Payroll: From Sole Proprietor to Employer

You have worked for years to build your business as a sole proprietor. Now that all of your efforts have paid off, you have come to the realization that you cannot continue to handle the workload alone. You need help. That means it is time to begin hiring. It also means something else: you need to start thinking about how you are going to handle payroll. One of the first things to consider is whether you should contract with a small business payroll service.

The scenario described above is something sole proprietors experience every day. All of the choices those business owners make in their transition from sole proprietor to employer will impact on their ability to do business competitively in the future. So it is critical that they understand the legal and administrative implications of payroll.

If you are a sole proprietor preparing to make that transition, you need to educate yourself in the following areas:

Tax Identification Numbers

As a sole provider, you have likely used your Social Security number for tax reporting purposes to date. That will no longer do once you hire your first employee. You will need a federal Employer Identification Number (VIN) at minimum – you may also need state and local numbers depending on the requirements of all applicable tax jurisdictions. Rest assured that obtaining identification numbers is relatively easy. It can be done online or with a single phone call.

Employee Classifications

For tax reporting purposes, the IRS requires employers to classify all of their workers according to specific guidelines. For example, there are distinct differences between an employee and an independent contractor.

Any employees you add to the payroll will be subject to payroll taxes that you will have to deduct from wages and pay on their behalf. Independent contractors pay their own taxes, but you are still required to report any income in excess of $600 annually.

Because employee classifications can be sticky at times, working with a small business payroll service right from the get-go is a very good idea for most sole proprietors transitioning to employers. Payroll service providers know all of the intimate details of IRS employee classifications.

Tax Withholding and Payments

Employers are required to withhold taxes from employee wages and make regular payments on their behalf. However, tax payments are not made every pay period. Rather, employers establish tax accounts into which they deposit withheld amounts until payment is due. This creates another level of administration that the business owner has to keep track of.

Hand-in-hand with tax withholding and payments is the requirement to provide employees with the documentation they need to file their taxes in the spring. In the simplest cases, only a W-2 form would be required. But more complex cases may include additional forms covering everything from health insurance to workers comp payments. Business owners either have to keep track of it all or contract with a small business payroll service.

ACA Compliance

Last but not least is the reality that small businesses must maintain ACA compliance just like their larger counterparts. What constitutes compliance for the small business depends on annual revenues and the number of employees, but compliance is required nonetheless.

Making the transition from sole proprietor to employer is good in the sense that it means a business is growing and producing revenues. But there is a lot to know and learn from a payroll standpoint. If you are planning to make the transition yourself, consider working with a small business payroll service that can handle everything from paying wages to reporting to ensuring regulatory compliance.

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