A single-member LLC (SMLLC) has the structure and liability protection of a limited liability company (LLC), but it can pay income taxes like a sole proprietor. This tax structure is called a disregarded entity. The SMLLC is a unique hybrid in the world of business types.
There can be 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 and Taxpayers
Single-Member LLCs have the advantage of being in a specific limited liability company business form. This structure allows for the separation of the business owner for legal and liability purposes. However, the SMLLC member files income taxes like a sole proprietor.
Because a single-member LLC is disregarded as an entity for tax purposes, there is confusion about how they pay employment taxes. In essence, they are both the employer and the employee. Is the member responsible for paying these taxes through the owner's Social Security Number, or does the business pay these taxes through the business entity's employer identification number (EIN)?
The IRS says that a single-member LLC that is a disregarded entity for tax purposes is treated as a separate entity for purposes of employment tax and certain excise tax. This means that the SMlLC is required to use its name and employer ID for reporting and payment of employment taxes.
Employer Identification Number – EIN
An EIN—also known as a federal employer identification number (FEIN)—is a unique employer ID number given to the business by the Internal Revenue Service (IRS). It is used for tax purposes for businesses that have employees as well as for other identifying purposes like getting a line of credit. An EIN may also be required for 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 and pay employment taxes
- For registration and to show they are a legitimate business with banks and other businesses
A Single-member LLC needs an EIN, as do all business entities. If the SMLLC has employees the firm will have two identifier numbers. One is for the single member-owner and the other is for the SMLLC entity. 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.
Filing as a Disregarded Entity or a Corporation
The IRS decided that an SMLLC may elect to be treated as either a disregarded entity or as a corporation. As a disregarded entity, the single-member owner pays taxes and reports activity on the owner's federal return as a sole proprietorship. This reporting includes using Form 1040, Schedule C, Schedule E, and Schedule F.
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 does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and Taxpayer Identifier Number (TIN) of the single-member owner for federal tax purposes. The TIN is like a Social Security number but is issued to the business entity and not an individual.
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 pays employment taxes (federal income tax withholding, FICA taxes, and federal unemployment taxes).
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.