Hiring Employees as a Sole Trader

If you wonder whether a sole trader can have employees, the answer is yes! Not only that - there is also no specified limit on how many employees a sole trader can have.

That said, sole traders who employ staff (or intend to do so) should understand all the implications and legal requirements involved.

How a sole trader differs from a company

As a sole trader, you personally own the business assets, including any money you earn. This contrasts with a company structure in which the owner and the business are defined as separate entities and business and personal assets are completely separate.

While both types of business structures can employ people and pay them a wage, the difference between the two matters when it comes to paying yourself.

As a sole trader, you can take money out of the business as drawings at any time and use it as you wish. However, you cannot employ yourself or pay yourself a wage (more on this below). The opposite is the case in a company. For example, even a director can be paid a wage in a company, but they cannot make any personal drawings as the money in the company account is not their own to spend.

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Responsibilities as a sole trader employer

One financial advantage of employing people is that you may be able to claim tax deductions for doing so.

However, running any type of business, including a sole trader enterprise, involves many considerations and responsibilities regarding employing people.

Here’s an overview.

Types of employees

This depends on your needs - e.g. whether you need someone to work for you for a short time only or on an ongoing basis.

The options include: 

• Permanent, ongoing employment - whether part-time or full-time, you are responsible for withholding PAYG (Pay-As-You-Go) tax from a permanent worker’s pay as well as paying superannuation into their fund. You must also provide annual, personal and other paid leave.
• Casual employment - these workers forgo certain paid leave entitlements in place of a higher wage rate. However, you are still under the same obligations regarding PAYG tax and superannuation.
• Fixed term contract - workers on these contracts usually have the same entitlements as permanent workers, but they are employed for a specified time period only. 
• Independent contractors - technically not employees (see below for details on this).

Wages

Most types of work will be covered by an Award or Agreement, and you will need to research which ones apply. However, it is essential to ensure all workers are paid at least the minimum wage rate ($24.10 per hour in 2024/25). You must also provide employees with a payslip each time you pay them, which can be electronic.

You will need to report wage details to the ATO (Australian Tax Office) in every payroll cycle through a system called Single Touch Payroll (STP). You can do this using STP-enabled software or a service provider.

Taxation obligations

Your tax obligations include: 

• PAYG withholding - you must withhold the relevant amount of PAYG tax from an employee’s wage and remit it to the ATO. 
• Payroll tax - a state-based tax paid by employers with a payroll above a certain threshold, depending on the state or territory. It applies to sole traders as well as companies. However, if you are a small sole trader business, it’s unlikely you would have to pay this tax. 
• Fringe Benefits Tax (FBT) - this is a tax levied on extra benefits provided to employees. An example is when a business provides a workplace vehicle to the employee for their personal use (which comes with some exemptions, as explained in our post on FBT car exemptions).

Superannuation and insurance

Employers must also pay the Superannuation Guarantee (SG) into a compliant fund for each employee in addition to wages. The SG rate for 2024-25 is 11.5% of wages (increasing to 12% in 2025-26).

Another obligation is Workers’ Compensation Insurance, which provides coverage in case of accidents and injuries at work. Even if you have only one employee, you must have this insurance.

Independent contractors

A simpler way to employ people is to hire independent contractors at an agreed-upon rate. Freelancers are often hired this way.

Independent contractors are not employees and, as such, are responsible for their own PAYG tax, leave, and (usually) their own superannuation. However, treating a worker who is essentially an employee (working regularly in an employer/employee relationship) as an independent contractor is illegal. Doing so could result in fines and penalties.

Health & Safety

As an employer, you are obligated to provide a safe workplace for all workers in terms of the physical environment, social culture, and non-discrimination. Infringement notices and penalties may apply otherwise.

Other obligations

As well as the above, there are many other considerations when it comes to employing people.

This includes recruitment costs, job descriptions, skills training, maintaining employee records, accounting for leave obligations, and more. It’s important to thoroughly research what’s involved and speak to your accountant first.

Why sole traders cannot hire themselves as employees

Sole traders cannot employ themselves mainly because they and their businesses are considered one and the same. In that sense, a sole trader already personally owns all the profits in their business - unlike in a company where the funds belong to the business itself.

So, as a sole trader, all you need to do to access funds is withdraw them. However, make sure to allow for potential bills, including those from the tax office.

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