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

Forum|Forum|7 years ago
June 6, 2019
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TurboTax Business Windows

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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.

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TaxGuyBill

Level 13

You post indicates you are using TurboTax "Business", which is for Corporations and Partnerships. Is that correct?

Has your Single Member LLC filed the form to make the election to be taxed as a Corporation?

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robert-1875Author

Level 2

No. The LLC was created and started operation in 2017.

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TaxGuyBill

Level 13

Then as Helena said, you need to correct/cancel the W-2/W-3 and all of the associated payroll forms.

You can use either the "Self Employed" Online version, or better yet, any of the CD/downloaded versions (the "Home & Business" version may give you more guidance).

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Anonymous

Answer

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.

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mark-makuch

Level 3

I agree with this and have understood it to be so for my whole career, but when I was challenged to back it up recently, I could find lots of posts like your answer, from self assured accountants like myself, but I actually couldn't find it written down anywhere official, in an IRS pub or the Code or Regs. I see things that say 'you're subject to SE tax', but nothing that specifically says 'you may NOT pay yourself as an employee' and it would be helpful to be able to point people to such a thing. Do you have a cite, or are you like me and you just have always trusted that this is so?

VolvoGirl

Level 15

Yes. I've read it. Please point out the part where it says a sole proprietor or person organized as a single member llc can't put herself on payroll. Keep in mind that same person organized the same way (but choosing to have her single member llc treated as an s corp for tax purposes) can so it's not simply logical, like I can't be both employee and employer, because that's plenty possible. So where in 31.3401 does it specifically say a person can't be an employee of her single member llc?

You cannot deduct your own salary or any personal withdrawals you make from your business. As a sole proprietor, you are not an employee of the business.

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.

(And if you paid yourself and deducted it as an expense then you would have to include it as income on the same tax return so it would be a wash.)

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

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

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BLafleur

Level 2

Not a reply, but a related question......

A single member LLC (daycare) is owned by single member LLC (Properties). (Basically the same person owns both businesses, but on paper Properties, LLC owns Daycare, LLC) Can the owner of Properties, LLC be paid a W2 wages by the Daycare, LLC?

Carl

Level 11

An LLC be it single member or multi-member is considered to be a disregarded entity by the IRS. Under no circumstances and with no exceptions can an LLC issue the owner(s) of that LLC a tax reporting document of any type. There are no exceptions.

Now what makes your post unclear is that you "say" you have a single member LLC. However, you have indicated that you are using TurboTax Business (different from Home & Business.) TurboTax Business flat out can not be used to file a tax return for a single member LLC. Period. So either you incorrectly indicated what flavor of TurboTax you are using, or you filed the appropriate forms with the IRS to have your single member LLC "treated like an S-Corp" (or C_Corp) for tax purposes only. *THIS MATTERS* big time, because the owner of a corporation "can" be a W-2 employee of that corporation, be it an S-Corp or a C-Corp.

So you may need to provide some clarity here to confirm that the information you are being provided is correct for your specific and explicit situation.

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BLafleur

Level 2

Carl, Turbotax is not being used at all here.

Both LLC's are Single member and are not treated as a corp.

Lady owns single member LLC, Properties, LLC. Properties, LLC owns single member Daycare, LLC.

Can Daycare LLC pay Lady W-2 wages?

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caremedical

Level 2

Partners are not employees and should not be issued a Form W-2 in lieu of Form 1065, Schedule K-1, for distributions or guaranteed payments from the partnership.

this particular statement from IRS does not preclude from some one having W2 in addition to Form1065 from the company.

I manage a medical group. I have two roles in the company. One is seeing patients like every other physician employee. Second is managing operations of the medical group.

I have been receiving W2 income similar to everyone in the company based on number of patients seen or number of shifts worked.

Then the profit is issued as 1065 . and this is in addition to W2. Both of these incomes are computed in 1040 as a pass through entity to compute AGI.

I am not an accountant and my accountant suggested this is correct way to do it. Recently someone mentioned about restriction for LLC owners not being eligible to have W2 income. I am curious about the interpretation.

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Mike9241

Level 15

you are not a single member LLC if a 1065 is filed. you are a partnership.

see this article. what should be done probably is that some of the payments should be classified as guaranteed payments (those where % ownership in the partnership is ignored) but W-2's are not issued for guaranteed payments.

https://legalbeagle.com/12716583-can-a-partner-in-an-llc-receive-a-salary.html

how to fix it - see a pro because this is not only a problem for you but also for any other partner that received a w-2.

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Darkstar0571

Level 2

Yes but that wash is fine? If you set up your books to show that? As people do it so they don't have to pay in estimated taxes, they do it so taxes come out to the IRS so we aren't all screwed 4 times a year with no money to send in for estimated taxes. Will you get in trouble doing that?

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mark-makuch

Level 3

I completely agree there are advantages to the employee treatment, and also that there's no real reason to prohibit it as it only helps people to pay the appropriate tax. I don't know why they forbid it, but they do. So the answers to your questions are 1) is it okay to do this? Answer: No, it's not okay. 2) Will anything bad happen if you do it? Answer: I know people have done this for years without ever having a problem. I even know of one person who got caught doing it in an audit and told the auditor 'who cares it comes out the same in the end' and the auditor was like 'fine, good point' and let it go unchanged. So, it's kind of like speeding. Can you probably get away with it? Yes. Is it allowed? No.

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Mike9241

Level 15

the applicable ruling was issued in 1969. if you are not an employee and you are not if you are the owner of a SMLLC then you can not take a w-2.

there is are good reasons for not taking a w-2. first you overpay your FICA and Medicare taxes. an employee has up to 7.65% taken out of his paycheck and the employer pays another 7.65 % total 15.3% and the balance of schedule C income id taxed at 15.3% * .9235 or 14.13%. if the result of the W-2 is a loss there is no negative se tax computed so the owner has overpaid. no w-2 then the owner pays the effective rate of 14.13% assuming the income does not exceed the FICA limit. another reason, an owner's a w-2 reduces schedule C net income which, if the business qualifies for the full 20% QBI deduction, reduces the QBI deduction by 20% of the gross w-2.

if audited the IRS may disallow the w-2 deduction not refund the related fica and medicare taxes paid and then hit the owner's 1040 for those taxes + penalties for failure to pay them properly.

want a proper w-2, then incorporate the business - s-corp would avoid double taxation of the income and get you some QBI deduction. see a tax pro if you think about going this route. there are many things you'll need to learn so the corporate return is a mess and a prime object for audit.

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Ultimateace

Level 2

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

Level 15

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

Level 15

Here is a post earlier in the thread from @88273

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: