Fix disregarded entity owner paid by W-2 for 2021?

[kateandbill]

Hi. Single member LLC in MD formed in 2021. I'm the sole member/owner and only worker since inception (may change later but not immediately). IRS has the LLC recorded as a disregarded entity. I'm just catching up to that important distinction.

I've been paying myself as a W-2 employee since June when I started doing contract work. And now I realize that was a mistake. I tripped over the details as I was looking to see how to handle my SEP contribution. I see the 20% for self-employed vs. 25% for employee. And it seems I'm the former, W-2 notwithstanding.

Fixing this for the SEP is important but not urgent since I've got a few months. What's really urgent seems to be deciding how I want to fix the bigger LLC/partnership vs. disregarded entity thing, and the withholding and tax filing issues associated with that.

My guess at this point is I have two choices:

1) Stay single member LLC, stop paying myself as an employee, start handling things as self-employed with flow-through to my personal tax filings. File to recover the employer payroll withholdings that I didn't need to make in 2021.

2) Take on my wife as a second member for the LLC and then stop being a disregarded entity. Be a LLC/partnership. MD is not a community property state and I have zero concerns about loss of control  or assets/share to her. That would allow me to be an LLC employee going forward. I'm not sure about looking back to fix 2021, or if I even want this -- is it advantageous?

What do you think? What is important that I have to do by year end? How can I find the right pro to steer me through this and the other things I'm screwing up. I'm in MD just outside NW DC. 

Thanks for reading this far and any insights or well-meaning dope-slapping you can offer. 

[Critter-3 · Accepted solution]

1) Stay single member LLC, stop paying myself as an employee, start handling things as self-employed with flow-through to my personal tax filings. File to recover the employer payroll withholdings that I didn't need to make in 2021.   If you remain a single member LLC  it is against the law to issue yourself a W-2 and file payroll tax returns.  This must be undone immediately this is not a choice  UNLESS you choose to be taxed as an S-Corp which may not be possible for the 2021 tax year.  SEEK LOCAL PROFESSIONAL assistance to make all these corrections. 

2) Take on my wife as a second member for the LLC and then stop being a disregarded entity. Be a LLC/partnership. MD is not a community property state and I have zero concerns about loss of control  or assets/share to her. That would allow me to be an LLC employee going forward. I'm not sure about looking back to fix 2021, or if I even want this -- is it advantageous?   If you choose to be a multi member LLC being taxed as a partnership then you must first fix your current error and close the Sch C  and then get a new EIN for the partnership and start that one fresh going forward.  AND  Partners are NEVER employees so again you do not file any payroll tax forms.  Partners are issued a K-1 from the separate form 1065 for the partnership return.   

What do you think? What is important that I have to do by year end? How can I find the right pro to steer me through this and the other things I'm screwing up. I'm in MD just outside NW DC.   

RUN to a local tax pro to get educated on what you want to do and what is best for your situation.  Seek an enrolled agent who handles business returns ...   

https://www.irs.gov/tax-professionals/choosing-a-tax-professional

[Carl]

You need to seek professional help yesterday, if not sooner. You can't just "start" doing things right. You have to undo all that you've done wrong. Especially the W-2 stuff. This can potentially be a double-whammy if your state also taxes personal income. Seek professional help. You can not use TurboTax to "fix" this. The program is not designed or intended for fixing mess ups like this. You *need* professional help.