Key Takeaways

  • An LLC can hire both members and non-members as employees, offering flexibility in business structure.
  • Hiring employees comes with legal and tax responsibilities, including payroll taxes and compliance with labor laws.
  • LLC members are generally not considered employees unless the LLC elects corporate tax treatment.
  • Hiring family members like a spouse or children can offer tax advantages when done properly.
  • Having employees can enhance an LLC’s growth capacity, operational efficiency, and legal separation of duties.

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.

Legal and Administrative Steps to Hiring Employees

Before hiring employees, an LLC must take several legal and administrative steps:

  • Obtain an Employer Identification Number (EIN): Required for federal tax purposes and payroll reporting.
  • Register with State Agencies: Depending on the state, LLCs may need to register with the state’s labor department or revenue agency.
  • Set Up Payroll Systems: This includes tax withholding, wage payments, benefits administration, and issuing W-2 forms annually.
  • Secure Workers’ Compensation Insurance: Most states require coverage for employees to protect against job-related injuries or illnesses.
  • Display Labor Law Posters: Required federal and state labor law notices must be posted in the workplace.
  • Adhere to Employment Laws: LLCs must comply with laws regarding minimum wage, anti-discrimination, overtime pay, and workplace safety.

These steps help formalize employment relationships and protect the LLC from potential legal disputes or penalties.

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.

Hiring Family Members and Close Relations

An LLC can employ spouses, children, or other family members, which can offer unique tax and operational benefits:

  • Hiring a Spouse: Can reduce self-employment tax for the member while offering benefits like health insurance through the LLC.
  • Hiring Children: Wages paid to children under 18 may not be subject to Social Security or Medicare taxes in certain cases (sole proprietorships or single-member LLCs taxed as sole props).
  • Recordkeeping Requirements: It’s essential to maintain formal job descriptions, time sheets, and payroll records to justify the legitimacy of these relationships.
  • Fair Compensation: Family members must be paid a reasonable wage for actual work performed to avoid IRS scrutiny.

These strategies can enhance tax efficiency and trust within the business while still adhering to legal standards.

Compliance Risks of Misclassifying Employees

Misclassifying workers as independent contractors instead of employees can lead to legal and financial consequences:

  • IRS Penalties: Fines and back taxes may be owed for unpaid payroll taxes.
  • Loss of Limited Liability Protection: Missteps in classification could pierce the LLC veil, exposing members to personal liability.
  • Wage and Hour Violations: Failure to provide overtime pay or benefits may result in lawsuits or government action.
  • Unemployment Claims: If misclassified workers file for unemployment, states may audit and penalize the LLC.

LLC owners should properly document employment relationships and understand both federal and state employment classifications to maintain compliance.

Tax Advantages of Hiring Employees in an LLC

Hiring employees, especially under the right tax classification, can provide several tax advantages for an LLC:

  • Tax Deductions: Employee salaries, benefits, and payroll taxes are deductible as business expenses.
  • Reduced Self-Employment Taxes: When a member becomes a W-2 employee under a corporate tax election, their salary is subject to income tax withholding rather than self-employment tax.
  • Income Splitting: Some LLCs employ spouses or children to legally distribute income within the family and reduce overall tax burden.
  • Retirement Plan Contributions: Contributions to employee retirement plans (e.g., SEP IRAs or 401(k)s) may be deductible for the LLC.

These strategies, when properly structured, can support the LLC’s bottom line while meeting regulatory standards. Always consult a tax professional or an UpCounsel attorney before implementing advanced tax arrangements.

Benefits of Having Employees in an LLC

Hiring employees can significantly strengthen an LLC’s operations and legal structure. Here are the core advantages:

  • Operational Efficiency: Delegating tasks to employees allows LLC members to focus on strategic business growth.
  • Specialized Skills: Employees bring expertise that may not exist within the membership, enhancing the company's capabilities.
  • Brand Growth and Scalability: With employees, an LLC can serve more customers and expand its market presence.
  • Clear Role Separation: Hiring non-member employees reduces blurred lines between ownership and operations, supporting liability protection.
  • Improved Customer Experience: Dedicated staff can provide consistent service, which can increase client satisfaction and retention.
  • Attracting Talent Through Benefits: Offering benefits like health insurance or retirement plans can help attract and retain skilled employees.

Frequently Asked Questions

  1. Can an LLC hire its owners as employees?
    Yes, but only if the LLC elects to be taxed as a corporation. Otherwise, members are considered self-employed.
  2. What are the benefit of an LLC with employees?
    Benefits include improved scalability, operational efficiency, clear liability protection, and tax advantages like payroll deductions.
  3. Does an LLC need an EIN to hire employees?
    Yes. An Employer Identification Number (EIN) is required for payroll tax filings and employment records.
  4. Are LLCs responsible for employment law compliance?
    Absolutely. LLCs must comply with all applicable labor laws, including wage laws, safety regulations, and anti-discrimination statutes.
  5. Can hiring employees affect the liability protection of an LLC?
    Not directly, but improper employment practices—like misclassification or negligence—can lead to lawsuits that may threaten LLC protections if not managed properly.

If you need help understanding whether an LLC can have employees, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.