I recently wrote the article below for Zimmerman Boltz & Co. as it relates to Dental Practices, but it certainly applies to other single member LLCs as well.
For wages paid on or after January 1, 2009, Single Member Limited Liability Companies (“SMLLCs”) that have not elected to be treated as corporations are required to change the way they report and pay federal employment taxes and wage payments. SMLLCs that have employees, are disregarded for tax purposes, and that elected to report and pay employment taxes under the sole members taxpayer identification number must now report and pay all employment taxes under the SMLLCs employer identification number.
Background on Limited Liability Companies
A Limited Liability Company (LLC) is a relatively new business structure for dental practices. Most states today allow professional practices, including dental practices, to operate as LLCs. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of the LLC are more like a partnership in that it provides management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members. There is no maximum number of members. And, most states also permit SMLLCs.
Over the years, however, there has been some confusion regarding the taxation of SMLLCs as to how they report and pay employment taxes. The main cause of the confusion, of course, is the IRS. When the states created the LLC as a new form of business entity, the IRS did not create a new tax classification for the LLC. Rather, the IRS used the tax entity classifications it has always had for business taxpayers: (i) corporations, (ii) partnerships, and (iii) sole proprietorships. An LLC is always classified by the IRS as one of these types of taxable entities.
Tax Treatment of a Limited Liability Company
A SMLLC can be taxed as either a corporation or a single member disregarded entity. A SMLLC cannot be a partnership because a partnership requires two or more members. To be treated by the IRS as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the IRS as a disregarded entity, which is taxed as a sole proprietor for income taxes. That is, all the tax attributes such as income, loss, credits, and deductions flow up to and are reported on the single member’s federal income tax return. As an example, if the single member is an individual, then the tax attributes of the SMLLC are reported on the individual member’s Form 1040 schedule C. The individual owner is then treated as a sole proprietorship for federal income tax purposes, and the owner is subject to taxes under the Self-Employment Contributions Act (SECA). The confusion in this area arises in determining how to report and pay the employment taxes for a SMLLC that is a disregarded entity. In 1999, the IRS issued Notice 99-6, which is effective through December 31, 2008 and is obsolete as of January 1, 2008. Notice 99-6 gave the SMLLC classified as a disregarded entity two options for reporting and paying employment taxes:
1. Use the EIN assigned to the LLC, or
2. Use the name and taxpayer identification number (“TIN”) of the single member owner, which is usually an individual and thus the individual’s social security account number.
Under Notice 99-6, even if the employment tax obligations are reported using the SMLLC’s EIN, the single member owner retains ultimate responsibility for collecting, reporting, and paying over the employment taxes.
Recent Employment Tax Law Changes
In August 2007, regulations were issued requiring SMLLCs to use the practice’s EIN—thereby eliminating the SMLLC’s option to use the single member owner’s TIN. The SMLLC will continue to be disregarded for other federal tax purposes, including income tax. This change will begin for employment taxes that accrue after January 1, 2009. The new regulations state that the LLC, not its single owner, will be responsible for filing and paying all employment taxes on wages paid on or after January 1, 2009. The regulation changes are not retroactive. The owner of a disregarded entity remains responsible for paying employment taxes on wages paid before January 1, 2009.
The examples in the regulations clarify the treatment of a disregarded entity for purposes of employment tax on wages paid on or after January 1, 2009.
1. LLC A is an eligible entity owned by individual A and is generally disregarded as an entity separate from its owner for federal tax purposes. But, effective January 1, 2009 LLC A is now to be treated as an entity separate from its owner for purposes of employment taxes. Thus, if LLC A has employees it must pay the employees’ wages, as defined in Internal Revenue Code (IRC) Sections 3121(a), 3306(b), and 3401(a) and withhold the required taxes.
2. LLC A is an employer and is subject to all provisions of law and regulations, including penalties that apply to employers. Thus, LLC A is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes under IRC Sections 3402, 3403, 3102(b), 3111, and 3301, respectively. LLC A must file the applicable employment tax forms, such as Form 941, Employer’s Quarterly Employment Tax Return, Form 940, Employer’s Annual Federal Unemployment Tax Return; file Forms W-2 with the Social Security Administration and furnish them to LLCA’s employees, and make timely employment tax deposits.
3. A is not, however, an employee of LLC A for purposes of employment tax because LLC A is treated as A’s sole proprietorship for income tax purposes. A is self-employed for purposes of the tax on self-employment income. This means that A is subject to tax under IRC Section 1401 on his net earnings from self-employment with respect to LLC A’s activities. As a sole proprietor, A is entitled to deduct trade or business expenses paid or incurred through LLC A’s activities, including the employer’s share of employment taxes imposed under sections 3111 and 3301, on A’s Form 1040, Schedule C, Profit or Loss for Business (Sole Proprietorship).
These changes in the regulations do not change income tax treatment for a disregarded entity or other LLCs, or employment or excise tax treatment for LLCs classified as partnerships or corporations.
Required Action
1. If your practice is impacted by the employment tax changes discussed above and you do not have an EIN, then the practice will need to obtain one.
2. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number, and completing lines 8 a, b, and c.
3. A SMLLC that is a disregarded entity and does not have or will not have employees does not need an EIN. It should simply use the name and TIN of the single member owner for federal tax purposes.
If a SMLLC, whose taxable income and loss will be reported by the single member owner, desires to obtain an EIN even though the SMLLC has no employees, it will not use the EIN for any federal tax reporting purposes.
