A sole trader can employ people, and many do. "Sole trader" describes the legal structure — one individual who is the business — not the number of staff. What changes when you hire is the list of obligations: PAYG withholding, Single Touch Payroll reporting every payday, superannuation, the correct award rate, workers compensation insurance, and seven-year employee records. The one person you cannot employ is yourself.
What you take on when you hire
| Obligation | What it involves |
|---|---|
| PAYG withholding | Register with the ATO, withhold tax from each pay using the ATO tax tables, and report and pay it on your activity statement. |
| Single Touch Payroll | Report wages, PAYG withheld and super liability to the ATO on or before every payday, through STP-enabled software. No exemption for small employers. |
| Superannuation guarantee | Pay the current rate on top of wages, into the employee’s chosen or stapled fund, by the quarterly due dates. The rate changes — check ato.gov.au. Late payment is not deductible. |
| The correct pay rate | The relevant modern award or enterprise agreement, or the National Minimum Wage if no award applies. Rates change each 1 July. Use the Fair Work Ombudsman’s pay tools. |
| Leave and entitlements | Annual leave, personal leave, public holidays and the rest of the National Employment Standards. Casuals get loading instead of leave, and a pathway to permanent employment. |
| Workers compensation | Compulsory insurance, arranged through your state or territory scheme. Required before the employee starts, not after. |
| Records | Fair Work requires employee records and pay slips to be kept for seven years — longer than the ATO’s five-year rule for tax records. |
| Payroll tax | A state tax, only once your total wages exceed the state threshold. Thresholds and rates differ by state and change; check your state revenue office. |
Single Touch Payroll
STP is the reporting system that replaced payment summaries. Every time you pay an employee, you report the gross wages, the PAYG withheld and the super liability to the ATO — on or before payday, not quarterly and not at the end of the year.
- It applies to every employer, including one with a single part-time employee.
- It needs STP-enabled software. There is no manual form; the report is a file submitted through a product that supports it.
- STP Phase 2 asks for more detail — gross pay disaggregated into its components, employment and income types, and the reason for a termination.
- Your employees see the result in myGov as their income statement, which is what they use to lodge their return.
- A finalisation declaration is due after the end of the financial year to mark the data as final.
This is the obligation most often discovered late, because nothing stops you paying someone before you have set it up. Get the payroll system running before the first payday, not after.
Employee or contractor?
Hiring a contractor looks like a way to avoid all of the above. Sometimes it genuinely is; often it is not, and getting it wrong is expensive.
The distinction turns on the real substance of the relationship, not on what the paperwork calls it, whether the person has an ABN, or whether they issue invoices. Courts and the ATO look at the totality of the arrangement — control over how the work is done, whether the person can delegate, who supplies the tools, who bears the commercial risk, whether they are running their own business or working in yours.
Calling an employee a contractor to avoid super, leave and PAYG is sham contracting, and it carries penalties under the Fair Work Act. Note also that superannuation can be payable to some contractors — a contract wholly or principally for a person's labour attracts super even where the person is genuinely a contractor for other purposes. If it is close, get advice before the first payment rather than after an audit.
You cannot employ yourself
As a sole trader you and the business are one legal person, so:
- No wage, no PAYG withholding, no STP report for your own money. What you take out is drawings — see how a sole trader is taxed.
- No superannuation guarantee on yourself. Your own contributions are voluntary, and may be deductible if you lodge a notice of intent with your fund and it is acknowledged before you lodge.
- Workers compensation generally does not cover you. Schemes are state-based and most exclude the sole trader themselves; personal accident or income protection cover is the usual substitute. Check with your state or territory authority.
- You cannot employ your spouse to shift income unless they genuinely do the work and are paid a commercially reasonable amount for it. The ATO looks closely at family payments.
The liability question
This is the real reason employing staff often triggers a change of structure. A sole trader has unlimited personal liability, and employees create liabilities of a size a one-person business does not: accrued leave, redundancy entitlements, unpaid super, an unfair dismissal claim, an injury at work.
If the business cannot meet them, you meet them, from personal assets. A company limits that exposure — imperfectly, because directors carry personal liability for unpaid PAYG withholding and super through director penalty notices, and lenders ask for personal guarantees. But the difference is real, and it is worth pricing before you hire rather than after. See sole trader, partnership, company or trust?
Before the first payday
- Register for PAYG withholding with the ATO, against your existing ABN.
- Work out the correct award and classification using the Fair Work Ombudsman's tools, and the pay rate that goes with it.
- Set up STP-enabled payroll software and do a test run.
- Take a TFN declaration and a super choice form from the employee, and check for a stapled fund if they do not nominate one.
- Arrange workers compensation cover through your state or territory scheme, before they start work.
- Give them a Fair Work Information Statement, and the Casual Employment Information Statement if they are casual.
- Check your state's payroll tax threshold — you are almost certainly under it with one employee, but the thresholds and rates differ by state and are worth knowing.
Related reading
- Sole trader, partnership, company or trust? — when hiring should change the structure
- How much tax does a sole trader pay? — why your own drawings are not wages
- PAYG instalments — the other PAYG, and why they are not the same
- What is bookkeeping? — payroll records and how long to keep them
Frequently asked questions
Yes. Being a sole trader is about the legal structure, not the headcount — one individual owns the business, and that individual can employ others. What follows is the full set of employer obligations: PAYG withholding, Single Touch Payroll, superannuation, award rates, workers compensation and employee records.
No. You and the business are the same legal person, so there is nobody to pay a wage to. Money you take out is drawings — not a deductible expense, not subject to PAYG withholding, and not reported through Single Touch Payroll. You are taxed on the business profit regardless of how much you withdrew.
Yes. STP applies to every employer, with no small-employer exemption. You report gross wages, PAYG withheld and the super liability to the ATO on or before each payday, using STP-enabled software. Set it up before the first pay run — there is no manual alternative to fall back on.
Sometimes. A contract that is wholly or principally for a person’s labour attracts the superannuation guarantee even where the person is genuinely a contractor in other respects. Having an ABN and issuing invoices does not settle it. Where it is close, get advice before the first payment — unpaid super is not deductible and attracts a charge on top.
It is worth costing. Employees create liabilities a one-person business does not have — accrued leave, redundancy, unpaid super, injury and dismissal claims — and as a sole trader you meet them from personal assets. A company limits that, though imperfectly: directors remain personally liable for unpaid PAYG withholding and super, and lenders ask for guarantees.
Sources
PAYG withholding, Single Touch Payroll and superannuation guarantee obligations come from the Australian Taxation Office; awards, minimum wages, record-keeping periods, information statements and the employee-contractor distinction from the Fair Work Ombudsman; workers compensation and payroll tax from state and territory authorities. Rates and thresholds change — confirm the current position at ato.gov.au and with a registered tax agent. Balaana is bookkeeping software, not a tax agent or an employment adviser — this article is general information, not advice about your situation.