Single member LLC - hired/terminated employees

[EMS0]

Hi. Single member LLC for approximately 8 mos this year. I hired and terminated W2 1099employees earlier this year. I'm curious how their brief employment will impact how I file taxes for this year. As the business owner, I also switched my status from employee to contractor, how does that impact tax filing beyond state/fed taxes taken out vs not being taken out in my wages? 

[VolvoGirl]

 Unless you set up your SMLLC as an S corp you file the LLC on schedule C in your personal return.  If you switched from employee to independent contractor you will still get a W2 for the employee part and a 1099NEC for self employment contractor.

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax. You can fill out Schedule C and enter Self Employment Income into Online Deluxe but if you have any expenses you will have to upgrade to Premium version. Or buy any of the Desktop programs. All the Desktop programs have all the same forms, but you will get the most help in the Home & Business version.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment. You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400. The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. So you get social security credit for it when you retire. You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040. The SE tax is already included in your tax due or reduced your refund. The SE tax is in addition to your regular income tax on the net profit.

Turbo Tax Self Employed Tax Hub
https://turbotax.intuit.com/personal-taxes/self-employment-taxes

Turbo Tax Self Employment info
https://turbotax.intuit.com/tax-tips/self-employment-taxes/beginners-tax-guide-for-the-self-employed...

Here is some IRS reading material……
IRS information on Self Employment
https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

Publication 535 Business Expenses
https://www.irs.gov/pub/irs-pdf/p535.pdf

Publication 334, Tax Guide for Small Business
https://www.irs.gov/pub/irs-pdf/p334.pdf

[VolvoGirl]

You will need to give your employees and contractors a W2 or  1099NEC.  Have you been filing the quarterly payroll reports for the W2 employees?   I assume you have an EIN for your business?  You enter all the payments into your schedule C.  

How to prepare 1099 & W2
https://ttlc.intuit.com/community/forms/help/how-do-i-create-w-2-and-1099-forms-in-turbotax/00/25869

You need to give a 1099NEC to anyone you paid $600 or more to for the year. But not to corporations or for merchandise. You send the IRS a copy of the 1099Misc with the transmittal summary form 1096. These are due to the person by Jan 31 and to the IRS by Jan 31 also.

You can prepare W2 and 1099NEC & 1099MISC in either the Desktop Home & Business program or the Online Premium version.

[K M W · Accepted solution]

Hi, EMSO, congrats on starting your business!

Let me address your question in three separate parts:

1. W2 employees:  The tax treatment for a W2 employee is the same regardless of how long their employment lasted.  Whether they worked for you for an hour, a day, a month, or over many years, you are required to pay them as an employee, including withholding federal, state (if applicable) and FICA taxes, and are responsible for remitting the payroll taxes to the federal or state government, and are responsible for remitted required payroll tax reports.  So regardless of how long they worked for the company, your tax responsibilities remain the same.

2, 1099 Contractors: if you hire a subcontractor, you are required to issue a 1099NEC to that contractor if you pay them over $600 during the year. So, if you had a subcontractor that you paid less than $600 during the year, you do not have a filing requirement to issue a 1099NEC for that contractor.

3. With regards to switching your status from employee to subcontractor - as a Single Member LLC (SMLLC), you do NOT pay yourself from the business as either an employee or a subcontractor (note, this answer would be different if your SMLLC has elected to be taxed as a different entity, such as a C-Corporation or a S-Corporation),  A SMLLC is treated like a sole proprietor for tax purposes, meaning you would report the SMLLC income and expenses on your personal tax return on Schedule C.  Your SMLLC would NOT pay you either as a W2 employee or as a 1099NEC contractor; rather, you will be taxed on the total net income of the business on your personal tax return.

[EMS0]

@VolvoGirl Thanks for your help. The business does have an EIN and the payroll system I use (Gusto) files my quarterly tax reports for all employees/contractors, but 

[EMS0]

@K M W Thanks for your thorough response!

