Can a Sole Proprietor Have Employees? Legal Rules Explained

Can a sole proprietor have employees? Yes, a sole proprietor can hire employees, must meet specific federal and state requirements, and there is no legal limit on the number of employees. However, hiring employees introduces additional legal and tax responsibilities, and the owner is personally responsible for all business liabilities.

This article is for OnlyFans creators and other sole proprietors considering hiring employees. It will clarify the legal rules, tax responsibilities, and compliance steps involved in hiring staff as a sole proprietor. Understanding these rules is crucial because hiring employees introduces new legal, tax, and financial obligations, and mistakes can lead to costly penalties or personal liability.

A sole proprietorship is a business structure where one individual owns and operates the business, with no legal separation between the owner and the business. The owner is personally responsible for all legal and financial liabilities of the business. An employee is a person hired to perform work under the direction and control of the business owner, subject to payroll tax withholding and employment laws. When a sole proprietor hires employees, they must meet specific federal and state requirements and take on additional legal and tax responsibilities.

Can a Sole Proprietor Have Employees Under U.S. Law?

Can a sole proprietor have employees under federal law? Yes, a sole proprietor can legally hire employees as long as they follow federal employment laws and state labor laws. The business owner becomes the employer and takes full responsibility for payroll, tax withholdings, and compliance.

This matters because there is no legal separation between the business and the owner. Personal and business assets are fully exposed if payroll rules are missed. For creators earning a steady OnlyFans income, hiring adds structure but also adds risk.

What Changes When a Sole Proprietor Hires Employees?

Can a sole proprietor have employees without changing the business structure? Yes, but hiring employees changes how taxes, reporting, and liability work. The business moves from solo self-employment into employer status.

Once you hire employees, you must pay employees on regular pay periods, calculate gross pay, and withhold taxes. You also take on employer-side tax obligations that did not exist before. This is where many OnlyFans creators get it wrong and underestimate the ongoing workload.

How Payroll Taxes Work for Sole Proprietors with Employees

Can a sole proprietor have employees and still handle taxes simply? Payroll adds layers, but the rules are clear if followed properly.

Payroll taxes include income tax withholding from employees and employer-paid taxes. As the employer, you must withhold taxes from gross pay and send those funds to the IRS on schedule.

Payroll Taxes You Must Handle

Tax Type	Who Pays it	Notes
Federal income tax	Employee	Withheld from wages
Social Security tax	Shared	Employer and employee portions
Medicare taxes	Shared	Employer and employee portions
Federal unemployment tax	Employer	Based on employee wages

You must also track employee contributions, issue W-2s, and file quarterly and annual tax forms.

Key Responsibilities After Hiring Employees

When you hire employees, you are responsible for several critical tasks. Each comes with its own set of rules and deadlines.

Withholding Federal Income Tax

You must withhold federal income tax from employee wages based on their Form W-4 and remit these amounts to the IRS.

Paying Social Security and Medicare Taxes

Both the employer and employee contribute to Social Security and Medicare taxes. You are responsible for withholding the employee’s share and paying the employer’s portion.

Paying Federal Unemployment Tax

As an employer, you must pay federal unemployment tax (FUTA) based on employee wages.

Filing Payroll Tax Forms on Time

You are required to file payroll tax forms, such as Form 941 (quarterly) and Form W-2 (annually), by their respective deadlines.

Following Labor Laws on Wages, Overtime Pay, and Recordkeeping

You must comply with federal and state labor laws regarding minimum wage, overtime, and accurate recordkeeping for all employees.

Failure in any of these areas can lead to audits from tax agencies and penalties that grow quickly.

How Self-Employment Taxes Still Apply to the Owner

Can a sole proprietor have employees and stop paying self-employment taxes? No. Hiring employees does not remove the owner’s self-employment tax obligations.

The business owner still reports business income on their personal tax return. Net income flows through Schedule C and increases adjusted gross income. Self-employment taxes apply to the owner’s share of profits, separate from employee payroll taxes.

For creators earning over $20,000 per month, this overlap is often misunderstood. Payroll taxes and self-employment taxes run at the same time and affect cash flow.

Income Tax Reporting and Quarterly Estimated Payments

Can a sole proprietor have employees and skip quarterly estimated tax payments? No. Hiring employees does not change how the owner pays income tax on business profits.

Sole proprietors must still make quarterly estimated tax payments to cover income tax and self-employment taxes. Payroll taxes are separate and must be deposited on their own schedule.

Missing estimated payments often leads to penalties at tax filing time, even if payroll was handled correctly.

Required Setup Before You Hire Employees

Can a sole proprietor have employees without registering anything new? No. Several steps are required before the first paycheck is issued. As a sole proprietor, you must:

Step 1: Apply for an Employer Identification Number (EIN)

You must obtain an Employer Identification Number (EIN) from the IRS to hire employees and report payroll taxes.

Step 2: Register with State Tax Agencies

Register with your state’s labor, workforce, or revenue department to handle state unemployment insurance and income tax withholding.

Step 3: Verify Employee Work Authorization (Form I-9)

You are required to verify that each new employee is legally authorized to work in the U.S. by having them complete Form I-9.

Step 4: Obtain Workers’ Compensation Insurance

Most states require employers to carry workers’ compensation insurance as soon as they hire their first employee.

Step 5: Set Up Payroll Processing and Direct Deposit

Establish a payroll system to calculate wages, withhold taxes, and pay employees on time.

