Employing People as Sole Trader: A Quick Guide
Sole traders or sole proprietors may wonder how to hire new employees as their business expands. As this happens, it becomes necessary to take on more personnel to ensure that the operations’ increased workload is being met. In addition to this, sole traders may need to acquire accounting services for small businesses to keep up with their finances.
Compared to limited companies, hiring employees is more unusual for sole proprietors. To shed some light on this, here’s a quick guide to getting started with employing people as a sole trader:
Sole Traders as Employers
Sole traders can certainly hire employees without having to start a limited company.
These individuals are business owners that have set up a business without a formal business structure, such as limited companies or partnerships, but it does not limit them from employing other staff to help run the business as it grows. You’ll typically find employees or freelancers working for sole traders.
Sole Traders as Employees
Unlike company directors, sole traders cannot be employees of their own business and are always considered self-employed. Since limited companies are considered legal entities, company directors can engage under a contract of employment. However, having a contract with yourself would not make sense for sole traders.
Setting Up to Be an Employer
While business structures may be different between sole traders and limited companies, the process of becoming an employer is quite similar.
Start by registering yourself as an employer with HM Revenue and Customs (HMRC) and PAYE registration before the first salary payment is made. Registering for PAYE can be done by providing your business details through an online form. After five working days, you can use them to enrol for PAYE online.
Not only are these required to become an employer, but you’ll need to set up a reliable system to handle your payroll and accounting. Whether you’re working with an accountant for your photography business, having a good accounting process to keep your books in order is extremely important for any business, especially when starting out.
One of the most important aspects of employment to consider is labour law. Sole traders need to identify whether their personnel will be considered an employee, a worker, or a self-employed contractor or freelancer. This is essential to stay on top of one’s employment obligations.
Employees are the most commonly known type of work engagement. They generally work under contract, but they can also work in the absence of a contract under certain conditions, such as, but not limited to, the following:
- being required to work unless on leave;
- being paid for the time worked as agreed;
- entitlement to statutory leaves and benefits; and
- being subject to disciplinary measures.
Employees have a defined set of rights and benefits, and these are typically granted after a period of continuous employment.
Workers are individuals who perform specific services personally and are compensated with money or other benefits in kind. They’re given a contract with a set duration to complete the work, and they are generally not allowed to subcontract these tasks. While workers aren’t classified as employees, they are certainly entitled to employment law rights.
Freelancers and Contractors
People who work for sole proprietors but aren’t classified as employees or workers are typically considered self-employed contractors or freelancers, including sole traders. Contracting another self-employed individual means there is no employer-employee relationship and no law obligations besides health, safety, and preventing discrimination.
Under the employment law, individuals are considered self-employed if they are not under any direct supervision, submit invoices for completed work, and take responsibility for completing their annual self-assessment tax returns, among other things. This is usually stipulated in the contract with terms such as ‘consultant,’ ‘independent contractor,’ and ‘self-employed.’
The Bottom Line: Should You Employ as a Sole Trader?
While it’s possible to employ staff as a sole trader, it’s worth noting the risks, such as employment law cases that can cost time and money. Any sole trader that’s considering becoming an employer for their growing business should find ways to protect their finances in the process. By doing so, you’re ensuring not only the protection of yourself as a sole trader but the protection of your business as well.
Here at 1to1 Accountants, we provide accounting services for small businesses and freelancers. Whether you’re setting up a business that needs accountants for designers or are sole traders in other businesses, we’re the accounting firm that can cater to your needs. Schedule a free consultation with us today!