Owner of single member llc paid himself on payroll and issued w2. is this ok? If not OK, how is this best corrected?

[Mike9241]

no. taking wages from a partnership, proprietorship, SMLLC or even a MMLLC is not ok when you are not an employee.  there was one case decades ago where a taxpayer took wages when he was not an employee.  the IRS would not refund the taxes the "employer" withheld and paid in and in addition they had the taxpayer pay the SE taxes along with penalties and interest.   they also disallowed the "employer" deduction for wages and the related payroll taxes.  without consulting a pro, he signed off on the closing agreements.  he found that because he signed those agreements and that the statute of limitations had passed he could not recoup the payroll taxes paid by the "employer"  

[Ultimateace]

I know this old topic but I just found.  

 So let’s  ponder what would happen if a person does deduct their own wages and gets audited.    
     The wages go back into profits and get taxed.  But if they were reported on the same return…. Then the net change is zero?   I mean the employers portion on the social security/ med are the same as what the individual would owe… the taxes are paid in under the ssn of the owner so still credits as paid.  And likely IRS wouldn’t flag an account unless the schedule C business doesn’t have an TEIN.    Just saying.  It would almost be the same as costing advertising as office supplies…. Bad form but the finished product is the same 

[ColeenD3]

No, it is more than bad form. It is an incorrect way to do your taxes and it needs to be corrected. It is the same as saying that you included your short-term capital gains as interest and it's all taxed the same so it's okay because the finished product is the same.

@Ultimateace  

[ColeenD3]

Here is a post earlier in the thread from @HelenaC

No, a Single Member LLC cannot issue themselves a W-2. An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship. You are not allowed to deduct wages you pay yourself. Net earnings are reported on Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship) .
 

You must amend your Payroll Tax Returns to reverse your payroll. For additional information, click on Correcting Employment Taxes | Internal Revenue Service - IRS.gov. 

I also saw you were looking for a link from an IRS source saying how you should pay yourself.

Pay Yourself

Employers use Form 941 to:

• Report income taxes, Social Security tax, or Medicare tax withheld from employees' paychecks.

@mark-makuch

[VolvoGirl]

See Schedule C instructions page C-10 for line 26,  right above line 30, Do not include….amounts paid to yourself

http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

[elainegales]

I am the SINGLE MEMBER LLC , I receive a W-2 and I have SEP IRA paid by my own funds. Do I have to change my W2 to a 1099 or other form. Please answer while there is still time for 2022 taxes if you can.

[PatriciaV]

@elainegales

If your SMLLC has not elected to be taxed as a S-corporation, you may not pay yourself (the owner) as an employee and issue Form W-2. Instead, you pay self-employment tax on the net earnings from your business.

To resolve this, you must amend your Payroll Tax Returns to reverse your payroll. For additional information, click on Correcting Employment Taxes | Internal Revenue Service - IRS.gov. 

Because this may take some time to accomplish, you may wish to request an extension of time to file. This TurboTax article provides instructions: How do I file an IRS extension (Form 4868)?