Like any other business, a limited liability company (LLC) can hire all the employees it needs and pay them a competitive salary. Under some circumstances, an LLC can even pay its member (owner) managers a salary. Generally, reasonable salaries are tax deductible, but you must also keep up with employment tax deposit and reporting requirements.
Salaries for LLC Members
An LLC can be managed by its members or by hired managers. If you are part of a multiple-member LLC managed by all its members, then you and the other members cannot take a salary. Instead, all company payments to the members are considered profit distributions. However, if the operating agreement assigns management responsibilities to only one or a few members, the LLC may pay those members a separate salary. Similarly, if your LLC hires a nonmember individual to act as a manager, the company may pay them a salary.
If you have a single-member LLC taxed as a sole proprietorship that you manage yourself, you cannot take a salary from the company. This is because the Internal Revenue Service (IRS) treats the business as a disregarded entity, which means all its income passes through to you anyway. But if you elect to have your LLC taxed as a C corporation, you may take a salary. In this case, the LLC itself pays taxes on its income instead of you reporting the company's income on your personal tax return. Again, if you hire someone to manage your company, that person can receive a salary.
Finally, regardless of the number of members your LLC has, you may hire nonmanagement employees and pay them a salary. As operating expenses, employee salaries are tax deductible. You may also take a tax deduction for bonuses paid to employees. In both cases, IRS regulations specify that the payments must be reasonable and in compensation for services performed. Generally, a salary is reasonable if a similar business would pay the same amount for the same or similar services.
Tax Reporting Requirements
If your business has salaried employees, you must comply with federal and state tax reporting requirements. Because state laws vary, check with your state tax agency about its rules. Federal tax law requires that you withhold federal income tax as well as Social Security and Medicare taxes from your employees' paychecks. You must deposit the withheld amounts with the IRS via electronic funds transfer on a quarterly or semiweekly basis. Additionally, you may have to file an Employer's Quarterly Federal Tax Return (Form 941) to report the amount of withheld funds.
At the end of each year, the LLC must also file a Wage and Tax Statement (Form W-2) for each employee. Along with Form W-2, the LLC needs to file a Transmittal of Wage and Tax Statements (Form W-3). You can file these forms electronically with the Social Security Administration.
Your LLC needs an employer identification number (EIN) to complete IRS forms. All businesses with employees must have an EIN and use it for employment tax reporting. There are several options for obtaining an EIN.
An LLC is a good alternative to a sole proprietorship or partnership because of its tax flexibility and simple management structure. If you're ready to forge ahead with your business, consult an online service provider to get you started efficiently and affordably.
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