70+ currencies with full visibility, secure processing, and on-time delivery
Protect your intellectual property through Remote’s two-step IP Guard process
Stay compliant with evolving regulations, with built-in legal oversight and uncapped indemnity protection
Whether you're hiring locally or across borders, Remote COR simplifies the process so you can focus on what you do best, not on admin.
Ready to grow your team with confidence? Book a demo for Remote COR today.
