LLC Payroll Taxes: Everything You Need to Know
LLC payroll taxes are those taxes paid if you have employees working for your LLC, and an LLC consists of members who are in charge of the business.3 min read updated on January 01, 2024
Since the Internal Revenue Service (IRS) doesn’t recognize LLCs, the member(s) of the LLC must elect to be taxed as a sole proprietorship (single-member LLC), partnership (multi-member LLC) or corporation (single or multi-member LLC). If the single-member LLC doesn’t elect to be taxed as one of these business structures, then the IRS automatically taxes the LLC as a sole proprietorship. Similarly, those multi-member LLCs that fail to make the appropriate election will be taxed as a partnership.
LLCs are considered pass-through entities, as the profits and losses of the company are passed on to the members who report it on their personal tax returns. Therefore, the LLC itself does not pay federal income taxes.
As previously noted, the LLC does not pay federal income taxes; rather, the members report all income from the LLC on their own personal tax returns. Generally, LLCs are in fact taxed as sole proprietorships (also referred to as disregarded entities) in which the profits/losses are reported on Schedule C of Form 1040 for those members of the LLC. The profits and losses are added in with the member’s other income in order to determine what tax is owed, or alternatively, how much money is to be reimbursed to the member.
By default, multi-member LLCs are taxed as partnerships. The LLC will file an information return with the IRS, and thereafter, each member will file Schedule K-1 on his or her individual tax returns to identify the percentage of profits/losses that each member is responsible for.
Any LLC (single or multi-member) can also elect to be taxed as a corporation. This is generally done if there is some sort of tax advantage to the member(s) and company if choosing to file taxes as a corporation. If this is the case, the LLC will submit Form 8832 (Entity Classification Election).
Regardless of the type of business structure elected for tax purposes, LLC members are self-employed rather than employees of the LLC and must pay self-employment taxes based on the share of their income. This self-employment tax is included on the member’s Form 1040 and is calculated utilizing Schedule SE.
LLC with Employees
If the LLC has employees, the business has additional taxes to pay, including:
- Employment taxes
- Withhold and report both federal and state income taxes
- Pay and report FICA taxes, i.e., Social Security and Medicare
- Workers’ compensation taxes
- Unemployment taxes
Property Taxes for an LLC
If the LLC owns property, then property taxes must be paid on that property. Sales and excise tax are also required. With regard to franchise taxes, LLCs are generally not responsible for this type of tax, as most states require corporations to pay such tax.
Obtaining an EIN for Payroll Taxes
An EIN, known as an Employer Identification Number, is the business identification number that is used for federal tax purposes. It is provided by the IRS and is used to pay employment taxes, as well as open a business bank account. Furthermore, some financial institutions require businesses to show proof of an EIN before doing business with the LLC.
Some LLCs might not need an EIN. For example, if the LLC is a single-member LLC with no employees, it might not be necessary for that member to obtain an LLC. However, if the member hires employees, then an EIN will likely be required. If a single-member LLC does, in fact, have employees, the business has two ways in which to report and pay employment taxes:
- Use the name and EIN given to the LLC
- Use the name and social security number of the member
While the member can try using his or her personal SSN, the IRS might likely contact the member requiring that he or she obtain an EIN for tax purposes, particularly if the LLC has several employees. Further, obtaining an EIN in this case can prevent future disputes or legal issues.
If you need help learning more about LLC payroll taxes, 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.