Identification Numbers
A sole proprietorship may use the owner's social security or an employer identification number (EIN). However, I recommend that you obtain an EIN (for free at irs.gov) so that you don't have to give out your personal social security number to vendors, etc. In addition, the sole proprietorship MUST use an EIN if any of the following occurs:
- It has employees
- It files returns for excise taxes; or
- It has a qualified retirement plan
Employees
If you have people work for you, they can be treated one of two ways:
As an employee. This means that you control the way that they work for you. You tell them where to work, how to work and when to work - just as if you were working for someone else. You must have the employee fill out Form W-4, Employee's Withholding Allowance Certificate and Form I-9, Employment Eligibility and Identity Verification. You must then withhold income taxes from each employee according to how they filled out their W-4. You must also withhold the employee's share of Social Security and Medicare (FICA) and pay the employer's share of FICA, FUTA, state unemployment taxes, and workers' compensation premiums. These are normally remitted monthly or quarterly, depending on the size of your business, along with the appropriate forms. Since the employee only pays 50% of the FICA taxes, you will need to figure into your budget the other 50% that you - as the employer - must pay.
Quite frankly, even though I know how to fill out all of these payroll forms, I find that the small cost of hiring someone to do it or subscription to a payroll service is worth the peace of mind. Just don't use one of the big firms like ADP which charge a lot. Check around, check prices, and check referrals. You shouldn't have to pay more than $25 a month unless you have a lot of employees.
Sub-Contractors
As a sub-contractor. This person also owns their own business and is responsible for all of their own taxes and tax reporting requirements. You may hire them to do a job for you, but you cannot tell them how or when to work like your employee. You are hiring their business. If the tax authorities audit your return and determine you have expensed your labor as sub-contractor, but treated them like employees - they will re-classify them and hit you for the bill for all the back taxes you should have paid. Ouch. Any sub-contractor you pay more than $600 a year to must be given Form 1099-NEC stating the amount you paid them and listing their identification number (Social Security or EIN). A copy of the 1099-NECs - along with the Form 1096 cover sheet - is sent or transmitted to the IRS showing that they are responsible for their own taxes, and thus helping protect your business from re-classification.
Many small businesses give 1099-NEC forms to all sub-contractors they hire (even those who are paid less than $600) just to have a paper trail in case of an audit.