Creating a single-member limited liability company offers the creator a degree of flexibility in how the owner manages the company, including the company as a “disregarded entity” for income tax purposes. However, the Internal Revenue Service’s rules, and the obligations the tax authorities impose, go up substantially if that entity has its own employees to whom it pays wages. Owners of disregarded entities must be very mindful of their employment tax obligations, in order to avoid personal liability for the steep penalties that can come with unpaid employment taxes.
Owners of single-member LLCs have the option to treat the entity as a disregarded entity, which means the entity is taxed like a sole proprietorship and the owner pays the company’s taxes on his/her personal income tax return. The owner elects disregarded entity status for his/her single-member LLC simply by filing the LLC’s taxes on his/her Schedule C. This offers potential cost savings in terms of tax preparations, as the LLC does not require its own tax return. On the other hand, if the owner desires that the IRS treat the LLC as a corporation, he/she must file a Form 8832, “Entity Classification Election,” and file separate corporate tax returns for the LLC.
For single-member LLCs, even those functioning as disregarded entities, the requirements are more complicated if they have employees. First, the LLC must complete Form SS-4, “Application for Employer Identification Number,” and obtain its own employer identification number. Disregarded entities with no employees, conversely, can simply use their owners’ Social Security numbers as their EINs.
Duties uptick if your disregarded entity has employees
Additionally, single-member LLCs electing disregarded entity status, but that have employees, must file certain tax forms in the name of the LLC. For example, say a disregarded-entity LLC has two employees to whom it pays wages. While the owner may continue to pay the LLC’s income taxes on his/her personal Schedule C, the IRS considers the LLC a separate entity that must file under its name (and using its EIN) when it comes to employment taxes. These obligations include filing the applicable employment tax returns, making employment tax deposits, and submitting the appropriate employment documents to the Social Security Administration (and providing the employees with W-2 forms.)
The LLC is also separately responsible for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes related to the employees. The owner, however, is not an employee of the LLC, but rather is self-employed, and must pay self-employment tax on his/her earnings received from the company’s activities. Owners of single-member LLCs should be keenly aware of their financial responsibility regarding employment taxes. With these entities, the owner possesses ultimate responsibility for paying employment taxes on a disregarded entity’s employees. So, if the LLC does not pay its employment tax obligations, the IRS can seek payment against the entity’s owner.
To obtain the best possible legal and accounting advice about your business entities, disregarded or otherwise, contact the tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. We offer our New Jersey clients the knowledge and personalized attention to help you craft the best possible tax plan for your business. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.
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