Single Member LLC Payroll: Everything You Need to Know
A single member LLC payroll includes any hired employees and you may also deduct your own salary from the company's earnings depending on how you are taxed.3 min read
2. Sole Proprietor Designation
3. Electing Corporate Tax
4. Employee Salaries
5. How to Deduct
Updated October 22, 2020:
A single member LLC payroll includes any employees your business has hired. You may also deduct your own salary from the company's earnings if you choose to be taxed as a corporation or LLC.
Deducting a Salary for a Single-Owner LLC
Single member LLCs are a unique crossover between LLCs and a sole proprietorship. They afford the owner the limited liability protection of an LLC, but with the option to pay taxes as a sole proprietor would. When you operate your business as an LLC, this will affect your ability to be a salaried employee that deducts their salary from company earnings. As a single member LLC, you can pay your taxes as a corporation or a sole proprietorship. With either of these methods, you can deduct salaries paid to employees.
Sole Proprietor Designation
Sole proprietorship is the automatic designation a single member LLC receives from the IRS. If you file taxes as a sole proprietor, you report all business income and losses on your personal tax return. This can be done on a Schedule C or a Schedule C-EZ. Wages are reported on Schedule C as employee expenses. You may also deduct payroll taxes on this form. Let the IRS know your company's structure, including the number of employees you have.
If you receive a W-2 from your LLC, you can report this income under "wages & income" on your tax return. If you pay estimated taxes, enter them under deductions & credits in the "federal estimated taxes, by quarter" section.
Remaining LLC earnings or losses go on your personal tax return. These numbers are reported on the same return as any other income sources you have outside of your business. If you take profits from an LLC, you cannot deduct these on your personal tax return as a salary.
SMLLCs that have employees can report employment taxes in two ways:
- Report them under the SSN of the company's owner
- Report them using the LLC's EIN
A single member LLC does not need an EIN if it chooses to be taxed as a disregarded entity, as long as it does not have any employees or excise tax liability. In this case, the company can use the federal tax ID number of the owner to report its taxes. When employment taxes are paid and reported using the company's EIN, it still falls on the owner to ultimately verify and pay all taxes regarding the entity.
Electing Corporate Tax
You can use form 8832 to pay taxes as a corporation instead of an LLC or sole proprietor. When being taxed as a corporation, you can pay yourself a salary and deduct it from your corporate tax return.
Corporations are classed as separate taxpayers by the IRS. So, company income does not go on your personal tax return. You will file a corporate tax return, which is done on form 1120 or 1120A. While a salary deduction sounds beneficial, its merits are often outweighed by the penalty of double corporate taxation. The salary you pay yourself will be reported and taxed on your personal tax return.
Employee salaries may always be deducted, no matter how you choose to be taxed. Salaries can only be given in exchange for services performed for the company. The salaries must be reasonable for the tasks performed and expertise required. Unfortunately, there are no hard and fast rules about when a salary is "reasonable". Hours worked per year, amount of responsibility, and skill level required are a few good ways to evaluate a job's target salary.
How to Deduct
When you are the only member of an LLC, paying yourself is as simple as writing a check in the business' name or making an electronic transfer of funds to your personal account. You can deduct employee salaries as a sole proprietor by calculating the yearly total and reporting it in the expense area of your personal tax return. This serves to reduce your taxable income. On Form 1120 for corporations, you may enter the total amount for all salaries paid, including your own salary, on the "salaries and wages" line.
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