Single Member LLC Payroll Taxes: Everything You Need to Know
Single member LLC payroll taxes must be collected by the LLC owners and it can be reported depending on the tax structure and if the company has employees.3 min read
2. Update on IRS Regulations
3. SMLLC as Disregarded Entity
Single member LLC payroll taxes must be collected by the owners of the LLC. They can be reported in several ways, depending on what tax structure the owner elects and whether the company has employees.
Single Member LLCs
Out of all of the business structures available, single member LLCs are a unique breed. Single member LLC owners keep the liability protection LLCs offer them, but they are able to pay their taxes as a sole proprietorship. This arrangement is referred to as a disregarded entity.
LLCs are beneficial for their low regulation and small list of requirements. The main requirement to form a single member LLC is to write articles of organization and send it to your Secretary of State, along with a small fee. Once that is done, there are few regulatory requirements for this business entity.
Many owners are confused about how their businesses should collect and pay employment taxes. The business must withhold these taxes from employees' paychecks, and there is often confusion about which tax numbers to report these collections under.
Employer ID Numbers (EINs) are issued by the IRS to businesses that have employees. An EIN is required to conduct certain legal business, such as to open a bank account under the business' name. When an SMLLC has employees, two EINs are needed. One will be issued to the member, and one will be issued to the SMLLC itself. Be sure not to mix up these numbers or use them interchangeably. That can lead to errors that require IRS intervention to correct, and it will make filing taxes more complicated for you and your employees.
An SMLLC owner has the option of paying taxes for the company as a corporation. If this option is not chosen, your business will be considered a "disregarded entity". This means the entity is not considered separately at tax time, and you can pay taxes for you and the LLC on a single tax return.
Update on IRS Regulations
Since 2009, single member LLCs have been liable for collecting employment taxes and reporting them to the IRS under their company's EIN. The IRS is working to create clear documentation on how to do withholding, collect FICA taxes, and pay unemployment taxes under the SMLLC structure.
Section 6672 of the IRS code details the fact that SMLLC owners are responsible for understanding how to collect these taxes correctly. This part of the code is known as "responsible person penalty". It states that penalties are applicable when a business owner willfully neglects to collect and pay FICA or employment taxes for its employees.
The penalty is the same amount as the taxes owed. Generally, the owner of the LLC is considered the "responsible party", and an LLC does not shield the owners from this form of liability. As an owner of an LLC, be sure your employment taxes are being collected and reported correctly. By not verifying this, you are putting yourself personally at risk for IRS penalties.
SMLLC as Disregarded Entity
Owners of SMLLCs can write themselves a check or complete an electronic funds transfer in order to get funds out of the business. According to the IRS, single member LLCs can consider their business as a disregarded entity, which means they pay taxes as a sole proprietorship instead of an LLC or corporation. You can save money on tax preparation this way by reporting all business and personal income on a single Schedule C.
There are no minimum tax amounts for an SMLLC, unlike for regular LLCs. This is a benefit to consider if you are operating in a state with high minimum tax fees. For example, California's minimum taxes are $800 per year for LLCs.
As an LLC with employees, you can report their employment tax withholdings in two ways:
- Use the EIN of the owner
- Use the EIN of the LLC
An SMLLC without employees does not need an EIN and can report all tax amounts under the owner's tax ID number.
Remember that LLC owners are the ones responsible for ensuring all withholdings make it to the IRS, regardless of what EIN they are reported under.
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