3 Things to Know about Sole Proprietorship and Payroll

Working as a sole proprietor is one of the easiest ways to run your own business without a lot of complications. When you are the only employee, the payroll is pretty simple.

Paying your taxes is pretty straightforward as well. You can even employ family members without running into too many complications. And yet, plenty of sole proprietors still find the business side of running a business – as opposed to serving customers – more than they really want to deal with.

As a nationwide leader in payroll services and benefits administration, BenefitMall doesn't have a lot of opportunities to work with sole proprietors. Nonetheless, they say the key to operating a sole proprietorship efficiently is knowledge. The more sole proprietors know about their businesses and the law, the easier it is to do things the right way.

To that end, here are three things to know about sole proprietorship and payroll. Whether you are new to self-employment or you have been established as a sole proprietor for decades, your knowledge in these three areas will influence the success of your business.

1. You Can Hire Family Members

Sole proprietors looking to hire normally turn to family members first. For example, you might hire a spouse or child. Both are legally allowed at both the federal and state levels. According to BenefitMall though, there are certain tax requirements that come with hiring family members.

Where adult family members are concerned, they must be legitimate employees conducting legitimate company business on a regular schedule. Next, both Social Security and Medicare taxes must be paid on their wages. The employees pay their 50% share; the employer – which would be you in this case – is responsible for the other 50% share.

Where hiring children is concerned, sole proprietors still must abide by federal and state child labor laws. Children under the age of 18 do not pay Social Security or Medicare tax so there would be no FICA withholding for your minor children. Income tax still applies regardless of the age of an employed child.

2. You Can Hire Non-Family Members

Many sole proprietors believe they cannot hire non-family members without changing their business structure. This is not true.

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Sole proprietors can hire complete strangers without incorporating or forming partnerships. Having said that, hiring people outside of your family does not make you an employee. You are still a sole proprietor responsible for paying your own self-employment tax and filing the appropriate schedule.

 All wages paid to your employees can be claimed on Schedule as a business expense.

3. You Can Outsource Payroll Functions

BenefitMall says that it is impractical for most sole proprietors to outsource payroll if they either work alone or work only with one or two employed family members. Anything beyond that might make payroll outsourcing a wise move. Outsourcing payroll is tremendously helpful to sole proprietors with a half-dozen or more employees.

The problem sole proprietors run into with multiple employees is keeping employee payroll and withholding separately from their own. Remember that there is no distinction between assets held by a sole proprietor. There are no business assets vs. personal assets. Everything is lumped together under the law. So keeping things straight where payroll is concerned can be a bit challenging.

This does not necessarily suggest that a sole proprietor should change his or her business structure in order to separate assets and put him or herself on the payroll.

There are still plenty of benefits to remaining a sole proprietor; benefits that could still be enjoyed simply by outsourcing payroll to a company like BenefitMall.