A single-member LLC (SMLLC) has the structure and liability protection of a limited liability company (LLC), but it can pay income taxes like a sole proprietor. This tax structure is called a "disregarded entity." The SMLLC is a unique hybrid in the world of business types.
There can be some confusion about how the SMLLC pays employment taxes—the taxes withheld from the pay of employees. Specifically, the question is which employer ID number the SMLLC is supposed to use for this purpose.
Key Takeaways
- Single-member LLC's (SMLLC) are entities that have corporation status but also characteristics of a pass-through business.
If an SMLLC needs to pay employment taxes, it pays them using the SMLLC's name and EIN. - For most other tax responsibilities, the SMLLC uses the owner's name and EIN.
- If an SMLLC doesn't pay employment taxes and has no excise tax liability, it doesn't need an EIN.
SMLLCs as Employers and Taxpayers
Single-member LLCs have the advantage of being in a specific limited liability company business form. This structure allows for the separation of the business owner for legal and liability purposes. However, the SMLLC member files income taxes like a sole proprietor.
Because a single-member LLC is disregarded as an entity for tax purposes, there is confusion about how they pay employment taxes. In essence, they are both the employer and the employee. Is the member responsible for paying these taxes through the owner's Social Security Number, or does the business pay these taxes through the business entity's employer identification number (EIN)?
The IRS says that a single-member LLC that is a disregarded entity for tax purposes is treated as a separate entity for purposes of employment tax and certain excise tax. This means that the SMlLC is required to use its name and employer ID for reporting and payment of employment taxes.
What Is an Employer Identification Number (EIN)?
An EIN—also known as a federal employer identification number (FEIN)—is a unique employer ID number given to the business by the Internal Revenue Service (IRS). It is used for tax purposes for businesses that have employees as well as for other identifying purposes like getting a line of credit. An EIN may also be required for opening a business bank account.
Businesses need EINs for two reasons:
- Because they have employees and pay employment taxes
- For registration and to show they are a legitimate business with banks and other businesses
A single-member LLC needs an EIN, as do all business entities. If the SMLLC has employees the firm will have two identifier numbers. One is for the single member-owner and the other is for the SMLLC entity. These numbers should not be used interchangeably because they can cause problems at tax time.
Filing as a Disregarded Entity or a Corporation
Your SMLCC may elect to be treated as either a disregarded entity or as a corporation. As a disregarded entity, the single-member owner pays taxes and reports activity on the owner's federal return as a sole proprietorship. This reporting includes using Form 1040, Schedule C, Schedule E, and Schedule F.
If the SMLLC has employees, the business has will use the owner's EIN and name for information returns and and other information related to income tax. However, the owner must use the company's EIN and name for employment and excise taxes.
Your SMLLC doesn't need an EIN if it doesn't have employees or an excise tax liability. In this case, you should use your name and taxpayer identifier number (TIN) for federal tax purposes. The TIN is like a Social Security number but is issued to the business entity and not an individual.
Who Has the Responsibility for Paying Employment Taxes?
The SMLLC owner is ultimately responsible for collecting, reporting, and paying employment taxes. Generally speaking, the owner must withhold the necessary employment taxes the IRS requires.
Frequently Asked Questions (FAQs)
How is a single-member LLC taxed by the IRS?
Generally speaking, a single-member LLC owner files their business taxes via their personal return. However, if the company has employees, the owner needs to collect and pay employment taxes.
Can I filed my single-member LLC and personal taxes separate?
Typically, you cannot file your taxes separately if your single-member LLC is a disregarded entity. If that's the case, your LLC's activities will be included in your personal tax return.
FAQs
If your LLC is taxed according to the default rules the members cannot be considered as employees and cannot receive a salary. However, if you choose to have the LLC taxed as a corporation, the members who actively work for the LLC can be considered employees and can receive a salary.
Does a single-member LLC pay FICA? ›
FICA doesn't apply to Limited Liability Company owners, though. For tax purposes, an LLC is considered the same tax entity as its owners, and all tax obligations flow through to the individual members. LLC members are not considered employees and do not receive paychecks from which FICA is withheld.
How single-member LLCs pay federal income tax? ›
Paying Federal Income Tax
To report and pay federal income tax on your SMLLC's business, you will need to attach Schedule C, Profit or Loss From Business, to the personal federal tax return you file with the IRS. Schedule C contains information about your SMLLC's annual income, expenses, and overall profit or loss.
Can I put myself on payroll as an LLC? ›
Salaries and Wages
For many LLC owners, the most advantageous way to receive payment is to treat themselves as employees. In this arrangement, you (and other owners who actively work in the business) receive paychecks just as you would if you were an employee at someone else's company.
What are the disadvantages of a single-member LLC? ›
Disadvantages of a single-member LLC
The first of these is cost. An LLC is subject to state formation fees, as well as ongoing fees such as annual report fees and franchise taxes. Before you file the documents to form your LLC, you'll need to select a registered agent located in the state.
How to avoid self-employment tax with LLC? ›
Your tax liability for self-employment tax does not change. LLC taxed as an S corporation. As an LLC, you can elect to be taxed as an S corporation. If you choose this option, you will not pay self-employment tax.
Can a single-member LLC hire employees? ›
And if you're running a single-member LLC, the good news is that hiring employees is possible! Indeed, single-member LLCs are often considered "one-man shows." Still, they can have employees just like any other business entity. As a result, hiring employees can help your LLC grow and reach its full potential.
How can a single-member LLC avoid taxes? ›
An LLC, however, can elect to be taxed as a corporation either a C Corporation or S Corporation. This option can reduce your self-employment tax burden, because only the salary you pay yourself is subject to self-employment taxes.
What are the tax benefits of a single-member LLC? ›
LLCs are considered “pass-through entities,” which means the LLC itself does not pay federal income taxes on business income. Instead, income “passes through” to individual members of the LLC, who pay federal income tax earned from the LLC via their own individual tax returns.
What is the most tax-efficient way to pay yourself? ›
For most businesses however, the best way to minimize your tax liability is to pay yourself as an employee with a designated salary. This allows you to only pay self-employment taxes on the salary you gave yourself — rather than the entire business' income.
That's called an owner's draw. You can simply write yourself a check or transfer the money for your business profits from your LLC's business bank account to your personal bank account. Easy as that!
What percentage should I pay myself from my LLC? ›
Reasonable compensation
Some tax professionals recommend paying yourself 60 percent in salary and 40 percent in dividends to stay clear of IRS problems unless this means your salary would be too low compared to others in your field.
Can a business owner put himself on payroll? ›
Using draws is the only option for sole proprietors — you cannot legally pay yourself a W-2 salary. That's because paying yourself a salary isn't a deductible expense for tax purposes when you're a sole proprietor.
Can an LLC owner be a W-2 employee? ›
In general, an active member of an LLC cannot receive what is commonly known as W-2 income. This is due to the fact that an active member is not considered to be an employee of an LLC. The only exception to this is if an LLC has elected, through the IRS, to be treated as a corporation for tax purposes.
Is an owner's draw considered income? ›
For many individuals, an owner's draw is classified as income and may be subject to federal, state, local, and self-employment taxes, so it's important to plan ahead before filing taxes.