Step 6: Prepare an Employee Handbook (if required)

Draft an employee handbook to outline workplace policies and procedures, if required by your state or business needs.

Step 7: Comply with Local, State, and Federal Employment Laws

Ensure you are following all applicable employment laws, including minimum wage, overtime, and anti-discrimination regulations.

Step 8: Withhold and Remit Payroll Taxes

Withhold the appropriate federal and state payroll taxes from employee wages and remit them to the proper agencies.

Step 9: Provide Form W-2 to Employees at Year-End

At the end of the year, provide each employee with a Form W-2 summarizing their earnings and tax withholdings.

Skipping any of these steps creates compliance gaps that are easy to detect during audits.

Workers’ Compensation and Employment Law Compliance

Can a sole proprietor have employees without insurance? In most states, no. Workers’ compensation insurance is required once employees are hired.

Workers compensation covers lost wages and medical expenses if an employee is injured. Failure to obtain workers compensation insurance exposes personal assets to lawsuits. For a small business with growing OnlyFans income, this risk is often underestimated.

Employment laws also govern minimum wage, overtime pay, recordkeeping, and employee classification. These rules apply regardless of industry.

Employee vs. Independent Contractor Rules

Can a sole proprietor have employees and still use independent contractors? Yes, but classification must be correct.

Independent contractors are not employees. They control how work is done and usually work for multiple clients. Employees follow schedules, receive hourly pay, and are subject to employer control.

This is where many OnlyFans creators get it wrong. Chatters, editors, or assistants often function like employees even if paid as contractors. Misclassification triggers back taxes, penalties, and interest.

Hiring Family Members Under a Sole Proprietorship

Can a sole proprietor have employees who are family members? Yes, with special rules.

A spouse can be hired, though federal unemployment tax may not apply. A child’s pay may be exempt from Social Security and Medicare taxes if under certain ages. Income tax to withhold still applies.

In practice, this matters because family hires must be real. Duties must be legitimate, pay must be reasonable, and records must be clean.

How Many Employees Can a Sole Proprietor Have?

Can a sole proprietor have employees without limits? There is no federal limit on how many employees a sole proprietor can hire.

The practical limit is operational. As the number of employees grows, payroll costs, compliance risk, and liability increase. At that point, many business owners consider other business entities.

Liability Risks for Sole Proprietors with Employees

Can a sole proprietor have employees and protect personal assets? No. A sole proprietorship business structure offers no liability protection.

Personal assets and business assets are the same in the eyes of the law. Employment claims, payroll disputes, and tax issues can reach personal bank accounts and property.

This is why some creators move to a limited liability company once hiring begins.

When Creators Consider Changing the Business Structure

Can a sole proprietor have employees long term? Yes, but growth often pushes creators to reassess their business structure.

An LLC can provide legal separation between personal and business assets. It does not change how income tax works by default, but it can reduce exposure from employment-related claims.

For creators earning consistent six figures annually, this shift often comes after the first hire.

Tax Deductions and Payroll-Related Expenses

Can a sole proprietor have employees and deduct payroll costs? Yes. Employee wages, payroll taxes, and workers’ compensation premiums are business expenses.

These deductions reduce taxable income but do not eliminate tax obligations. Payroll costs reduce business’s profits, which lowers income tax and self-employment taxes over the tax year.

Tracking payroll expenses properly matters for accurate tax returns and tax write-offs.

Common Mistakes OnlyFans Creators Make When Hiring

• Paying workers without proper tax withholding
• Skipping payroll tax deposits
• Misclassifying employees as independent contractors
• Forgetting workers’ compensation coverage
• Failing to track payroll obligations

These issues often surface months later, when penalties are larger.

FAQs

Are there employees in sole proprietorship?

Yes, there can be employees in sole proprietorships once the business owner decides to hire help. The owner becomes the employer and must follow federal and state employment laws that apply to wages, payroll, and worker protections. There is no limit on employees based on business structure alone.

What are the 7 disadvantages of a sole proprietorship?

Key disadvantages include unlimited liability, lack of legal separation, higher personal financial risk, difficulty raising outside capital, full tax responsibility, limited growth structure, and exposure from employee-related claims. These disadvantages become more serious once employees are hired and payroll obligations begin. For creators, risk tends to increase as income and team size grow.

How many employees are in a sole proprietorship?

There is no legal limit on how many employees a sole proprietor can hire under federal law. The real limit is practical and depends on payroll costs, compliance workload, and tolerance for liability exposure. Many small business owners review their business structure as their team grows.

Can you add someone to a sole proprietorship?

You cannot add another owner to a sole proprietorship under current law. To add a business partner, the business must change structure, often to a partnership or limited liability company. Employees can be hired, but they do not receive ownership rights.

Conclusion

A sole proprietor can legally hire employees, but that choice changes how the business operates on a day-to-day level. Payroll taxes, income tax withholding, and employment laws apply as soon as wages are paid, and mistakes affect both business income and personal assets. Self-employment taxes still apply to the owner’s profits, even while payroll taxes run in parallel. For OnlyFans creators who are already earning, understanding these rules early reduces compliance risk, protects cash flow, and avoids penalties that grow over time.

At The OnlyFans Accountant, we help creators hire employees the right way while staying compliant with payroll and tax rules. We work directly with OnlyFans creators on employee setup, tax withholdings, and long-term structure decisions tied to real income. Contact us to review your hiring plan and get clear guidance before payroll mistakes happen.