1. OK perfect. I hired the employees and withheld taxes on their paychecks, and I believe the payroll system I use (gusto) has an option for me to generate W2s for them as well. (When is the appropriate time to send those out to former employees?) So, it sounds like I'm good for this one (unless I misinterpreted something) 

2. Since I am considered a contractor for now and was an employee earlier (where I had my taxes withheld or I guess they went to state/fed/Medicaid/etc.), I will get a W2 and a 1099. But for #3. since I've already being paying myself (employee/contractor), would it be a wise choice to switch/ file my SMLLC to an S Corp? I also don't know if that would help retroactively or just a wise decision moving forward into the new year? 

3B. Last part for the third section, if I'm not an employee/contractor, how do I fund my overall expenses that are not business related i.e. groceries, credit card, debit, leisure?

Thank you so very much for helping and offering information. 

[VolvoGirl]

#1. You need to issue the W2 and 1099NECs to the people by Jan 31, 2025.   Your payroll system should know that.   

#2. How have you been paying yourself.  When you file as self employment independent contractor you do not pay yourself or give yourself a W2 or 1099NEC.  Sole proprietors cannot take a withdrawal or salary and include it as an expense on their tax return. As a sole proprietor, you are not an employee of the business. You don't pay yourself or enter a salary or withdrawal for yourself. All the business income and expenses are your personal income and expenses in the first place. You just fill out a Schedule C. The net profit or loss is your income.  If you have a net profit of $400 or more on schedule C you will pay SE self employment tax on it in addition to your regular income tax. It's all included on your personal 1040 form.  

#3B   What do your personal living expenses have to do with this?   You don’t report those anywhere.  You need to pay them out of your profit or savings etc.   If you are filing Schedule C for self employment it is a disregarded entity and it doesn’t matter which account or credit card you pay business expenses or personal expenses out of.  It’s all yours in the first place.   

[K M W · Accepted solution]

1. Forms W2 are required to be issued to the employees and copy A is required to be filed with the Social Security Administration by January 31of the subsequent year (so the 2024 Forms W2 have to be filed by January 31, 2025). You will want to check with your state to see if they also have filing requirements for the W2 forms.

2.If you were operating as a SMLLC taxed as a sole proprietor earlier in the year, you should NOT have been doing payroll for yourself.  You as the owner of the SMLLC taxed as a sole proprietorship are not considered an employee, and so therefore should not be paid as an employee. I recommend you "unwind" any wages you paid yourself, and file amended payroll tax reports for the year to eliminate any impact of treating yourself as an employee.

3B: To pay yourself as a SMLLC, you would do so through an owner's draw. To pay yourself LLC income through an owner's draw, write a check from the LLC to your personal account. Record the withdrawal as an owner's draw, along with the appropriate debit in the owner's business account. This periodic payment eliminates the need for payroll taxes and forms. The LLC need not withhold taxes on distribution payments, meaning there are no W-2 or W-4 (employee withholding) forms to deal with. Instead, you will report your share of the business income on your personal tax return and pay income taxes and self-employment taxes on it.

As to whether you should become an S Corporation or not - there are a lot of factors to consider outside of the income tax factors. I would recommend you seek legal expertise to determine what the best business structure is for your situation.

[EMS0]

@VolvoGirl 

Thank you. That's a lot of good information and my oh my, how confusing taxes are for business owners. Yay. Thanks for the clarity and time to reply! 

[EMS0]

@K M W  Thanks for helpful information! If I wanted to know about the idea of "unwind"ing my payroll/how I've been paying myself this year, is that a question for this forum or is it more individualized/personalized with a tax expert? 

[K M W · Accepted solution]

You would want to amend your payroll tax returns to eliminate the amounts you paid yourself, including eliminating the payroll taxes you paid in for yourself.  Essentially reversing 100% of the payroll you paid yourself on the amended payroll tax returns.

As for additional advise on how to do so, I would recommend you seek a local expert to assist - payroll taxes are outside the scope of TurboTax assistance, as it is not an income tax, it's a payroll tax.  Maybe you can reach out to your payroll software provider and they can give directions/assistance?