The company is doing well, and you need another pair of hands to help with the workload. But, like many others in your situation, you may be asking if sole proprietors can hire employees. And, if so, what steps do you take?
The quick answer is that sole proprietors can hire employees. However, as you might expect, there are tight standards to follow and procedures to establish. We'll go over them in this basic guide...
Can a lone proprietor hire employees?
We get this question a lot because many sole traders believe they'll need to form a limited company to increase their staff. This is generally due to misunderstanding about the term "single trader," which indicates working alone.
In reality, being a sole trader simply means that you own your entire business, which is not legally distinct from you in the same way that a limited corporation is. It has nothing to do with whether or not you can hire people.
How can I hire employees as a sole proprietor?
So, now that you know you can, what measures do you need to take to establish yourself as an employer and hire employees?
Employer registration
First, you must register with HMRC as an employer. It's best to do this before hiring, but as long as you register before the employee's first payday, you'll be good.
When you register, you will receive an Employer PAYE Reference Number (ERN). This assists HMRC in identifying your company. It will also be required to complete your end-of-year PAYE return.
Remember that it may take up to five working days to get this from HMRC, and you cannot register more than two months before you begin paying a new hire.
Determine who will manage your payroll.
You may feel comfortable handling this yourself, but many sole proprietors use accountants to handle payroll. An accountant will preserve employee records, offer payslips, and even make tax payments to HMRC on your behalf, allowing you to focus on building your business while making employee payments.
However, if you decide to run payroll yourself, you will need to use payroll software to track everything, make the necessary HMRC submissions, maintain records, update HMRC about new employees, calculate tax deductions from employees' salaries and pay this to the tax office, and produce payslips for the employees.
Set up a company pension plan.
Every company in the UK is required by law to set up a workplace pension and contribute to it as part of a process known as 'automatic enrolment,' unless an employee chooses to opt out.
The minimum auto-enrolment contribution is 8% of a qualifying employee's wages. Employers must contribute at least 3%, while employees must contribute at least 5% of their earnings.
Once again, an accountant can handle this, or you can set it up and maintain it yourself.
Sole proprietorships have employment rights.
If you hire someone on a PAYE basis, they will be entitled to statutory employment entitlements such as holiday pay, paid sick leave, pension contributions, and maternity or paternity pay.
If you opt not to hire individuals and instead hire another sole trader - a freelancer - to help you, these self-employed workers normally do not qualify for employment benefits and are usually responsible for their own tax issues.
However, if you choose this path, you must be certain of their genuine work position. If HMRC investigates and determines that the worker's job status was employment rather than self-employment, your company will be liable for unpaid PAYE tax.
There have also been high-profile gig economy instances, including Uber, in which self-employed workers sought employment rights from their client. Again, as an employer, this may have a financial impact on your company.
