Should single member LLC owners be on payroll?

Should single member LLC owners be on payroll? The answer is it depends.

A single member LLC (Limited Liability Company) that has not opted to be taxed as a corporation is taxed as a sole-proprietorship.

Self-employed persons are not employees of their business, since there is no distinction between a business and its self-employed owner for tax purposes. Bottom line is that only employees are supposed to be on payroll and subject to the payroll tax withholding.

A self-employed person pays self-employment tax on their net earnings from self-employment (business profit) reported on Sch C that acommpanies their Form 1040. Self-employment tax is Social Security and Medicare taxes combined.

Besides it being incorrect for a SMLLC taxed as a sole-proprietorship to be on payroll, you are paying into FUTA, and most probably your state’s SUI taxes unnecessarily.

In South Dakota, SD-SUI, SD-Surcharge, and SD-Investment Fee would be paid into unnecessarily. The South Dakota Department of Labor (as do many states) exempt LLC members taxed as a sole-proprietorship and LLP members taxed as a partnership from the SUI taxes. Check your state’s regulations.

Also, it’s possible that you are overpaying Social Security tax because there’s an annual maxium limit for Social Security tax which quite probably wouldn’t have gotten caught and adjusted between the Social Security from your paycheck withholding and Social Security portion from the self-employment tax.

Contact us if you have put yourself on payroll when you shouldn’t have or have further questions.

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