How a Single-Member LLC Pays Employment Taxes for Employees
A single-member LLC (SMLLC) is a unique hybrid in the world of business types. The SMLLC has the structure and liability protection of a limited liability company (LLC), but it can pay taxes like a sole proprietor. This tax structure is called a disregarded entity.
But there is some confusion about how the SMLLC pays employment taxes—the taxes withheld from the pay of employees. Specifically, the question is which Employer ID Number the SMLLC is supposed to use for this purpose.
SMLLCs as Employers
The single-member LLC has the advantage of being in a specific business form called a limited liability company, which is separate from the business owner for legal and liability purposes. But the SMLLC member files income taxes like a sole proprietor.
How a SMLLC Pays Employment Taxes
Because a single-member LLC is disregarded as an entity for tax purposes, there is a lot of confusion about how the single-member LLC pays employment taxes. Is the member responsible for paying these taxes through the owner's Social Security Number, or does the business pay these taxes through the entity's EIN?
When an SMLLC and Owner Need an EIN
This is a confusing issue. An EIN is an employer ID number, and it's used for businesses that have employees, for employment tax purposes. An EIN may also be required for other purposes, such as opening a business bank account.
The problem comes with the concept of needing an EIN. Businesses need EINs for two reasons:
- Because they have employees, for employment tax purposes.
- For registration purposes with banks and other businesses, to show they are a legitimate business.
For a Single-member LLC, for tax purposes, the SMLLC needs an EIN. If the SMLLC has employees, both the single member owner and the SMLLC will need an EIN (two EIN's). The IRS warns:
These numbers should not be used interchangeably. Doing so will result in complicated problems which could require the taxpayer's, practitioner's, and IRS's resources to correct.
Update on IRS Regulations
After January 1, 2009, previous IRS regulations became obsolete and the IRS has stated that single-member LLCs will be responsible for collecting, reporting and paying over employment tax obligations using the name and EIN assigned to the LLC.
The IRS has attempted to clarify how a single-member limited liability company (LLC) pays employment taxes (federal income tax withholding, FICA taxes, and federal unemployment taxes).
SMLLC as Disregarded Entity
The IRS states that a single-member LLC may choose to be a disregarded entity. Basically, this just means that the single-member LLC files its taxes as a sole proprietorship.
In this case, if the SMLLC has employees, the business has two options for reporting and paying employment taxes:
- Using the name and Employer ID Number (EIN) assigned to the LLC, or
- Using the name and EIN of the single-member owner.
A single-member LLC that is a disregarded entity that if the SMLLC does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes.
Who Has the Responsibility for Paying Employment Taxes?
The IRS says:
Even if the employment tax obligations are reported using the SMLLC's name and federal employer identification number (EIN), the single member owner retains ultimate responsibility for collecting, reporting and paying over the employment taxes.