Single Member LLCs with Employees
Over the years, there has been confusion regarding Single Member Limited Liability Companies (SMLLCs) in general and specifically, how they can report and pay employment taxes.
An LLC is a new entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or sole proprietor. An LLC is always classified by the IRS as one of these types of taxable entities.
A multi-member LLC can be either a partnership or a corporation, including an S corporation. To be treated as a corporation, an LLC has to file a Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation. A multi-member LLC that does not so elect will be classified by the IRS as a partnership. A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated by the IRS as a corporation, the SMLLC has to file the Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the IRS as a disregarded entity which is taxed as a sole proprietor for income taxes.
The confusion in this area arises when determining employment tax requirements for an SMLLC that is a disregarded entity. Notice 99-6 gives the SMLLC classified as a “disregarded entity” two options for reporting and paying employment taxes:
Using the name and EIN assigned to the LLC, or
Using the name and EIN of the single member owner
Even if the employment tax obligations are reported using the SMLLC’s name and employer identification number (EIN), the single member owner retains ultimate responsibility for collecting, reporting and paying over the employment taxes.
An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. An SMLLC that is a disregarded entity does not need an EIN and should use the name and EIN of the single member owner for federal tax purposes. However, if a SMLLC needs an EIN to fulfill employment tax requirements, or for non-federal purposes such as banking or state law requirements, the owner must check the “Other” box and write “Disregarded Entity – Sole Proprietorship” in the space provided on Line 8. If the SMLLC checks box 13 of the SS-4, which states that the SMLLC has employees or expects to have employees, the single member owner will be assigned its own EIN (a second EIN) if it does not already have one. The single member owner will need its own EIN, even if the SMLLC will be filing the employment tax returns.
Do not use the single member owner’s EIN if the SMLLC is filing the employment tax returns. If the numbers are used interchangeably, this will result in complicated problems which will could require the taxpayer’s, practitioner’s and IRS’s resources to correct.
There are also instructions contained in Notice 99-6 which limit changing back and forth between reporting under the SMLLC or the single member owner’s EINs. Be sure to review this notice and its limitations before making the election.
In October 2005, the IRS issued proposed regulations (PDF) requiring SMLLC’s to be treated as the taxpayer for employment tax and excise tax obligations.
The single member owner of the SMLLC will no longer be treated as the employer. However, the SMLLC will continue to be disregarded for other federal tax purposes.
Once the final regulations are issued, the IRS will not issue two EINs (one for the LLC and one for the owner) because the LLC will be considered an employer and will be held responsible for the employment taxes.