Can an LLC Have Employees: Everything You Need to Know
Can an LLC have employees? The answer is yes, it can but there are some important distinctions to be made when it comes to LLCs and their employees.3 min read
2. Member Employee Exceptions
Can an LLC have employees? The answer is yes, an LLC can have an unlimited number of employees! However, there are some important distinctions to be made when it comes to LLCs and their employees.
Limited liability corporations, or LLCs, are an incredibly popular way to structure a business. LLCs provide the benefits of corporate liability protections without requiring separate tax return filings and without the possibility of double taxation. Whether your LLC is managed by its members or by managers, and regardless of the number of members that comprise it, it can still have employees. Employees do not need to be members of the LLC, however members may choose to be employees.
The legal definition of an employee is any individual hired for a wage, salary fee, or payment to perform work from an employer. Keep in mind that employees are different than independent contractors. The former work directly for the company, while the latter do not. This difference is significant when it comes to determining whether specific laws apply to the business, as some laws are only effective once a company has acquired over a certain number of employees.
It can also matter when it comes to determining whether an individual is able to receive worker's compensation or whether the LLC can be held liable for any damages caused by an individual. An LLC will receive limited liability for any damages caused by an employee, but the limited liability protections will not extend to the company's employees. This means that members cannot be held personally liable for any damages cause by an employee, but the LLC itself can be held liable. If an employee action leads to company liabilities, the liability protections remain valid for members, not for employees.
The IRS considers LLC members (owners) to be self-employed, whereas LLC employees are not. Under state laws, LLC members are not considered to be LLC partners, nor LLC employees. If you are an LLC owner, you work for the LLC, of course, but this does not mean you are automatically legally determined to be an employee.
Who Can Be an Employee?
Determining your individual tax status begins with clarifying your role within an LLC and how you earn income. In order to comply with the law, you'll also need to comprehend how the IRS will tax your LLC income.
An LLC is required to have an Employer Identification Number (EIN) from the IRS in order to hire employees. This is used to report taxes and other documentation, as well as other financial and taxation purposes, including opening a business bank account. In some states, you must register as an employer in addition to the other initial LLC registration filings. This employer classification is usually used for taxation purposes, however it may also apply to certain annual filing requirements or statutory compliance reports.
Although the IRS considers LLC members to be self-employed, LLC employees are not. Just like other business entities that directly hire employees, the IRS requires LLCs to file returns and pay payroll tax.
Member Employee Exceptions
Should the LLC decide to be taxed as a corporation, it can also decide to hire its members as employees who get paid a "reasonable" salary, which is determined in comparison to industry standards. State regulations determine the terms of appointing a member as an employee, and these regulations vary from state to state and from year to year, so be sure to research your state's laws.
The IRS may consider income to be employment income if it is a result of services provided to the LLC or on behalf of the LLC for guaranteed payment. If a member becomes an employee, the employee salary is subject to regular federal withholding taxes instead of self-employment taxes. This can be very beneficial.
If you're a member, another choice to consider is hiring your spouse as an employee. Due to their salary, this would decrease the LLC's reported profits and decrease your personal self-employment tax as well. It's important to consider the correct and legal ways to do this, and your spouse must actually perform the obligations as expected of an employee. In addition, this type of situation should be discussed with an accountant and an attorney before being put into action, as this type of arrangement may be scrutinized by the IRS.
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