A limited liability company (LLC) is an entity established under state law and not under federal law. For IRS purposes a single member LLC can elect to be taxed as a corporation or as a sole proprietorship. If you set up a single member LLC and have not elected to be taxed as a corporation by filing Form 8832, your LLC will be considered a disregarded entity and you will be taxed as a sole proprietorship for income tax purposes.
As indicated by the IRS, if you have a single member LLC and you do not owe any excise taxes and your LLC does not employ you, you do not need an employer identification number. But if you are employed by your single member LLC, your employment tax obligations and liabilities changed starting on January 1, 2009. This was the result of a change in IRS regulations, reported in Internal Revenue Bulletin 2007-39, indicating that a single member LLC is considered an entity separate from its owner for employment and excise tax purposes.
Prior to January 1, 2009, as the single member LLC owner and employee you could file and pay employment taxes using either your own name and social security number, or the LLC’s name and employer identification number . But starting on January 1, 2009 the single member LLC is responsible for collecting, reporting and paying employment taxes under the LLC’s name and employer identification number. You can apply for an employer identification number by filing Form SS-4.
As indicated by Stuart A. Simon in an article for Buchalter Nemer, this change in the regulations means that starting in 2009, as the owner of a single member LLC you can no longer be held personally liable for unpaid payroll taxes. You could still be held liable for unpaid payroll taxes prior to 2009. However, Simon points out that the IRS has been able to disregard the liability protection afforded LLCs by state law and go after the owner of a single member LLC directly for payment of payroll taxes from personal assets.
Simon cites several cases in which the owners of LLCs have been held liable for payroll taxes including the trust fund portion, which are the social security and Medicare taxes withheld from employees, as well as the employer’s corresponding portion of the payroll taxes.
This caution is also noted by Beth S. Cohn of the law firm of Jaburg Wilk. Cohn points out that when an LLC closes down the business, court decisions have allowed the IRS to collect the entire employment tax obligation of the LLC from the personal assets of its sole owner and member.
Robert E. Ward and Associates, P.C. point out that with the regulation that took effect on January 1, 2009, the owner of a single member LLC could be held liable for the trust fund portion of payroll taxes, but the owner would not normally be held liable for the employer portion of the taxes unless the ‘corporate veil’ of the LLC were pierced in a court determination.
But they also point out that in some states the owner could be held liable for state unemployment taxes for a single member LLC. In that case there could be an advantage for the LLC to be considered the employer, since new employers generally have a lower unemployment tax rate than established businesses with a history of layoffs.
Sources:
Beth S. Cohn, Employment Tax Traps in Single Member LLCs, Jaburg Wilk Attorneys at Law
Employment Tax Obligations of Single Member LLCs, Robert E. Ward and Associates, P.C.
Form 8832, Entity Classification Election
Form SS-4, Application for Employer Identification Number
Internal Revenue Bulletin 2007-39, IRS
Single Member Limited Liability Companies, IRS
Stuart A. Simon, Single-Member LLCs and Payroll Taxes – Beware of the Taxman, Buchalter Nemer