If your limited liability company is growing, it’s only natural that you are thinking about hiring. However, with numerous factors to consider – from payroll taxes to tax withholding, from obtaining a social security number to self-employment taxes – it all can seem overwhelming.
We’ve handled LLC employee hiring multiple times for our company and on behalf of our customers, so we decided the put all our knowledge in a simple guide where we explain the LLC business structure, tax implications, and the Internal Revenue Service rules.
This being said, let’s jump straight in and explore what federal law requires for ruling an LLC with employees.
- Limited Liability Companies (LLCs) have the flexibility to hire various types of employees, including individuals, company members, and independent contractors.
- While company members can also serve as employees, they are subject to self-employment and IRS rules.
- LLCS need to follow specific procedures and meet legal requirements when hiring, paying, and filing taxes for employees.
- It’s worth noting that LLC members are not allowed to accept a salary but instead receive a share of the profits.
Can You Hire Employees in an LLC?
An LLC can hire employees, and the hiring process is similar to that of other business entity structures, requiring employers to get an Employer Identification Number (EIN) from the IRS, set up a payroll system, and comply with local, state, and federal employment laws.
Who Can Be an Employee?
A limited liability company (LLC) can hire a broad range of individuals as employees:
- Individuals: These are your typical hires, who can be full-time or part-time employees. They are subject to federal income taxes, and the LLC must withhold taxes from their salaries.
- Company Members: LLC business entities can opt to be taxed as a C Corporation or an S Corporation, in which case members do not pay tax on profit. Instead, the corporation handles taxes, and the members receive a salary.
- Independent Contractors: While not traditional employees, contractors also form a significant part of an LLC’s workforce. They handle their own business expenses and employment taxes.
Member Employee Exceptions
In our hands-on exploration, we’ve observed some vital exceptions regarding LLC members as the company’s employees.
This understanding is backed by the Bureau of Labor Statistics, which reported that over 80% of small LLC owners opt not to become or hire employees for their businesses.
- Company Members: Generally, an LLC member isn’t considered an employee for tax purposes. They pay taxes on their share of the LLC’s profits, not a salary. According to this study the number of LLCs that opt for pass-through taxation, making individual members personally responsible for reporting profits and losses, has doubled compared to 1975 and continues to follow an ascendent path.
- Single-Member LLCs: The IRS views a sole-owner business as a “disregarded entity”. This means the member isn’t considered an employee, even if they perform duties typically carried out by employees. Instead, the member pays tax on all the profit of the LLC, and it is their personal responsibility to report this on their personal tax return.
How to Handle New Hires in an LLC
In an LLC, hiring employees involves a range of responsibilities, from payment to LLC tax filing. The process can be complex, but with the right strategy, it can be seamless and efficient.
- Hiring LLC Employees
Making new hires involves verifying the employee’s eligibility for work and obtaining relevant documentation. This includes their social security and Medicare numbers, personal details, and any other necessary documents. Business owners must report newly hired or rehired employees to the state in 20 days.
- Paying Employees
Paying employees in an LLC means ensuring they receive an industry-standard salary (which can be minimum wage or higher), as well as any employee benefits, including disability insurance. You must also withhold appropriate taxes from their wages, as required by the law.
- Filing Taxes
Filing state taxes as an LLC with employees requires a clear understanding of your business entity type and tax obligations. You’ll need to report all earnings and withholdings accurately.
See also: Can a Minor Own an LLC
Summing Up: Employee Dynamics in an LLC
In our experience, managing employee dynamics within an LLC can be a complex task that demands a profound understanding of various factors.
Whether it’s a sole owner or a multi-owner LLC, each business entity carries distinct tax obligations. An LLC, being a separate legal entity, must withhold income taxes from its employees by the law.
For example, in a two-person LLC where only one member is considered an employee, it is crucial to accurately report their compensation and fulfill the corresponding tax requirements.
However, by skillfully navigating these procedures and seeking legal advice when necessary, your LLC can cultivate a favorable workplace environment while ensuring compliance with all legal obligations.
Does the IRS permit LLC members to receive a salary?
No, the IRS does not allow members of an LLC to draw a salary. Instead, they are expected to take a share of the profits, which are reported on their personal tax returns.
How Does a Multi-member LLC File Taxes?
Multi-member limited liability companies typically report taxes as partnerships. Each of the LLC owners must report their share of the LLC’s profits or losses on their individual tax returns.
Can a Single-member LLC Have Employees?
Absolutely. A single-member limited liability company can hire an unlimited number of employees. The sole owner is responsible for withholding taxes and must purchase workers compensation insurance as per federal law.